Brexit is absorbing the oxygen needed to solve other problems

Knife crime, homelessness and social care are being neglected

Camilla Cavendish



The Brexit vortex has sucked us all in. When I can tear myself away from the latest developments, I idly wonder what effect this interminable soap opera must be having on Britain’s productivity. Some friends are waking up in the early hours, worrying about crashing out of the EU. Others are so angry at the thought of not leaving that they’ve turned into Twitter junkies.

The same is true of Whitehall, where non-Brexit activity has ground virtually to a halt. The Number 10 communications “grid” is shorn of virtually everything bar Brexit: announcements on anything else are repeatedly shelved. Reports languish unpublished, and policies sit in limbo, while officials grapple with Brexit planning and ministers are distracted by political manoeuvring. Most ministerial activity feels more like firefighting — a dollop of cash to the National Health Service, the police return to “stop and search” tactics to help fight knife crime — than deep thinking about root causes.

I’ve never liked hyperactive government. There are few things worse than ministers inventing counterproductive initiatives to get headlines. The machismo of legislating reached its apogee between 2000 and 2009, when Labour governments introduced a new criminal justice act almost every year, spawning an industry in legal training.

But when business is losing confidence in Britain, knife crime is at an all-time high, climate change looms, hospitals are in deficit and homelessness is erupting back on to the streets, some domestic policy is needed. In December, the chairs of six all-party parliamentary select committees signed a joint statement complaining that the lengthy Brexit process was having a “serious detrimental effect” on wider domestic policy, including the NHS, public transport and the environment. There is also silence on the bigger question of what kind of country the UK wants to be.

The grievances which were exposed by the referendum and the divisions which have deepened since then require a bold response. Theresa May seemed poised to tackle inequalities when she pledged to end “burning injustices” as she became prime minister. But few policies followed.

What protections should workers have in the gig economy? How to tackle automation? What rights and responsibilities should come with citizenship? How will Britain integrate immigrants from so many different cultures? Nothing.

Some progress is being made. When the centre is distracted, shrewd ministers can still get things done. The health secretary, Matt Hancock, is making strides on genomics, technology and steering the NHS towards preventing illness, not just treating it. The education secretary, Damian Hinds, this week launched a consultation to prevent children going missing, by insisting on a register of those educated at home. The Industrial Strategy chugs along. But too often, the big picture is being missed.

Every day, UK-based businesses receive pitches from other countries to relocate their headquarters. Where is the fightback from government? Given the likelihood of continuing Brexit uncertainty, the cabinet should be on a war footing and every minister briefed on Britain’s pre-eminence in corporate governance and our rule of law. They should be talking the country up. Yet outside the trade department, they are voiceless.

Important issues are stuck. A green paper on social care, originally promised in 2017, is urgently needed to fix a system which could bring down the NHS: hospitals can’t discharge elderly people who are medically fit but have nowhere to go.

The Timpson review remains unpublished although its recommendations on how to give excluded pupils a better education and protect them from gangs could be a vital part of the fight against knife crime. As the streets fill up with homeless people, it seems unlikely that the Conservatives will achieve their manifesto pledge to halve rough sleeping. Tackling the perfect storm of short-term tenancies, evictions, delays in universal credit payments and a lack of social housing will take a concerted effort. But ministers are confined to handing out small bits of cash because they cannot muster the required cross-departmental action.

When she first came to power, Mrs May rightly urged her advisers to think beyond Brexit. But she lost precious time while she still had momentum. She took a scorched earth approach to policies associated with her predecessor; abandoned plans to reform prisons; went tepid on the Northern Powerhouse and junked David Cameron’s obesity strategy — only to later resurrect it.

Then, she lost her majority in the 2017 election. Since then, it has been almost impossible to pass legislation. Ministers have been advised not to draw up any bills, especially those which could be amended by mischief-makers.

The looming financial costs of Brexit have made the Treasury especially wary of anything that might require extra spending, including the Augar Review of higher education, commissioned by Mrs May with the clear intention of slashing university tuition fees.

If there is a general election, voters will want to talk about issues beyond Brexit and want a vision of the country’s future. But the government’s cupboard looks bare. This premiership has been dominated by leaving the EU and keeping the Conservative party intact. We still cannot judge the results on either front. But one thing is clear. The self-inflicted wound of Brexit has stolen the oxygen, just when we need to address so many other issues.


The writer, a former head of the Downing Street Policy Unit, is a senior fellow at Harvard University

The EU’s China Conundrum

The European Union is increasingly caught between the United States and China. Until it finds a common strategic purpose, the bloc will struggle to advance its interests and is increasingly likely to fall victim to great-power plays.

Philippe Legrain

legrain27_antonio masiello_getty images_ xi conte

LONDON – Europeans can’t agree on how to handle a rising China. While European Union leaders were gathering in Brussels recently to discuss a more assertive common approach, Chinese President Xi Jinping was visiting Rome. Xi was there to mark Italy’s independent endorsement of the Belt and Road Initiative (BRI), his $1 trillion pan-Eurasian infrastructure investment plan that aims to bolster China’s economic and political influence. So much for a unified EU stance.

How, then, should the EU engage with China? As the United States and China stumble toward a new Cold War, each wants the Europeans in their camp. US President Donald Trump’s administration barks at Europeans to follow its aggressive lead in confronting China over trade, technology, and security. Meanwhile, China woos the EU by pointing to their shared interest in defending the multilateral trading system, the Paris Agreement on climate change, and the Iran nuclear deal against Trump’s attacks.

Ideally, the EU ought to chart its own course. But as long as it remains weak and divided, it will struggle to do so.

