Donald Trump’s war on the Federal Reserve

The president has left himself just one tool to stop a recession — bullying Jay Powell

Edward Luce




Pity Jay Powell. The man who appointed him as chair of the US Federal Reserve wonders whether he is a bigger enemy of the US than China’s president, Xi Jinping. Donald Trump entered new territory by implying his country’s central bank was run by a traitor. Previously, Mr Trump had described Mr Powell as “clueless” and a man with a “horrendous lack of vision” who is like a “golfer who cannot putt”. Also he “maybe” regrets having picked him.

Anyone would think Mr Powell was trying to ruin Mr Trump’s re-election prospects. In fact, most of Mr Trump’s recent epithets came after the Fed had done what he wanted by cutting interest rates in late July. His tweet followed an otherwise anodyne speech in which Mr Powell sounded a mildly dovish tone about the Fed’s likely trajectory. His offence, it appears, was to sound agnostic about how far the Fed should go to counteract the fallout from a trade war that is harming domestic growth. Though the Fed chair was too diplomatic to single out America’s escalating trade war with China, Mr Trump correctly sensed that this was the unforced error to which the Fed chair was referring.

Where does it go from here? At the best of times, US presidents have limited power to stop a recession, or even a growth slowdown. Mr Trump has already ruled out two out of the three most obvious things he can do to to keep the economy buoyant ahead of next year’s election. The first would be to call off his trade war with China. The likelihood that it will get worse has spurred a flight to the dollar, which has more than wiped out any depreciatory effect of last month’s quarter point interest-rate cut.

The US investment outlook is already fraught with uncertainty. On Friday the US president “ordered” US businesses to disinvest from China. Concerns about a US-China decoupling now seem almost quaint. Mr Trump is aiming for a full-blown divorce. This is not a climate that is conducive to higher investment.

The second tool Mr Trump is abjuring is global co-ordination. This weekend he is meeting his G7 counterparts in France. It would be the ideal moment for leaders to issue a clear statement that they will act to stop competitive currency devaluations and trade wars. Such pledges have had a constructive impact on many occasions over the past 50 years.

International co-ordination can steer currency markets, as happened in the 1980s, and can help to rescue the global economy, as happened in the financial crisis. But cross-border co-ordination is foreign to Mr Trump. It goes against his belief that sovereign powers should act alone. That is also out of the question.

The third tool a US president can use is fiscal stimulus. Mr Trump has mused in recent days about passing a payroll tax holiday, which would put more money in American consumer pockets. However, Democrats would probably demand a price that Mr Trump would find hard to swallow, such as a federal $15-an-hour minimum wage, or a big infrastructure package.

Each would boost the economy. But Mr Trump is allergic to striking deals with Democrats (and vice versa). Either way, Mr Trump now says a tax cut is off the table.

That leaves him with just one tool — bullying Mr Powell. The problem is that the Fed has fewer tricks up its sleeve than Mr Trump supposes. The difference between a fed funds rate of up to 2.25 per cent, which is where it is now, and going to 2 per cent or below would be minimal at a time when we are facing fears of what former Treasury secretary Lawrence Summers calls “secular stagnation” — negligible long-term growth. It is like pushing on a piece of string, as the saying goes.

A better metaphor would be that Mr Trump is administering futile beatings to the Fed chair with a golf club. The president can threaten all he likes — and even stretch the law to imply he can fire Mr Powell. That may be what eventually happens. But he cannot turn the Fed into a magic box of economic remedies.

The larger danger is that the Fed is already enabling Mr Trump to indulge his most combative instincts. Every time Mr Trump threatens China, he looks to the Fed to bail him out.

Mr Trump is now pushing for a 100 basis point rate cut. This puts Mr Powell in an unwinnable position. On the one hand, monetary easing gives Mr Trump further room to pursue his growth-dampening trade war. On the other, the Fed would be negligent if it failed to react to the incoming data. Mr Powell’s remit is to aim for the dual target of 2 per cent inflation and full employment. It is not his role to question a president who is making that task far harder.

Over the long term, the Fed as an institution will probably survive Mr Trump’s assaults with its independence intact. The same looks decreasingly likely for the man who heads it. It is quite possible that Mr Powell will be replaced from among the galaxy of unprincipled job seekers who audition daily on Mr Trump’s TV screen. Technically, the president does not have the power to remove the Fed chair before his term ends in 2022. But this president is a unique kind of leader.

Earlier this week, Mr Trump tweeted quotes from an admirer that likened him to “the King of Israel”. Mr Powell should beware. Biblical scholars will recall that the infamous King Herod was fond of having heads served to him on a platter.


