Wall Street's Best Minds
Bill Gross: Stocks Rest on Faulty Foundation
Equities “are priced for too much hope,” junk bonds “for too much growth,” writes the fund manager.
By William H. Gross
Trump Reversals Hint at Wall Street Wing’s Sway in White House
By ALAN RAPPEPORT
WASHINGTON — President Trump made three startling economic policy reversals on Wednesday, stepping away from pledges he made as a candidate and even policies he supported only days ago.
The shifts confounded many of Mr. Trump’s supporters and suggested that the moderate financiers he brought from Wall Street are eclipsing the White House populist wing led by Stephen K. Bannon, the political strategist who is increasingly being sidelined by the president.
In a series of interviews, Mr. Trump said he no longer wanted to label China a currency manipulator — a week after telling The Financial Times that the Chinese were the “world champions” of currency manipulation.
In an interview with The Wall Street Journal, the president said he no longer wanted to eliminate the Export-Import Bank. And he said that he might consider reappointing Janet Yellen as chairwoman of the Federal Reserve when her term ends next year.
Yet before the election, he regularly denounced China and said that Ms. Yellen should be “ashamed” of herself because of what he said was her political bias.
Mr. Trump’s latest pronouncements suggest he is moving toward a more mainstream economic approach, although on other issues that he discussed on Wednesday, like a tax overhaul and health care, his policy and strategy appeared muddled.
Mr. Trump asserted in a Twitter post on Wednesday night that his agenda remained on track.
“One by one, we are keeping our promises — on the border, on energy, on jobs, on regulations. Big changes are happening.”
Mr. Trump began the day with an interview with Fox Business Network in which he backed away from the so-called border-adjustment tax favored by Speaker Paul D. Ryan and House Republicans.
He also backtracked on his claim last month that he was moving on from his plan to repeal the Affordable Care Act to focus on taxes. Now he is again putting health care first.
In an interview published by The Journal midday, Mr. Trump revealed his softer approach to China — the about-face coming less than a week after meeting with China’s president, Xi Jinping — and made another reversal on health care.
He said that the government would not continue to pay subsidies to health insurers under Obamacare only days after the administration said it would.
Mr. Trump said the threat to withhold subsidies was a way to force Democrats to negotiate with him over the future of the Affordable Care Act.
In the Journal interview, Mr. Trump said that “Democrats will start calling me and negotiating” because they want to avoid any interruption of the “cost-sharing” subsidies, which reduce out-of-pocket costs for seven million low-income people.
On Monday, the Department of Health and Human Services had issued a statement saying that “the cost-sharing subsidies will be funded” while a federal appeals court weighed the legality of the payments.
Mr. Trump’s remarks coincided with a letter in which doctors, hospitals, insurance companies and employers pleaded with him and with Congress to help stabilize insurance markets by authorizing a continuation of the subsidies.
“Time is short and action is needed,” said the letter, sent Wednesday by eight groups including the U.S. Chamber of Commerce, the Blue Cross and Blue Shield Association, America’s Health Insurance Plans, the American Medical Association and the American Hospital Association.
The president’s comments on Wednesday recalled his reaction when Republican leaders pulled a bill to repeal President Barack Obama’s health care law from the House floor last month.
Mr. Trump predicted then that “Democrats will come to us” in an effort to save the law, which he said was imploding. They did not.
To make the muddy waters even murkier, Mr. Trump took his plans to rewrite the tax code into uncharted territory when he threw cold water on the border adjustment tax that is the linchpin of the tax reform plan.
After months of waffling on that tax, he instead called for a new “reciprocal tax” that appears to be a different kind of levy on imports.
“I don’t like the word adjustment because our country gets taken advantage of, to use a nice term, by every other country in the world,” Mr. Trump said in the Fox Business interview. “So when I hear border adjustment, adjustment means we lose.”
He added: “I love the idea of reciprocal. You can call it a reciprocal or a matching tax or a mirror tax.”
The notion left tax experts scratching their heads. “I’m genuinely confused,” said Itai Grinberg, a tax expert at Georgetown University’s law school.
“If one imposes a tax that varies based on the country of origin of the good or service, then what one may in substance have is something akin to a country-specific tariff regime.”
What is clear is that all of the uncertainty surrounding the White House’s economic plans is causing frustration among some of Mr. Trump’s supporters, including those who helped get him elected.