Until recently, the EU considered China a strategic partner – and primarily a source of growth and jobs. But its new draft China strategy, developed by the European Commission and the EU’s External Action Service, is tougher and more nuanced. China is now regarded simultaneously as “a cooperation partner with whom the EU has closely aligned objectives, a negotiating partner with whom the EU needs to find a balance of interests, an economic competitor in pursuit of technological leadership, and a systemic rival promoting alternative models of governance.”

Like their American counterparts, albeit less vehemently, European policymakers increasingly fret about the challenge from an authoritarian, statist, and technologically dominant China. The centralization of power in Xi’s hands and the overtness of his “Made in China 2025” industrial policy, which seeks Chinese dominance in ten key high-tech sectors, have dashed earlier European hopes for political and economic liberalization. Europe’s politicians are increasingly receptive to business complaints that China is buying up EU firms and their technologies while denying reciprocal access to Chinese markets.

Given this, the EU ought to be a natural ally for the US in seeking to open Chinese markets and safeguard foreign investors’ intellectual property. But Trump has no time for allies, labels the EU “a foe,” and threatens a trade war with Europe over its huge trade surplus with the US, notably in cars. EU policymakers hate Trump’s unilateral protectionism and his “America First” worldview. And they don’t trust him, rightly believing that Trump could readily cut a deal with China at the EU’s expense. As a result, the EU is understandably loath to line up behind Trump’s China policy.

That provides an opening for China, which makes all the right noises about multilateralism and has a genuine interest – at least for now – in sustaining the open, rules-based international system. Furthermore, it engages seriously with the EU; Premier Li Keqiang is due in Brussels on April 9 for the annual EU-China summit. But at the same time, China is undermining the EU by negotiating with European governments bilaterally and playing them off against each other.

In this regard, China has established the “16+1” forum to engage with 16 countries in Central and Eastern Europe, 11 of which are EU members. Because these countries are poorer and are often treated as second-class Europeans by the likes of France and Germany, they particularly welcome China’s attention and investment.

China is also pouring funds into southern European economies that have been starved of investment since the eurozone crisis. It has invested in the port of Piraeus in Greece and Portuguese energy companies, and now plans to revamp the Italian port of Trieste. In total, 15 of the EU’s 28 member states have so far signed up to the BRI.

To be sure, Chinese investment in Europe is often beneficial, and increased trade and improved infrastructure are mutually advantageous. But, like the US Marshall Plan after World War II, the BRI also has a political dimension – namely, drawing Europe into China’s sphere of influence.

That raises fundamental long-term strategic questions. Does Europe’s future really lie primarily with Eurasia rather than with the West? If so, what would being China’s junior partner entail? And how, then, could Europe best advance its interests? Unfortunately, hardly anyone is posing these questions.

In the meantime, China’s bilateral approach to Europe enables it to divide and rule. When the French and German economy ministers recently proposed an EU industrial policy that would create European champions to rival Chinese (and American) giants, Portugal’s Socialist prime minister, António Costa, dismissed the idea. Costa also warned against EU plans to screen Chinese investment more stringently.

The EU is not only divided, but also weak. Although an economic colossus, the EU is a geopolitical dwarf ill-equipped for this new era of great-power competition.

True, a united EU can impose itself against lesser powers such as the United Kingdom, and hold its own with the US and China in purely economic terms. Its $19 trillion single market gives it huge clout in trade negotiations, competition policy, and setting regulations and standards.

But when economic policy intersects with foreign policy and security, the EU lacks the will and capacity to act strategically. Apart from France and the UK, which is leaving the EU, member governments lack a geopolitical mindset. The EU itself has no military power, and most of its members rely on the US for their defense. Moreover, the EU is increasingly a consumer of cutting-edge digital technologies developed elsewhere.

The upshot is that the EU finds itself caught between the US and China. It desperately needs to discover the sort of common purpose and strategic capacity that French President Emmanuel Macron seems to be almost alone in advocating. Until then, the EU will struggle to advance its interests and will be increasingly likely to fall victim to great-power plays.


Philippe Legrain, a former economic adviser to the president of the European Commission, is a visiting senior fellow at the London School of Economics’ European Institute and the founder of Open Political Economy Network (OPEN), an international think-tank whose mission is to advance open, liberal societies. His most recent book is European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right .

Collision course

The brewing conflict between America and Iran

Both sides need to step back




THE DRUMS of war are beating once again. An American aircraft-carrier strike group is steaming towards the Persian Gulf, joined by B-52 bombers, after unspecified threats from Iran. John Bolton, the national security adviser, says any attack on America or its allies “will be met with unrelenting force”. In Tehran, meanwhile, President Hassan Rouhani says Iran will no longer abide by the terms of the deal signed with America and other world powers, whereby it agreed to strict limits on its nuclear programme in return for economic relief. Iran now looks poised to resume its slow but steady march towards the bomb—giving American hawks like Mr Bolton further grievances.

Just four years ago America and Iran were on a different path. After Barack Obama offered to extend a hand if Iran’s leaders “unclenched their fist”, the two sides came together, leading to the nuclear deal. That promised to set back the Iranian nuclear programme by more than a decade, a prize in itself, and just possibly to break the cycle of threat and counter-threat that have dogged relations since the Iranian revolution 40 years ago.

Today hardliners are ascendant on both sides. Bellicose rhetoric has returned. Mr Bolton and Mike Pompeo, the secretary of state, believe in using economic pressure to topple the Iranian regime and bombs to stop its nuclear programme. In Tehran the mullahs and their Revolutionary Guards do not trust America. They are tightening their grip at home and lashing out abroad. In both countries policy is being dictated by intransigents, who risk stumbling into war.