Brazil and France, at Loggerheads on Trade

How these two powerful economies could sink a trade deal between Mercosur and the EU.

By Allison Fedirka

 

The Brazilian and French presidents are locked in a political feud rooted in trans-Atlantic trade negotiations. Brazil’s Jair Bolsonaro and France’s Emmanuel Macron have been sparring for several months over what each considers acceptable terms for a free trade deal between the European Union and the Mercosur trade bloc. Of particular concern is the extent to which Mercosur countries’ agricultural sectors can access EU markets. Paris had initially said it would accept the agreement on three conditions: that the pact mention implementation of the Paris Agreement on climate change; that it respect EU environmental and sanitary standards; and that it protect sensitive value chains through limited and progressive quotas. But the spat came to a head last weekend during the G-7 summit when Macron threatened to block the agreement over Brazil’s failure to control the fires raging in its portion of the Amazon. France considers the Brazilian response to the fires a breach of the French conditions – and potential grounds for breaking the agreement.

France is the eurozone’s second-largest economy and the EU’s third-largest, following Germany and the United Kingdom. Agriculture still plays a key role in the French economy, making Paris a gatekeeper when it comes to opening EU markets to foreign agricultural products. But Brazil packs a punch on the Mercosur side; it is disproportionately larger than every other member state, so it can make or break a trade deal. This may explain why Brazil didn’t blink at the French threats to block the agreement. Bolsonaro told Paris not to interfere in Brazil’s sovereign affairs and refused outside help in handling the Amazon fires. The free trade agreement, which has been decades in the making, is bringing to the fore critical national interests of both France and Brazil – and without their assent, the deal cannot pass.

 

 

Aligning Interests
Efforts to negotiate a free trade deal between Mercosur and the EU first began in 2000 and have continued haltingly since. Mercosur and the EU were in radically different positions in 2000 than they are today. The EU had a robust economy and was preparing for a massive membership expansion. Brazil, meanwhile, was still trying to overcome its economic crisis of the 1990s – and Argentina’s economy would collapse just one year later. By the time the South American economies recovered, the EU was reeling from the 2008 financial crisis. And then as Europe stabilized, Mercosur governments began leaning toward protectionist trade policies as they wrestled with further economic crises. Unfailingly, domestic problems overshadowed negotiations, and the two blocs were unable to reach a deal.

For the final EU-Mercosur free trade agreement to be viable, several geopolitical interests needed to align. Sure enough, in 2019, the two sides find themselves on more even footing and with complementary goals. Brazil and Argentina both elected governments that support free markets, a change from their predecessors’ protectionist policies that impeded the negotiations’ progress. Their initial market reforms have indeed put Mercosur in a better negotiating position. At the same time, the EU is facing uncertainty over Brexit, trade with the U.S. and talk of an imminent economic downturn. It’s more vulnerable – and therefore more open to reaching some kind of a trade agreement. That puts both sides in a position where they’re eager to strike a deal at the same moment. But it doesn’t mean their differences have disappeared.



 

Unresolved Differences
To smooth over the remaining differences, particularly on agriculture, two safeguards were introduced in the draft agreement. The first was a mechanism that, in theory, works to protect economic sectors from “significant or unexpected increases in exports.” The second was a precautionary measure that allows a country to reject agricultural imports from another if the imports are deemed harmful to health. But the two sides’ interpretations of these provisions differ significantly. Brazil believes these measures can be applied only with scientific evidence to back them up, and that the burden of proof lies with the country that lodges the complaint. Brussels, however, believes it’s the EU’s prerogative to regulate food safety.

France, in particular, seems unsatisfied with the terms and continues to threaten to scuttle the deal. Its reasons for doing so may go beyond the EU-Mercosur agreement itself. The French government, with the disruptions caused by the yellow vest movement fresh in mind, wants to avoid provoking social unrest among groups like farmers. In addition, the eurozone’s future growth is in question and there are fears of recession – and dealing with a downturn will likely pit France against other countries in Europe. (France would likely be among those footing the bill for an economic recovery package.) Perhaps most important, the EU has other important upcoming negotiations to consider, not least of which will be trade talks with the U.S. Conceding to Brazil in the Mercosur talks will set a bad precedent for other potential deals. But if France can draw a line in the sand with Brazil now, it will gain important leverage both with other EU members and in future trade negotiations for the bloc. In this sense, the French position is about much more than just Brazilian agricultural products.