Larry Kudlow, the economist who advised Mr. Trump when he was a candidate, panned Mr. Trump’s reciprocal tax idea as a nonsensical approach that would essentially raise taxes.
He suggested that the scattershot approach to economic policy coming from the White House was probably because of poor leadership at the National Economic Council, which is led by Gary Cohn, and the diminished role of the Treasury Department, which is steered by Secretary Steven Mnuchin.
“It’s complete chaos,” Mr. Kudlow said. “It sows confusion, and people lose confidence. The process is broken.”
Last Friday, Mr. Trump named Kevin Hassett, a conservative pro-immigration economist, to lead his Council of Economic Advisers. Ardent supporters worried it was an abandonment of the tough stance he took on the issue during the campaign.
Mr. Trump shared few details about how a reciprocal tax would work. It is unclear if, in his thinking, the United States would match tariffs that countries levy on certain American products against other products that those countries produce or if he wants to effectively have a value-added tax with different rates for goods and services from each country.
Either way, economists warned that economic effects could be calamitous.
“Any economist will tell you that tariffs are often, if not always, self-defeating,” said Michael J. Graetz, a tax law professor at Columbia University. “It doesn’t appear to be a sound idea as a matter of tax policy.” Howard Gleckman, a fellow at the Tax Policy Center, said, “It looks like Trump is not happy with the border adjustment tax idea for whatever reason and he’s looking for an alternative.”
With more changes apparently in store, Mr. Trump’s budget director, Mick Mulvaney, added an additional major reversal on his behalf: He said on CNBC on Wednesday that the president’s campaign promise to eliminate the national debt was “hyperbole.”
China faces a tough fight to escape its debt trap
The country needs to rebalance its economy before opening up capital flows
by: Martin Wolf
If something cannot go on forever, it will stop.” This is “Stein’s law”, after its inventor Herbert Stein, chairman of the Council of Economic Advisers under Richard Nixon. Rüdiger Dornbusch, a US-based German economist, added: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
These quotations help us think about the macroeconomics of China’s economy. Growth at rates targeted by the government requires a rapid rise in the ratio of debt to gross domestic product.
This cannot continue forever. So it will stop. Yet, since the Chinese government controls the financial system, it can continue for a long time. But the longer the ending is postponed, the greater the likelihood of a crisis, a big slowdown in growth, or both.
I have argued that it is in the interests of China and the rest of the world to keep their financial systems separate. The rapid growth of indebtedness and the size of its financial system represent a threat to global stability. China needs to rebalance its economy and stabilise its financial system before opening up capital flows. Western financiers will have a different view.
We should ignore this sectional interest.
Yet this raises a big question: will China achieve the needed rebalancing? As was true in the west before the financial crises of 2007-08 and the eurozone crisis that followed, the maintenance of stable growth in China has coincided with an explosive growth in indebtedness.
As a paper from the International Monetary Fund stresses: “Credit growth has been averaging around 20 per cent per year between 2009 and 2015, much higher than nominal GDP growth and the previous trend.” The picture is disturbingly similar to that of pre-crisis Japan, Thailand and Spain.
The turning point in these credit trends was 2008. That was no accident. Between 2000 and 2007, gross savings soared from 37 per cent to nearly 50 per cent of GDP. About half of this extraordinary rise financed additional domestic investment and half financed a rise in the trade surplus. Then came the western crisis. China decided (rightly) that its huge trade surplus was no longer sustainable. It raised investment, instead. That had already risen from 34 per cent of GDP in 2000 to 41 per cent in 2007. It then jumped to 48 per cent in 2010.
To achieve this outcome, the Chinese authorities promoted explosive credit growth. Before 2008, China had largely exported the credit surge attendant upon its massive rise in savings.
After the crisis, it re-imported it. A recent analysis by Credit Suisse concludes that credit needs to grow about twice as fast as nominal GDP if the government is to hit its target of real growth of 6.5 per cent.
The IMF adds that the credit growth coincides with declining returns on corporate assets, deteriorating corporate creditworthiness, falling efficiency of investment and rising financial complexity. We have seen this elsewhere. So will China be any different?
The answer is yes and no. Yes because, like Japan, China is a high-saving, creditor country.