It is probably too late to save the nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA). Iran has been complying, but critics in America complain that its temporary restrictions will ultimately legitimise the nuclear programme and that the deal will not stop Iran from producing missiles or sowing murder and mayhem abroad. President Donald Trump pulled America out of the agreement last year, calling it a “disaster”. It is not, but that damage is done. Renewed sanctions on Iran and the threat to punish anyone who trades with it have wrecked what is left of the agreement. Last week America cancelled waivers that let some countries continue to buy Iranian oil. It is extending sanctions to Iran’s metals exports. Instead of reaping the benefits of co-operation, Iran has been cut off from the global economy. The rial has plummeted, inflation is rising and wages are falling. The economy is in crisis.

Predictably, rather than bringing Iran’s leaders to their knees, America’s belligerence has caused them to stiffen their spines. Even Mr Rouhani, who championed the nuclear deal, has begun to sound like a hawk. Having long hoped that Europe, at least, would honour the promise of the deal, he is exasperated. On the anniversary of America’s exit from the agreement, on May 8th, he said that Iran would begin stockpiling low-enriched uranium and heavy water, which would in sufficient quantities breach its terms. Without economic progress in 60 days, he said, Iran “will not consider any limit” on enrichment. All this suggests that Iran will start moving closer to being able to build a nuclear bomb.

As he walks his country towards the brink, Mr Rouhani has three audiences in mind. The first is his own hardliners, who detest the nuclear deal and have been pressing him to act. He appears to have appeased them, for now. On May 7th the front page of an ultraconservative newspaper declared: “Iran lighting match to set fire to the JCPOA.” He is also trying to get European companies to break with America. He will not succeed. Despite European Union attempts to design mechanisms that allow European businesses to skirt American sanctions, most of them have decided that the American market is too valuable.

Iran’s most important audience is America, with which it seems to be playing an old game. Iranian leaders have long seen the nuclear programme as their best bargaining chip with the West. Though they have claimed that it is peaceful, UN inspectors have found enough evidence to suggest otherwise. The technology is the same whether power or a weapon is the ultimate goal. Iran’s centrifuges can produce a bomb faster than sanctions can topple the regime, goes the logic of hardliners. But they are wielding a double-edged sword. The threat of obtaining a nuclear weapon is useless if it does not seem credible. And if it is credible, it risks provoking military action by America or Israel.

The potential for miscalculation is large and growing. American troops are within miles of Iranian-backed forces in Iraq and Syria. Its warships are nose to nose with Iranian patrols in the Gulf. America recently declared the Guards a terrorist group; then Iran did the same to American forces in the Middle East. Officials on both sides say their intent is peaceful, but who can believe them? America’s accusations that Iran has been planning to attack American forces or its allies in the Middle East are suspiciously unspecific. Violence by Iran’s proxies may be just the sort of provocation that leads America to launch a military strike. Mr Pompeo once suggested that he preferred American sorties to nuclear talks with Iran. Mr Bolton penned an article in 2015 in the New York Times entitled “To Stop Iran’s Bomb, Bomb Iran”. Now even Mr Rouhani appears to agree that the way forward lies with provocation and escalation.

A nuclear Iran would spur proliferation across the Middle East. Bombing would not destroy Iranian nuclear know-how, but it would drive the programme underground, making it impossible to monitor and thus all the more dangerous. The only permanent solution is renewed negotiation. Mr Trump, a harsh critic of America’s foreign wars, therefore needs to keep the likes of Mr Bolton in check. He will face pressure from hardline politicians at home and opposition in the region, not least from Israel.

Doing deals, though, is a Trump trademark. The president has shown an ability to change direction abruptly, as with North Korea. A new war is not in his interest, even if being hard on Iran is part of his brand. The Europeans can help him by urging Iran to keep within the deal—and condemning it if it leaves. Mr Rouhani, who spurned Mr Trump in the past, now says he is willing to talk with the deal’s other signatories if today’s agreement is the basis. That has so far been a non-starter for the Trump administration. It should not be. As the threat of a conflict grows, all sides need to head back to the negotiating table.

Why Economists Failed as “Experts”—and How to Make Them Matter Again

Economists should stop pretending to be scientists and go back to the core of the discipline—as a field of inquiry and way of thinking

By Martin Wolf




“I think people in this country have had enough of experts.”
-Michael Gove


Michael Gove, winner of the Brexit referendum (though loser in the game of politics, having failed to become leader of his party, and so, maybe, no true expert either) hit the nail on the head. The people of this country have, it seems, had enough of those who consider themselves experts, in some domains. The implications of this rejection of experts seem enormous. That should be of particular significance for economists, because economists were, after all, the “experts” against whom Mr. Gove was inveighing.

Yet it is not really true that the people of this country have had enough of experts. When they fall ill, they still go to licensed doctors. When they fly, they trust qualified pilots. When they want a bridge, they call upon qualified engineers. Even today, in the supposed “post-fact” world, such people are almost universally recognized as experts.

So, maybe the proper distinction to be made is between “trustworthy” experts and “untrustworthy” ones. The question then become what makes experts trustworthy—not, I should stress, intrinsically trustworthy, but rather perceived by the public to be so.

One might make three, admittedly speculative, points about this distinction between experts deemed by the public to be deserving of trust and those who are not.

The first is that some forms of expertise appear simply to be more solidly based than others in a body of theory and/or evidence, with recognizable successes to their credit. By and large, doctors are associated with cures, pilots with keeping airplanes in the sky and engineers with bridges that stay up. Such successes—and there are many other comparable fields of expertise—self-evidently make people with the relevant expertise appear trustworthy.