 
Brazil, on the other hand, is caught between the competing imperatives of maintaining complete control over the Amazon and expanding its trade relationships. The Amazon corridor, which traverses through northern Brazil, is both a vulnerable and strategic area for the country. It is sparsely populated and minimally developed, meaning the state presence there is quite limited. Brasilia is staunchly opposed to any foreign involvement in the management of the Amazon, fearing that foreign presence could overpower the Brazilian government’s control of the region and segment its national territory. So, while environmental concerns over the Amazon fires are significant, for Brazil, so too are national security concerns.

But Brazil has also made it a priority to develop strong and diversified trading relationships. It needs to stimulate economic activity to avoid a slowdown, and increased trade is a key pillar in these efforts. In particular, the country needs to expand beyond its top three trading partners (China, the U.S. and Argentina) whose own economic woes have made them less reliable. The Bolsonaro administration is working on multiple fronts to achieve this diversification. On Aug. 24, Mercosur and the European Free Trade Association (comprised of Switzerland, Liechtenstein, Norway and Iceland) announced they had reached a free trade agreement “in substance.” Mercosur is also in talks with Canada, South Korea and Singapore over trade, and Brazil has entered formal trade negotiations with the United States.

The EU-Mercosur free trade talks have been riddled with challenges, and even if the blocs today seem in a better position to make a deal, threats to an agreement persist. France and Brazil, in particular, will have to weigh the benefits of an agreement against other pressing national needs. It will be several more years before the deal comes into force. In the meantime, Paris and Brasilia will seize on issues like the Amazon fires to strengthen their own positions and to hedge their bets.

miércoles, septiembre 11, 2019

GOLD - THE $1,600 PER OUNCE TARGET / SEEKING ALPHA

|

Gold - The $1,600 Per Ounce Target

by: Andrew Hecht



- A spectacular rise from the April low.

- Markets rarely move in a straight line.

- This time could be different.

- Gold mining stocks outperform on the upside; leverage on dips to turbocharge performance.
 

Gold has been in a bull market since the early 2000s. In 1980, the yellow metal reached a high at $875 per ounce. In early 2008, the price moved above that level for the first time. In 2011, it reached its peak at $1920.70 per ounce in dollar terms before a correction took the price to a low at $1,046.20 during the final month of 2015. Gold then consolidated and traded in a $331.30 range over the next four years. The 2015 low was a critical support, and the July 2016 post-Brexit referendum high at $1,377.50 stood as the crucial technical resistance level.
 
Gold reached its low during the month that the US Fed began increasing the short-term Fed Funds rate from zero percent. The yellow metal broke through the resistance level at $1,377.50 in June 2019 when the US central bank told the market that short-term interest rates would move lower by the end of 2019. The move by the Fed was the first rate cut in many years, and it lit a bullish fuse under the gold market that continues to take the price to higher highs. The next technical target for gold is at just over the $1,600 per ounce level, but the ultimate goal is a challenge of the 2011 high. Even the strongest bull markets undergo corrective periods. Buying dips in gold is likely to enhance performance if this bull market has legs on the upside.
 
Meanwhile, gold mining shares tend to outperform the price action in the gold futures market on a percentage basis on the upside. To turbocharge performance, the Direxion Daily Gold Miners Index Bull 3X Shares (NUGT) could be an excellent short-term tool to take advantage of bull market dips in the precious metal.
 
This week's highs were next week's lows
 
Since June, when the price of gold moved steadily higher. The prospects for falling interest rates in the US and around the world lit a bullish fuse under the gold market, and the price rallied steadily from late May through early September. Over many of the summer weeks, the highs in gold from one week became the lows during the next week.
Source: CQG
 
 
The weekly chart shows that the trajectory if the most significant rally in years took gold over $290 per ounce high over 16 weeks. Gold posted gains in 12 out of the 16 weeks, and three times the high for one week was close to the low for the next week.
 
Open interest, the total number of open long and short positions in the COMEX futures market, rose from 465,077 contracts in late May to 643,563 contracts on September 4, the day of the most recent peak at $1,566.20 on the December futures contract. The metric rose by over 38% over the period to a new record high. The over-the-counter gold market in London is larger than the futures market, but the measure of activity on COMEX reflects increased volumes and interest in gold in the OTC market.
 
In a futures market, rising price and increasing open interest is typically a validation of a bull market trend. However, gold declined last Thursday and Friday causing the yellow metal to put in a bearish reversal on the weekly chart. The technical pattern could lead to further selling over the coming sessions. Meanwhile, open interest fell to under 620,000 contracts as the price of gold turned lower, which is not typically a bearish technical sign in a futures market.
 
A spectacular rise since from the April low
 
Gold fell to the lowest level of 2019 during the week of April 22.
 