The government controls the financial system and operates exchange controls. It may well avoid a crisis. Yet the answer is also no, because the authorities will need ever more credit expansion to achieve ever less growth. Chinese growth might then expire with a whimper, not a bang.
What are the possible escapes from the trap? One option would be for the authorities just to halt credit growth. If China’s growth depended on consumption alone, one might expect it to fall to 3-4 per cent a year. But China’s investment rate is still close to 45 per cent of GDP. Such a high rate of investment could not be justified if growth were so slow. Investment would then fall, creating a recession. The only escape would be for the government to take over the investment process, rendering market-oriented economic reform a nullity.
A second option would be to halt credit growth and let savings flow abroad, via a huge expansion in the current account surplus. Yet the trade discussions between Donald Trump and Xi Jinping in Florida show this would not be acceptable. Countries willing and able to run offsetting external deficits do not exist.
A third option would be to halt credit growth and raise consumption sharply, to offset a decline in investment. The problem here is that household disposable income is only a little above 60 per cent of GDP, while private consumption is about 40 per cent of GDP. Such savings rates are not so high by Asian standards. More than half of national savings consist of profits and government savings. If one wanted consumption to grow faster than now, the share of household incomes in GDP or of household wealth in total wealth needs to soar. The former would squeeze profits and investment. The latter would mean transferring public assets to households. Neither looks technically and politically workable. So consumption will not keep the economy from stalling.
A final (and perhaps best) option would be for the government to put much of the debt on its own balance sheet. It could restructure existing debt and be the principal borrower in future.
China would become a premature Japan. While government debt would rise, the borrower would be the country’s most solvent entity. Meanwhile, the private economy would be allowed to adjust to market signals.
Today, China can achieve growth of over 6 per cent only with rapid rises in indebtedness. All escapes from this trap are hard. The economy is now slowly rebalancing into consumption. But this will take well over a decade. Will the growth of debt be sustained until then? I doubt it.
Too Late to Compensate Free Trade’s Losers
CAMBRIDGE – It appears that a new consensus has taken hold these days among the world’s business and policy elites about how to address the anti-globalization backlash that populists such as Donald Trump have so ably exploited. Gone are the confident assertions that globalization benefits everyone: we must, the elites now concede, accept that globalization produces both winners and losers. But the correct response is not to halt or reverse globalization; it is to ensure that the losers are compensated.
The Influence of Affluence
By Marc Faber
Excerpted from the Gloom, Boom & Doom Report for April 2017
– Edmund Burke (1780)
– Francis Bacon (De Dignitate et Augmentis Scientiarum, 1623)
– John Bates Clark
– Eugene V. Debs
– Based on John Gray (A Lecture on Human Happiness, 1825)
– Zsa Zsa Gabor
But, as I have explained in the past, the distribution of wealth has become more unequal, with the 0.1% (the super-wealthy) doing extremely well, while the median household’s or asset owner’s wealth has declined by close to 40% in real terms (adjusted by the CPI) from its peak in 2007 (see Figure 2). I now wish to make some further observations about the increase in household wealth, in both nominal and real terms, of the 0.1%.
The Wealth Illusion
Furthermore, let us assume that I decide to sell my US$10 million house in Beverly Hills with the intention of buying another house in Palm Beach, Newport Beach, San Francisco, or an equivalent location. What will I pay for that house? I suppose it will be something like the inflated price at which I’m selling my existing home. I invite a statistician to explain to me what is a more appropriate index against which to measure the price of my house: the CPI, or an index of property values in an equivalent location?
Naturally, the total return of the stock market (including reinvestment of dividends) over the same period was far higher. The Dow Jones US Total Stock Market Index appreciated more than 100-fold between 1970 and 2017 (see Figure 4). (The Dow Jones US Total Stock Market Index is an all-inclusive measure composed of all US equity securities with readily available prices.) The total returns of other indices such as the S&P 500 and the Dow Jones Industrial Average are of a similar magnitude, whereby value outperformed growth over the entire period.
Most of the increase in household wealth accrued to a tiny percentage of the population (see Figure 2). In fact, following the Trump rally, the top 0.1% of households own more than the bottom 90%. Also, as I explained above, the increase in value of my Beverly Hills house is of limited utility if I wish to continue living in an equivalent house in an equivalent area somewhere else. We then need to consider the increase in the US population, which in 1970 was 205 million and is now 318 million.
The Road to Perdition
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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