The second is that some forms of expertise are more politically contentious than others. Nearly everybody, for example, agrees that curing people, flying airplanes and building bridges are good things. Social and political arrangements—and economics is inescapably about social and political arrangements—are always and everywhere contentious. They affect not only how people think the human world works, but also how it ought to work. These forms of expertise are about values.

The third point is that trust in expertise seems to be quite generally declining. This is partly perhaps because education is more widespread, which makes possession of an education appear in itself less authoritative. It is also partly because of the rapid dissemination of information. It is partly because of the easy formation of groups of the disaffected and dissemination of conspiracy theories. The internet and the new social media it has spawned have turned out to be powerful engines for the spreading of disinformation aimed at manipulation of the unwary.

It might be encouraging for economists that they are not the only experts who are mistrusted. Consider the anti-vaccination movement, hostility to evolutionary theory, or rejection of climate science. All these are the products of doubts fueled by a combination of core beliefs and suspicion of particular forms of expertise. The anti-vaccination movement is driven by parents’ concerns about their children. The hostility to evolution is driven by religion. The rejection of climate science is clearly driven by ideology. Every climate denier I know is a free marketeer. Is this an accident? No. The desire to believe in the free market creates an emotional justification for denying climate science. In principle, after all, belief in free markets and in the physics of the climate system have absolutely nothing to do with each other.

So economists are in good company with other forms of politically or socially contentious expertise. But they have a special difficulty. Not only are they engaged in an essentially controversial, because political, arena, and so also an inherently ideological one, but they suffer to a high degree from the first point I made above: their “science”, if science it is, just does not look to the public to be solidly based. It does not work as well as the public wants and economists have claimed. Economists claim a certain scientific status. But much of it looks to the outsider more like “scientism”—the use of an incomprehensible intellectual apparatus to obscure ignorance rather than reveal truth.

This does not mean that economists don’t know useful things. It is quite clear that they do. Markets are extraordinary institutions, for example. Economists’ elucidation of markets or of the principle of comparative advantage is a great intellectual achievement. Yet suspicion of economics and economists is both long-standing and understandable.

The problem became far more serious after the financial crisis. The popular perception is that the experts—macroeconomists and financial economists—did not appreciate the dangers before the event and did not understand the longer-run consequences after it. Moreover, the popular perception seems to be in large part correct. This has damaged the acceptance of the expertise of economists to a huge extent.

So how, in this suspicious contemporary environment, might economists persuade the public they are experts who deserve to be listened to?

I decided to ask my colleagues this question. One answered that:

1. Good economists have a clear (if incomplete) understanding of how the world works. This is a pre-requisite to making it a better place.

2. Economists have a sense of scale. They understand the difference between big and small and how to make that distinction. This is vital for policy.

3. Economics is all about counterfactuals. It understands the relevant comparators even if they are difficult to work out.

4. Economists are experts on incentives and motivations and empirically try to measure them rather than relying on wishful thinking.

5. Generally, good economists are expert in understanding the limits of their knowledge and forecasting abilities.

Another colleague added:

The general public usually associate economists with:

-A small set of macroeconomic forecasts (growth, inflation mainly), and
-A belief that markets always produce perfect outcomes

And they attribute failure to them if either:

-point forecasts (inevitably) prove wrong, or
-markets produce some bad outcomes

Whereas the expertise of economists is really in the building blocks that enable you to construct sensible forecasts and to understand how people are likely to behave and respond to a given set of circumstances/policies. This structure for understanding the world allows economists to take on board new developments, understand whether they reflect a rejection of their existing theories or merely a (possibly tail) outcome that was consistent with their “model,” and push forward their understanding of the world from there. Rather than throwing away all existing wisdom when circumstances change somewhat.


I agree with these propositions. Properly understood, economics remains very useful. One realizes this as soon as one is engaged with someone who knows nothing at all about the subject.

But I still have four qualifications to make.

First, a large part of what economists actually do, namely forecasting, is not very soundly based. It would be a good idea if economists stated that loudly, strongly, and repeatedly. Indeed, there should be ceaseless public campaigning by the professional bodies, emphasizing what economists don’t know. Of course, that would not—as economists might predict—be in their interests.

Second, in important areas of supposed economic expertise, the analytical basis is really weak. This is true of the operation of the monetary and financial systems. It is also true of the determinants of economic growth.

Third, economists are not disinterested outsiders. They are part of the political process. It is crucial to remember that certain propositions favor the interests of powerful people and groups. Economists can find themselves easily captured by such groups. “Invisible hand” theorems are particularly open to such abuse.

Finally, the division between economic aspects of society and the rest is, in my view, analytically unsound. The relationship between, say, economics and sociology or anthropology is not like that between physics and chemistry. The latter rests upon the former. But economics and anthropology lie side by side. I increasingly feel that the educated economist, certainly those engaged in policy, must also understand political science, sociology, anthropology, and sociology. Otherwise, they will fail to understand what is actually happening.

If I am right, the challenge is not just to purify economics of exaggerated claims, though that is indeed needed. It is rather to recognize the limited scope of economic knowledge. This does not mean there is no such thing as economic expertise: there is. But its scope and generality are more limited than many suppose.

Michael Gove was wrong, in my view, about expertise applied in the Brexit debate. But he was not altogether wrong about the expertise of economists. If we were more humble and more honest, we might be better recognized as experts able to contribute to public debate.

With this in mind, what should be the goal of an education in economics at the university level? A part of the answer will come from developments within the field. In time, the incorporation of new ideas and techniques may make the academic discipline better at addressing the intellectual and policy challenges the world now confronts.