Source: CQG
 
 
The weekly chart illustrates the move from $1,266 to the most recent peak at $1,559.80 on the continuous futures contract. The rise of 23.2% from the low to the high this year took gold to its highest price since 2013. The next target on the upside stands at $1,602.60 per ounce, the April 2013 high. However, the price at just above the $1,600 level only stands as a minor technical resistance level as gold's ultimate target is the 2011 peak at $1,920.70 per ounce.
 
Markets rarely move in a straight line

 
The chart shows that the rally in gold took the slow stochastic, a momentum indicator, and relative strength into overbought territory. On September 5 and 6, gold suffered its most significant correction of the year as the price of the yellow metal dropped by around $50 per ounce. The downdraft came on the back of positive news on trade that caused stocks to rally.
 
Moreover, Prime Minister Boris Johnson's plan to exit the EU without any deal on October 31 ran into a roadblock as the UK Parliament voted to put a leash on the new leader. Thursday, September 5, was a day when optimism returned to markets and stocks moved appreciably higher. The prices of some industrial commodities, including crude oil and copper, moved to the upside, which caused gold and silver to correct to the downside.
 
Gold moved from under $1,270 per ounce to the $1,560 level in a little over four months. Silver exploded from under $14.25 to over $19.50 per ounce in just over three months. The trajectory of the moves has been impressive, but markets rarely move in a straight line. December gold and silver futures were at $1,515 and $18.17 per ounce respectively on September 6.
 
Both will likely fall to lower levels over the coming days and perhaps weeks. A 50% retracement from the April and May lows to last week's highs in both metals would take them to $1,412.90 and $16.8925 per ounce.
 
The current correction could be the healthiest thing for the gold and silver markets as a cleansing of weak longs would clear the path of new buying that could take both of the precious metals to higher highs in the future. Higher prices could lead to wider daily trading ranges and severe corrective periods. The moment of truth for the next leg of the bull markets will depend on how they react to corrections as we witnessed at the end of last week.
 
I remain bullish on the prices of both metals and would view a continuation of selling as a golden buying opportunity.

 
This time could be different
 
 
It is virtually impossible to pick the top in a bull market or the bottom during a bearish market.
 
Human nature in the form of fear and greed leads market participants to buy on rallies and sell on price dips. Everyone loves a bull market and wants to profit by joining a herd of others in the way up.
 
When prices are falling, market participants often head for exits and liquidate positions at the same time. Many markets take stairs higher and an elevator to the downside, which is why the VIX index tends to appreciate during stock market corrections and collapse as share prices rise.
 
When it comes to the next leg of the bull markets in gold and silver that began just before the start of the summer of 2019, it is always possible that we have already seen the highs that will stand as resistance levels for an extended period. However, one factor is telling me that this time is different, and both metals will reach much higher lows and move to much higher highs over the coming weeks and months.
 
Gold is both a currency and a commodity. Gold recently rose to a record high in almost all currencies other than the US dollar and the Swiss franc. The last currency instrument to fall to a new low against gold was the euro at the end of last month. Gold has rallied in all currency terms, which is a commentary of the full faith and credit of the governments around the world that print the legal tender that is the foreign exchange instruments.
 
Over a decade of historically low interest rates and programs of quantitative easing around the globe pushed rates lower in the short-term and further out along the yield curve. The central banks have been running the currency printing presses overtime to stimulate the economy, and the world has become addicted to accommodative monetary policy.
 
The US attempted to end the vicious cycle of stimulus from 2015 through 2018. Meanwhile, the pivot in June that led to the first interest rate cut in years and the end of balance sheet normalization in the US amounted to a white flag as the US rejoined the stimulus party.
 
Central banks hold currencies as reserve assets, and they also hold gold. The monetary authorities can print paper legal tender to their heart's delight, but they cannot print more gold. When it comes to the yellow metal, governments can only buy and sell gold in the market or accumulate from producers who control the extraction process. They cannot print or create more gold. Central banks have been net buyers of the precious metal, with Russia and China leading the way over the past years. The two countries are leading gold producers, and they have been accumulating domestic output like vacuums.

Gold is the oldest means of exchange in the world. For thousands of years, gold has been a store of value and a currency. Long before king dollar, the euro, yen, yuan, ruble, or any other foreign exchange instrument was around, gold was the monarch when it comes to money. Gold is telling us that currencies are falling in value across the board, and that is why this time could be different when it comes to the bull markets in gold and silver.
 
Gold mining stocks outperform on the upside - Leverage on dips to turbocharge performance
 
If the price action in gold late last week is only a speedbump on the way to higher prices, gold mining stocks could be the perfect way to turbocharge profits. The mining stocks are not for the faint of heart as they outperform the price action in gold on the upside and underperform during corrective periods.
 
So far in 2019, the price of gold from a low at $1,266 to a high at $1,559.80 or 23.2%. Over the same period, the VanEck Vectors Gold Miners ETF (GDX) outperformed the yellow metal.
 
Source: Barchart
 
 
GDX moved from a 2019 low at $20.14 to a high at $30.96 or 53.7% as the ETF that holds many of the leading mining stocks delivered over twice the percentage return as the gold futures market. Last week, nearby December gold futures dropped from $1,566.20 to a low at $1,510.70 or 3.54%. Over the same period, GDX fell from $30.96 to $28.81 or 6.94% as the mining stocks underperformed the metal.
 
If the gold mining stocks are not for the faint of heart, the short-term Direxion Daily Gold Miners Index Bull 3X Shares is only appropriate for the bravest of the bulls. The fund summary for NUGT states:
"The investment seeks daily investment results, before fees and expenses, of 300% of the daily performance of the NYSE Arca Gold Miners Index. The fund invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is a comprised of publicly traded companies that operate globally in both developed and emerging markets, and are involved primarily in mining for gold and, in mining for silver. It is non-diversified."
Source: Yahoo Finance

NUGT has net assets of $1.6 billion, trades an average of over 10.5 million shares each day, and charges a 1.23% expense ratio. The highly liquid product is only appropriate for short-term trades as the leverage causes time decay for the instrument. However, in a market that moves higher in a straight line, the results can be explosive. During a correction, the value can melt like a snowball in the hot Nevada desert.
 
Source: Barchart
 
 
During the period when gold moved 23.2% higher, and GDX rallied by 53.7%, NUGT took off like a rocket with a rise from $14.06 to a high at $45.10 as it moved over three times higher.
 
Late last week NUGT fell from $45.10 to $35.60 or 21.1%, highlighting the risk of the leveraged product.
 
I continue to believe the next target in gold is at $1,600 and that is just a pit stop on its way to new record highs and a move that will take the yellow metal over $2,000 per ounce. On dips, NUGT could be an excellent short-term trading tool, but I'd use tight stops on any long positions. With triple-leveraged instruments, prices will probably hit stops often, but the goal is to capture a period where the product turns in explosive returns as it did from May through early September.
 
This time could be different because while the dollar is still the king of currencies, it is becoming clear that gold is the monarch of money.

Why stop at parliament? Let’s get rid of the whole government

A timeout will send a clear message to the world: Britain has not gone mad, we’re just drunk

Henry Mance

House of Commons, Houses of Parliament, London - Interior view of Commons Chamber, Architects: Sir Charles Barry and A. W Pugin. (Photo by Arcaid/Universal Images Group via Getty Images)
The Houses of Parliament, London. Imagine there’s no cabinet. It’s easy if you try © Getty


History is one damn thing after another; British politics is lots of damn things all at once. As a BBC journalist helpfully explained in the run-up to the Iraq war: “It’s like a complicated game of bluff, except it’s not a game and they’re not bluffing.”

But I have an idea — a way out of the mayhem. Instead of arguing over whether to suspend parliament, could we not simply suspend the whole government instead? No new laws, no policy announcements, no ministers. Like a toddler timeout, but on a national scale. Or a long walk after a family argument. Meet back here once we’ve all calmed down, OK?

It is the common sense solution. Brexit means restoring faith in our democracy. How can we do this while Priti Patel and Gavin Williamson exercise cabinet responsibility? They’ll get over being sacked for a bit — it won’t be the first time.

To those who say that a government is essential, I say: Belgium. In 2011 Belgium set a world record — 541 days — for a country without an executive, and it survived. I say also: Italy. Its bond yields hit a record low after its government collapsed this month.

Democracy, said Winston Churchill, was the worst form of government except for all the others. But what about no government? He didn’t think of that. The era of big government is over, said Bill Clinton. He too wasn’t thinking laterally enough. Imagine there’s no cabinet. It’s easy if you try.

The suspension need not last long. Drunk people take a cold shower to sober up. Our government could do with a stomach pump and several months in a darkened room. The time will fly. Doesn’t it seem like yesterday that the UK was a normal country? It was three and a half years ago.

Of course the doom-mongers will talk down the opportunities of no government. They’ll say there are risks that simply cannot be managed. I call that Project Fear. Make no mistake — we will be ready.

In fact, Britain has been working tirelessly to prepare for a country of no government. For several years, our departments have been dedicated to not achieving anything. The Iraq war, the deficit plan, David Cameron’s immigration target, Theresa May’s burning injustices. Did we achieve any of our objectives? Absolutely not. We should be confident of a smooth transition to no government.