Another part of the answer, however, must come from asking what an undergraduate education ought to achieve. The answer should not be to produce apprentices in a highly technical and narrow discipline taught as a branch of applied mathematics. For the great majority of those who learn economics, what matters is appreciation of both a few core ideas and of the complexity of the economic reality.

At bottom, economics is a field of inquiry and a way of thinking. Among its valuable core concepts are: opportunity cost, marginal cost, rent, sunk costs, externalities, and effective demand. Economics also allows people to make at least some sense of debates on growth, taxation, monetary policy, economic development, inequality, and so forth.

It is unnecessary to possess a vast technical apparatus to understand these ideas. Indeed the technical apparatus can get in the way of such an understanding. Much of the understanding can also be acquired in a decent, but not inordinately technical, undergraduate education. That is what I was fortunate enough to acquire in my own years studying philosophy, politics and economics at Oxford in the late 1960s. Today, I believe, someone with my background in the humanities would never become an economist. I am absolutely sure I would not have done so. It might be arrogant to make this claim. But I think that would have been a pity—and not just for me.

In addition, it would be helpful to expose students to some of the heterodox alternatives to orthodox economics. This can only be selective. But exposure to the ideas of Hyman Minsky, for example, would be very helpful to anybody seeking to understand the macroeconomic implications of liberalized finance.

The teaching of economics to undergraduates must focus on core ideas, essential questions, and actual realities. Such a curriculum might not be the best way to produce candidates for PhD programs. So be it. The study of economics at university must not be seen through so narrow a lens. Its purpose is to produce people with a broad economic enlightenment. That is what the public debate needs. It is what education has to provide.



Martin Wolf Associate Editor and Chief Economics Commentator, Financial Times


Don’t Trade on China’s Terrible Trade Numbers

April exports plummeted after a strong March, but the volatility is less meaningful than it appears

By Nathaniel Taplin





Just a month ago, many investors were convinced China’s economy was on the mend. What a difference a few weeks make.

Not only have trade tensions with the U.S. unexpectedly ramped up again, but April data has come in broadly weak: first the purchasing managers index, and now exports. Up 14% from a year earlier in March, exports crashed in April, down 2.7% from a year earlier.

But the numbers don’t yet add up to a double-dip slowdown. Several one-off factors made data for the first quarter, particularly March, look better than it really was. April PMI and export figures, by contrast, are less worrying than they appear. China is still enjoying a recovery, albeit relatively weak and early-stage.





Tide goes in, tide goes out. Photo: str/Agence France-Presse/Getty Images


What made first-quarter 2019 look so good? For one thing, first-quarter 2018, when China ran its first quarterly trade deficit since 2014 due to the shifting dates of the Lunar New Year holiday and high prices for oil and other imports. That meant impressive net-export growth was already baked into the cake for first quarter 2019, flattering headline economic growth. A big cut in the value-added tax that took effect April 1 probably also caused exporters to rush shipments to retain a higher export-tax rebate, siphoning off some exports from April.

Looking forward, there are a few reasons for optimism. Following a full-court press from regulators, banks are lending to small businesses again. New export orders have rebounded. And imports also ticked up in April, although the VAT cut may have distorted that too—importers may have delayed purchases to secure the lower rate.

There are also good reasons to worry. Renewed trade concerns are punishing Chinese stocks, and a loss of confidence could derail the nascent rebound in borrowing. If new export orders or credit growth starts flagging again, be prepared this summer for poor growth numbers—and firmer Chinese policy support.

Bonds Are Saying Something - We Should Be Listening: Part IV

by: Eric Basmajian
 
 
Summary

- Long-term interest rates continue to move lower on fears of slower economic growth.

- The factors that consensus continues to cite for higher interest rates are not the driving factors behind Treasury bonds.

- Why is consensus consistently wrong on interest rates?

- Bonds are saying something - is it finally time to start listening?
 
 
Bonds Are Saying Something - We Should Be Listening: Part IV
 
A few months ago, I wrote part III to this series outlining why interest rates would continue to remain low and most likely continue to fall on the long-end of the curve, confounding consensus opinion as to why interest rates should rise.
 
The consensus opinion on long-term interest rates, unfortunately, continues to reference the factors that do not ultimately drive the direction of long duration Treasury rates including deficits, QE or QT, foreign hedging and other factors that have put you on the wrong side of the interest rate decline since 2010.
 
In February (and again in March) I wrote earlier parts to this series in which I forecast that 30-year interest rates would continue to decline for the true fundamental factors that drive the shape of the Treasury curve, monetary tightening expectations, growth expectations, and inflation expectations.
 
In that research note, which you can find by clicking here, I wrote:
If you think that growth expectations are going to come down over the next several months, as I believe based on the leading indicators, and monetary tightening expectations will be moving anywhere but up, the pressure on the 30-year yield will be lower and in the short-term, we will see 2.9% again on the 30-year, indicating upside for (TLT).
 
This forecast was made when the 30-year Treasury rate was well above 3.0%. Today, as of this writing, the 30-year Treasury rate sits at 2.88%, just 8 basis points above the most recent cyclical low.
 
Many equity investors will try and discredit the analysis on Treasury rates by claiming that stocks have risen which must mean that growth is "good." First, "good" or "bad" growth are subjective opinions while accelerating and decelerating are objectively measured facts.
Economic growth has been empirically decelerating which brings with it lower long-term interest rates, regardless of the moves in the equity market. Much to the dismay of perma-equity bulls, a long position on US Treasury bonds is not equivalent to a short position in US equities. In fact, the two are often not even related. In 2014, both Treasury bonds increased (TLT was up over 20%) and the US equity market increased.
 
At EPB Macro Research, we use our 4-factor coincident index to measure the current direction of growth. This index is not a leading index and not used for forecasts, for that we use leading indexes.
 