True, there are lots of useful things a government might do in Britain, but the current generation of politicians seems incapable of any of them. So let’s take a political version of the Hippocratic Oath — first, do no harm.

We won’t call any referendums, prematurely invoke Article 50, negotiate any universally unpopular withdrawal treaties, or organise any more state visits by US President Donald Trump. Our government-less country will be less headless chicken, more hibernating tortoise.

I admit that Brexit is a complicating factor. Downing Street’s insistence on leaving the EU on an arbitrary date — with or without a deal — is a bit like a bloke insisting on getting married next summer — whether or not he has found a partner. Would this strategy focus the minds of his Tinder dates? I’m not convinced. If anyone desperately needs to leave the EU on October 31, they can always take a cheap flight to Norway.

The business of the nation can obviously not cease completely. What will happen to the HS2 railway or Heathrow airport’s third runway? Here, too, we’re actually remarkably prepared for no government. Ministers have approved both projects without definitely committing to either. So if HS2 and Heathrow really want action, their best hope is to make progress while there is no government, in the hope that it will be too late to cancel the work once the executive is back. Genius, really.

You may wonder if all this is very democratic. Please, at least wait until you’ve seen the opinion polling. No government may be the one thing the public can all agree on.

A government timeout will send a clear message to the world. Britain is not irredeemably mad, we’re just rather drunk. And, to paraphrase Churchill, in a few months we’ll be sober again.

Why America’s CEOs Have Turned Against Shareholders

The chief executives of America's largest companies made news this month by coming out against a model of corporate governance that has for decades prized shareholder value over all other considerations. But no one should assume that corporate America has finally seen the light.

Katharina Pistor

pistor9_Chip SomodevillaGetty Images_ceo jamie dimon


NEW YORK – The Business Roundtable, an association of the most powerful chief executive officers in the United States, announced this month that the era of shareholder primacy is over. Predictably, this lofty proclamation has met with both elation and skepticism. But the statement is notable not so much for its content as for what it reveals about how US CEOs think. Apparently, America’s corporate leaders believe they can decide freely whom they serve. But as agents, rather than principals, that decision really isn’t theirs to make.

The fact that American CEOs think they can choose their own masters attests not just to their own sense of entitlement, but also to the state of corporate America, where power over globe-spanning business empires is concentrated in the hands of just a few men (and far fewer women). As a matter of corporate law, CEOs are appointed by a company’s directors, who in turn are elected by that company’s shareholders every year. In practical terms, though, most directors remain on the board for years on end, as do the officers they appoint.

For example, Jamie Dimon, the chairman of the Business Roundtable’s own board of directors, has been at the helm of JPMorgan Chase for over 15 years. During most of that time, he has served as both CEO and chairman of the board of directors, in contravention of corporate-governance principles that recommend separating these two positions.

By capturing the process to which they owe their own positions, American CEOs have made a mockery of shareholder control. The Business Roundtable itself has long favored plurality over majority voting, which means that incumbent board members need only receive more votes than anybody else, rather than a majority. At the same time, the organization has fought the Securities and Exchange Commission tooth and nail to block a rule that would allow shareholders to write in their own candidates when votes are solicited. And it continues to try to weaken shareholders’ ability to propose agenda items for shareholder meetings.

In short, for the Business Roundtable and the CEOs it represents, shareholder primacy has never meant shareholder democracy. Instead, the shareholder-value model has given CEOs cover to avoid discussing corporate strategy, especially when it comes to considering alternatives to the share price as a metric for corporate performance. For CEOs, the share price is everything, because it protects the company from takeovers (the greatest threat to incumbent managers), and it increases their own remuneration.

Why, then, would CEOs come out against a status quo that has allowed them to reign almost unchallenged, in favor of a stakeholder-governance model that puts employees and the environment on an equal footing with shareholders? The answer is that revolutions often devour their children. Share-price primacy has not only ceased to protect CEOs in the way it once did; it has become a threat.

After all, it is one thing to champion shareholders when they are too dispersed to organize themselves. It is quite a different matter when shareholders have assembled into blocs with effective veto power and the ability to coordinate in pursuit of common goals. Some 74% of JPMorgan Chase’s shares are held by institutional investors, five of which – including Vanguard, BlackRock, and State Street – control one-third of total shares. And JPMorgan isn’t alone. Recent research in the US shows that the same few global asset managers are top shareholders at almost all of the largest financial intermediaries, Big Tech firms, and airline companies.