This 4-factor coincident index takes the broadest measure of the largest components of the underlying economy including employment, production, income, and consumption.
 
4-Factor Coincident Index Year over Year: 
Source: EPB Macro Research
 
 
What is the bond market telling us today?
 
The bond market continues to highlight the fact that economic growth remains in a period of deceleration. Interest rates can rise over the short-term for hundreds of factors but the longer-term trend will be determined by monetary tightening expectations, which will impact the short-end of the curve and growth/inflation expectations which will contribute to the shape of the curve.
 
Recession risk is moderate based on signals from the bond market as the 30-year vs. 3-month Treasury spread nears the cycle low.
 
 
30-Year vs. 3-Month Treasury Spread:
Source: Bloomberg, EPB Macro Research
 
 
 
In my analysis, the growth rate of the economy has not slowed sufficiently to put the economy on recession watch. For that, I'd need to see the coincident index, cited above, to slow near 1.50%. If the coincident index presented above moves near the 1.50% range, this indicates that the largest four factors of the economy, as an aggregate, have slowed sufficiently to put the economy at the risk of a recession should a shock occur.
 
A shock is unknowable by definition and can knock a few points off of the economy's growth rate. If growth is accelerating, shocks tend to get absorbed. If growth is decelerating, and the momentum is lower, shocks are more impactful.
 
If you couple a shock with a growth rate that is low enough, growth in the four-critical sectors of the economy can move negative which therefore is a recession.
 
If the coincident index is showing a growth rate of 2.50%, a recession is almost impossible unless a shock can knock a full 250 basis points off growth. The lower the coincident index moves in growth rate terms, the less significant of a shock is required to pull the economy into a recession.
 
It should be noted that if economic growth decelerates below 1.50% as it did in late 2015, a recession is not guaranteed. The commonly discussed "soft-landing" can still occur if a material shock does not materialize before the economy starts to reaccelerate. For a recession to occur, typically we'd need to see growth decelerate to a sufficiently low level and couple a shock to push aggregate growth below the zero bound.
 
The short-end of the Treasury curve sees literally zero chance of an interest rate hike. The only question is about when the next interest rate cut occurs. Out to January 2020, the Treasury market is implying a 0% chance of a rate hike and a 60% chance of a rate cut. This is why the short-end of the curve remains inverted.
 
Below is the spread of the 5-year Treasury rate and the 3-month Treasury rate which remains in negative territory.
 
5-Year Rate Minus 3-Month Rate:Yield Curve Inversion Source: Bloomberg, EPB Macro Research
 
 
The bond market is consistent with the current economic outlook. Recession risk is not "low" because growth is decelerating and the economy is moving closer to the 1.50% range on the coincident index which makes the economy vulnerable to a shock.
 
While recession risk is not immediate yet, the economy has cooled enough and the monetary restraint, measured by monetary aggregates such as the money supply growth, have contracted enough in which the bond market feels a rate cut is needed.
 
In short, the bond market wants a rate cut but recession risk remains on the back burner still. Should the coincident index move below the 1.50% range, you'd likely start to see the 30-year vs. 3-month spread corroborate that move and flatten more considerably, especially if the Fed does not cut rates by that time.
 
It should also be noted that the Treasury curve out to 7-year paper is below the effective Federal Funds rate and the 10-year Treasury rate is just 2 basis points above the EFFR as of this writing. This is not something that immediately impacts the economy or the stock market but rather works with long and variable lags. Having a deeply inverted Treasury curve out to nearly 10-years is something that works to greatly impact shadow banking and direct lenders and most non-depository institutions.
 
To get the direction of interest rates correct, you need to follow the factors that actually drive the bond market.
 
Recession calls come frequently from those in the permanently bearish camp and never from those in the reliably bullish camp.
 
Using an objective measure of economic growth through various coincident and leading economic aggregate indexes, we can properly prepare for periods in which recession risk is low, high, rising or falling.
As of right now, recession risk is rising but not at an alarming level. Should growth continue to slow and the economy becomes vulnerable to a shock, a warning flag will be raised.


What Blows Up First? Part 8: Leveraged Corporate Loans

by John Rubino



By now just about everyone understands what junk bonds are and why they matter. But there’s a non-publicly traded version of this kind of debt that’s also soaring and has recently caught the Fed’s eye.

Called leveraged loans, these are loans made by banks to companies with weak balance sheets – defined as debt exceeding six times EBITDA, the broadest measure of cash flow.

The dynamic with leveraged loans is the same as with junk bonds (and margin debt, mortgages and car loans), which is to say the longer an economic expansion lasts, the more willing the markets are to fund the sketchier borrows in a given category. Which creates an unstable sector, which leads to a crisis as soon as the economy turns down, and so on.

In the Fed’s most recent report on potential sources of instability, leveraged loans earned a place of honor by clocking a 20% increase in the past year, combined with “rapid growth of less-regulated private credit and a weakening of underwriting standards.”

As the following chart illustrates, outstanding leveraged loans have blown past their 2008 record highs and are now approaching twice that level.

Leveraged corporate loans


“Borrowing by businesses is historically high … with the most rapid increases in debt concentrated among the riskiest firms amid signs of deteriorating credit standards,” noted the Fed.

Soaring debt raises the vulnerability of corporations as a whole, especially when they’re running up against trade wars, disorderly Brexit negotiations, political turmoil in the US and slowing growth in Europe.

This is the kind of problem that festers under the surface for a time before “surprising” everyone by blowing up and causing/contributing to a crisis. The reason it can fester is that in good times when credit is freely available, low-quality borrowers don’t fail. There’s always someone willing to refinance whatever loans come due, so default rates are extremely low.


Experts without a sense of history (or, more frequently, with a desire to keep the profitable deals flowing) are quoted in the media touting this combination of high yields and low risk (a 2% default rate!) as an opportunity for pension funds and other yield-hungry buyers to generate outsized returns. The marks take the bait and the game continues.

Until a slowing economy or sector-specific problem bursts the bubble.

This perfectly describes junk bonds in the late 1980s and subprime mortgages in the 2000s, with one difference: Today’s leveraged loans occupy just one of maybe a dozen pockets of extreme and growing risk that’s mostly hidden from even professional investors. Sub-prime auto loans and the bonds in which they reside, student loans, emerging market dollar-denominated debt, peripheral eurozone country (read Italy and Spain) sovereign debt, tech stocks; the list just keeps going. When one of these goes several if not all of the rest will follow, in what promises to resemble a fire in a munitions factory.

As for what might start the fire, an equities bear market and/or an inverted yield curve would do nicely. And it just so happens that the Dow is down 500+ points as this is being written, while the Treasury bond yield curve is flattening big-time. From 1 month out to 7 years, it’s already slightly inverted.

Treasury yield curve leveraged corporate loans


The other posts in this series are here.

Planet Fox

6 Takeaways From The Times’s Investigation Into Rupert Murdoch and His Family

Using 150 interviews on three continents, The Times describes the Murdoch family’s role in destabilizing democracy in North America, Europe and Australia.

By LIAM STACK


Rupert Murdoch, the founder of a global media empire that includes Fox News, has said he “never asked a prime minister for anything.”

But that empire has given him influence over world affairs in a way few private citizens ever have, granting the Murdoch family enormous sway over not just the United States, but English-speaking countries around the world.

A six-month investigation by The New York Times covering three continents and including more than 150 interviews has described how Mr. Murdoch and his feuding sons turned their media outlets into right-wing political influence machines that have destabilized democracy in North America, Europe and Australia.

Here are some key takeaways from The Times’s investigation into the Murdoch family and its role in the illiberal, right-wing political wave sweeping the globe.

The Murdoch family sits at the center of global upheaval.

Fox News has long exerted a gravitational pull on the Republican Party in the United States, where it most recently amplified the nativist revolt that has fueled the rise of the far right and the election of President Trump.

Mr. Murdoch’s newspaper The Sun spent years demonizing the European Union to its readers in Britain, where it helped lead the Brexit campaign that persuaded a slim majority of voters in a 2016 referendum to endorse pulling out of the bloc. Political havoc has reigned in Britain ever since.
And in Australia, where his hold over the media is most extensive, Mr. Murdoch’s outlets pushed for the repeal of the country’s carbon tax and helped topple a series of prime ministers whose agenda he disliked, including Malcolm Turnbull last year.

At the center of this upheaval sits the Murdoch family, a clan whose dysfunction has both shaped and mirrored the global tumult of recent years.

The Times explored those family dynamics and their impact on the Murdoch empire, which is on the cusp of succession as its 88-year-old patriarch prepares to hand power to the son whose politics most resemble his own: Lachlan Murdoch.

A key step in that succession has paradoxically been the partial dismemberment of the empire, which significantly shrunk last month when Mr. Murdoch sold one of his companies, the film studio 21st Century Fox, to the Walt Disney Company for $71.3 billion.

The deal turned Mr. Murdoch’s children into billionaires and left Lachlan in control of a powerful political weapon: a streamlined company, the Fox Corporation, whose most potent asset is Fox News.

Mr. Murdoch nearly died last year, making the succession question an urgent one.

Succession has been a source of tension in the Murdoch family for years, particularly between Mr. Murdoch’s sons Lachlan and James.

His two sons are very different people. James wanted the company to become more digitally focused and more politically moderate, while Lachlan wanted to lean into the reactionary politics of the moment.

The brothers have spent their lives competing to succeed their father, and both men felt as if they had earned the top job. When Mr. Murdoch decided to promote Lachlan over James, it was Lachlan who delivered the news to James over lunch, souring the already poor relationship between the men.


James briefly quit the company in protest. But he was lured back by a carefully crafted compromise that put Lachlan in charge but allowed James to save face by maintaining the public illusion that he was the heir.

But all of these succession plans — as well as the lucrative Disney deal — were thrown into chaos last year when Mr. Murdoch broke his spine and collapsed on a yacht.

He was rushed to a hospital, and appeared to be so close to death that his wife, the model Jerry Hall, summoned his children to say their goodbyes.

Mr. Murdoch survived, but his brush with death only highlighted the instability in his family — and at the heart of his empire.

The Murdoch empire has been a cheerleader for the American president and helped overthrow an Australian prime minister.

Mr. Murdoch’s media outlets have promoted right-wing politics and stoked reactionary populism across the globe in recent years.

During the 2016 campaign, the Fox News host Sean Hannity advised the president’s former lawyer, Michael D. Cohen, to be on the lookout for ex-girlfriends or former employees of Mr. Trump lest they cause him trouble, according to two people who know about the interactions (Hannity denies offering such advice). Mr. Cohen was later sentenced to three years in prison for paying hush money to two women who said they had affairs with Mr. Trump.

The Murdoch empire has also boldly flexed its muscles in Australia, which was for many years Lachlan’s domain.


In Australia, Lachlan expressed disdain for efforts to fight climate change and once rebuked the staff at one of his family’s newspapers, The Australian, for an editorial in support of same-sex marriage (He says through a representative that he is in favor of same-sex marriage). He also became close to the politician Tony Abbott, whose 2013 election as prime minister was given an assist by Murdoch newspapers.