For CEOs, the emergence of powerful shareholder blocs has changed the corporate-governance game. With trillions of dollars of savings that need to be invested, institutional investors simply cannot be ignored. Even if asset managers do not actively involve themselves in corporate governance, they can still send a powerful signal to the market simply by dumping shares.

For years, the shareholder-primacy model led CEOs to eke out profits through outsourcing or labor-force downsizing, regulatory and tax arbitrage, and stock buybacks that shower cash on shareholders at the expense of investing in their companies’ future. But now, they have finally realized that these strategies are better for institutional investors than they are for the sustainability of firms.

Confronted with the headwinds they themselves generated, American CEOs seem to have concluded that best defense is a good offense. But if they are serious about abandoning the shareholder-primacy model, public statements will not suffice. They must also support legal reforms, particularly the measures needed to hold corporate directors and officers accountable to the principals they serve. That could mean extending board representation to employees and other stakeholders, or it could take the form of special audits, along the lines of those to which public benefit corporations submit.

Either way, if the new stakeholder model is going to amount to more than the old charade of “shareholder democracy,” the principals themselves must be involved in setting up the new regime. If we leave it for the agents to decide for themselves, we will end up right back where we started.


Katharina Pistor is Professor of Comparative Law at Columbia Law School and the author of The Code of Capital: How the Law Creates Wealth and Inequality (Princeton University Press).


The Geopolitical Logic of the US-China Trade War

The dispute was decades in the making.

By George Friedman


Since Donald Trump took office in 2017, the United States has introduced a series of measures to try to reduce its trade imbalance with China. But Trump’s decision to impose tariffs on China was preceded by a decade of failed negotiations aimed at establishing a more equitable trade relationship between the two countries. The Obama administration had multiple high-level meetings with Chinese officials over Chinese barriers to U.S. imports and Chinese manipulation of the yuan. Whether fair or unfair, the perception of multiple U.S. administrations was that China enjoyed free access to U.S. markets without reciprocating.

The Chinese made gestures toward accommodation, but they could not grant U.S. demands for greater access to the Chinese market. China’s economy had long been heavily dependent on exporting to foreign markets, since its own domestic market could not absorb the vast quantity of goods that Chinese industry was producing. But with the onset of the 2008 financial crisis, the domestic market took on a whole new significance.

The Japanese Example
There are several similarities between U.S.-China trade relations today and U.S.-Japan trade relations in the 1980s. During the 1970s and 1980s, Japanese industrial production significantly exceeded domestic needs, and Japan had closed off much of its own market to imports from the U.S. The mid-to-late 1980s were a time of extreme tension between the two countries. The U.S. made serious threats of retaliation, but none came to pass for two reasons. First, Japan was a strategic ally of the United States. The need to close off Vladivostok – which required Japanese cooperation – was ultimately more important than the U.S. trade imbalance with Japan. Second, in the late 1980s, the Japanese economy began to crumble. Competition from other manufacturing hubs forced Japan to reduce the price of its exports, which reduced profit margins and weakened the banking system that was underpinning the Japanese export industry. The banks tottered and collapsed, meaning Japanese manufacturers were no longer able to export at the same level they once were.

But before the banks collapsed, there was extreme bitterness and anti-Japanese sentiment in the United States over the loss of jobs to Japanese manufacturers. We’re seeing similar responses today to the Chinese. And China is also now facing intense competition and also lowering prices, while trying to enter other highly competitive markets in technology.

That said, there is a fundamental difference between Japan and China. Japan was a strategic asset to the United States – which, to some extent, helped contain the economic friction. Not only is China not a strategic asset to the U.S., but it’s actually increasingly viewed as a strategic threat. Either way, the Chinese have emphasized their growing military prowess, meaning that the arresters that were present in U.S.-Japan relations are absent from U.S.-China relations. Beijing being both a military and economic threat will force different responses from Washington.
But China had followed the Japanese strategy on dealing with the U.S. It held numerous meetings that ended without a resolution. Since there appeared to be no lever to force the Chinese to shift their policy, multiple U.S. administrations simply continued to hold talks that ultimately seemed to go nowhere. In these negotiations, the Chinese were aided by the large investments in China made by U.S. companies, which pushed Washington to maintain a stable relationship with Beijing. But while these companies profited from the relationship with China, it was always questionable whether the U.S. economy did as well. They were in China to take advantage of cheap Chinese labor, but in doing so, they closed U.S. factories and got rid of their American workers. This helped their bottom line, but the wealth that was created remained in China.
 
A Shift
In prior administrations, the outsourcing of manufacturing for U.S. businesses made it difficult to take action against the Chinese. But after the 2008 financial crisis, the massive displacement of the formerly powerful industrial working class created a large and angry segment of the population that became as politically powerful as the U.S. businesses that operated in China. The option of simply continuing inconclusive talks that had no impact on Chinese policy slowly evaporated.

And so, the Trump administration has used tariffs to try to force the Chinese to open their markets to U.S. competition. The problem is that the Chinese economy is in no position to accept such competition. The financial crisis severely affected China’s export industry as the global recession reduced the appetite for Chinese goods. This hurt the Chinese economy greatly, throwing it off balance in a crisis that still reverberates in China today. China’s main solution to this problem has been to increase domestic consumption – a task that has proved difficult because of the distribution of wealth in China, the inability of financial markets to massively increase consumer credit, and the positioning of Chinese industry to target foreign, rather than domestic, consumers. Selling iPads to Chinese peasants isn’t easy.

Allowing the U.S. to access the Chinese market would have been painful if not disastrous. The Chinese domestic market was the only landing pad China had, and U.S. demands for greater access to it were impossible to meet. The Chinese retaliated against U.S. tariffs, but it was feeble. China derives 4 percent of its gross domestic product from exports to the U.S. The U.S. derives only 0.5 percent from exports to China. China can do much less harm to the United States than the U.S. can do to harm China. Critics of the Trump administration’s use of tariffs will show that various farms or factories have been hurt by the tariffs, and those criticisms are valid, but they do not capture the full picture.

The Chinese responded by lowering the value of the yuan, thereby making their exports cheaper. This strategy works in the short run, but since it increases the price of commodities like oil, it is not a solution in the long run. It has also strengthened the case of those who say China manipulates its currency to strengthen its position as an exporter. It’s important to remember that this is not a new charge; the Obama administration was aggressive on this point but held off on retaliating. The Trump administration has also repeated the claim and, earlier this month, officially labeled China a currency manipulator.

But Trump has recently threatened to take more severe action: forcing U.S. firms in China to leave and return to the United States. There is some legal precedent for this, but should the U.S. follow through, it will be challenged in the courts for a long time. Such a move would be a major threat to U.S. businesses, possibly more so than to China itself. Politically, the move strengthens Trump’s position among Americans who blame their own economic struggles on the outsourcing of jobs to China. And with an election coming up, the political strategy of Trump’s threat is clear. But so too is the pressure that the U.S. is imposing on China. Foreign high-tech companies operating in China have been a major conduit for Chinese access to new technology.

Geopolitics consists of politics, economics and military matters. In comparing China and Japan, we can see all three at work. In the case of Japan, military considerations took precedence over the other two and limited U.S. actions. In the case of China, politics and economics are both pushing the U.S. to take action, while there are no military considerations to hold the U.S. back. If the Chinese decide to counter militarily, it’s better that they do so now when they remain weak, rather than later when they are stronger. The logic of geopolitics has brought us to this point. And the U.S. is unlikely to back down without concessions that China cannot make.


Daily chart

Trade uncertainty is at its highest point on record

The unpredictable outlook appears to be dragging down global growth




UNCERTAINTY IS a sort of poison for the global economy. Without knowing what lies ahead, firms delay making potentially profitable investments and hiring new workers. As President Donald Trump’s trade wars have escalated, economists have attempted to estimate how much uncertainty has risen—and to what extent it may be dragging down economic growth.

The latest such measure comes from Hites Ahir and Davide Furceri of the International Monetary Fund and Nick Bloom of Stanford University. To get a consistent measure of uncertainty over time, they scour country reports from the Economist Intelligence Unit, a sister company of The Economist. The more often a report mentions “uncertain”, “uncertainty” or “uncertainties” near a trade-related word, the higher the index value.

The results show that this measure remained low and stable for decades. Despite the collapse in trade around the time of the global financial crisis, uncertainty did not rise, perhaps because world leaders pledged not to resort to protectionist measures.

In recent years, however, trade uncertainty has surged, particularly in advanced economies.

Although it rose a little after Mr Trump’s election, it was only after he imposed tariffs on China that uncertainty fully blossomed. It rose in the third quarter of 2018 (the first round of tariffs was imposed in July 2018) and then fell in the fourth quarter because of an apparent truce between American and Chinese trade negotiators. This year the measure has climbed to unprecedented heights (see chart).

This has no doubt harmed the global economy. The authors reckon that the rise in trade uncertainty in the first quarter of 2019 may have dragged down global growth by as much as 0.75 percentage points. A separate study by economists at the Federal Reserve comes to a similar conclusion. Of course the world has seen very few episodes of this sort. And so, appropriately enough, the economists note that their estimates are uncertain.