The Murdoch family changed Australian politics in 2016 when it took control of Sky News Australia and imported the Fox News model. They quickly introduced a slate of right-wing opinion shows that often focused on race, immigration and climate change. The programming became known as Sky After Dark.

Last year, Mr. Turnbull and his staff accused Rupert and Lachlan Murdoch of using their media outlets to help foment the intraparty coup that thrust him from office in August. Mr. Turnbull, a moderate and longtime nemesis of his friend Mr. Abbott, was replaced by the right-wing nationalist Scott Morrison.

The Murdochs have denied any role in Mr. Turnbull’s downfall.

James Murdoch thought Fox News was toxic to the company.

James Murdoch became disillusioned with the family empire in the years before Lachlan emerged as heir. He came to see Fox News, in particular, as a source of damaging ideological baggage that was hobbling the company’s efforts to innovate and grow.

But Lachlan and Rupert did not share that belief. When Roger Ailes, the chief executive of Fox News, was ousted in 2016 amid a sexual harassment scandal, James wanted to revamp the network as a less partisan news outlet. He even floated the idea of hiring David Rhodes, a CBS executive.

His proposals went nowhere. Lachlan and Rupert opposed any change to what they saw as a winning formula and decided to stick with Fox’s incendiary programming.


But James believed he had seen firsthand the damage that outlets like Fox News were doing to the company.

He was the face of the Murdoch empire in Britain during a 2010 attempt to take over British Sky Broadcasting, in which the company owned a minority stake.

That bid was blown to pieces by the 2011 phone hacking scandal, which forced James and his father to appear before Parliament to explain why their employees hacked into the voice mail of private citizens, including a dead 13-year-old girl. The scandal forced the Murdochs to abandon their bid for Sky.

Five years later, facing pressure from digital rivals like Netflix and Amazon, the family made a second bid for Sky. James again acted as the empire’s public face. The bid again collapsed in a humiliating scandal.

This time it centered on the culture of Fox News, where sexual misconduct allegations and millions of dollars in secret settlements led to the departure of Mr. Ailes, the star host Bill O’Reilly and Bill Shine, an executive who later went to work for President Trump.

The behavior of Mr. Hannity, who used his show to spread conspiracy theories about the death of a Democratic National Committee staff member named Seth Rich, also fed concerns in Britain over the ethics of the company.

After months of review by regulators — and scrambling inside 21st Century Fox — the British government issued a withering rebuke to the Murdochs last year.

Not only did Britain block the company’s bid for Sky, it also ruled that no member of the Murdoch family could serve at Sky in any capacity, including on its board. At the time, James was serving as Sky’s chairman.

It was a deep humiliation that convinced James once and for all that the family empire could not survive its own politics and culture. Lachlan instead saw it as validation of his belief that James, having failed to acquire Sky once, had been the wrong man for the job.

Either way, by putting a much-needed revenue stream permanently outside the family’s grasp, it helped make the sale of 21st Century Fox inevitable.

The Disney deal worsened a family rift.

James and Lachlan were bitterly split over the prospect of selling 21st Century Fox to Disney. James pushed hard for the deal, which was completed last month, and Lachlan fiercely opposed it.

Lachlan vociferously opposed the deal because it substantially shrank the company he returned from Australia to one day lead, people closer to his brother said. He felt so strongly that at one point he warned his father he would stop speaking to him if he continued to pursue the deal. Mr. Murdoch ignored that threat. (Lachlan denied making the threat.)

Lachlan’s opposition was also fueled in part by his suspicion that his brother’s judgment had been clouded by personal ambition, people closer to Lachlan said. He thought James was willing to sell 21st Century Fox for less than it was worth because he wanted the deal to include a job for himself at Disney.


The deal transformed Disney into a media colossus, and a job there might have enabled James to position himself as a successor to its chief executive, Robert A. Iger. It would also let him escape the family company, its political baggage and the prospect of working for Lachlan.

The two brothers clashed over everything. When James wanted to respond to President Trump’s 2017 travel ban with a statement reassuring their company’s Muslim employees, Lachlan strenuously resisted. When James bought their father’s Beverly Hills mansion for $30 million, Lachlan, who had also wanted the house, got so upset that their father gave him some of its antique furniture. James thought he had bought that, too.

During the Disney negotiations, Mr. Murdoch grew concerned enough that James’s ambitions might interfere with the deal that he decided to assure Mr. Iger that it was not conditional upon Disney’s hiring his son. In the end, the sale went through, but James did not get a job. Today, the two brothers are barely on speaking terms.

Three of the Murdoch children wanted out, and Lachlan might too.

After the Disney deal, the commitment of Mr. Murdoch’s children to what remains of his media empire has been called into question.

The Disney deal made all of them an enormous amount of money: Mr. Murdoch received $4 billion and his children received $2 billion each. As executives at 21st Century Fox, Lachlan and James got an additional $20 million in Disney stock plus golden parachutes worth $70 million each.

Mr. Murdoch had structured his companies, 21st Century Fox and News Corporation, so that the Murdoch Family Trust held a controlling interest in them. He held half of the trust’s eight votes, and the remaining four were divided up among his four adult children. They were barred from selling those shares to outsiders.

James struck out on his own at the end of 2018. To make a more complete break with the company, he and his sisters Elisabeth and Prudence offered to sell their shares to Lachlan.

Mr. Murdoch embraced the idea and urged Lachlan to buy out his siblings. Then father and son would own the company together.

Bankers drew up documents to execute the sale, but Lachlan backed out; he said that it was not financially doable, though the decision raised questions about his commitment to the company.

People close to James said they believed Lachlan was not sure he wanted to stay at the company after the Disney deal was complete. They said he might even want to go back to Australia.