QE or not QE? Why the Fed is struggling with its message

US central bank faces communications challenge over new round of asset purchases

Joe Rennison in London, Colby Smith in New York and Brendan Greeley in Washington

The US Federal Reserve, led by chairman Jay Powell, has explicitly said that this time it is not trying to alter its monetary policy through its purchases

When the US Federal Reserve started pumping up its balance sheet once more last October, chairman Jay Powell insisted that such activity should not be seen as another round of “quantitative easing” — the big post-crisis effort to relax financial conditions.

Many investors were dubious then, and are still dubious now. “I think it is QE,” said Koon Chow, a strategist at Union Bancaire Privée. “It might not be explicitly recognised as QE — but it is QE.”

Definitions matter, as stocks and other risky assets have soared since the new scheme was put in place. If the market considers it a similar form of extraordinary support as the earlier programme, then taking it away, or even tapering it, could be tricky.

So what, exactly, is the Fed doing?

The Fed is purchasing $60bn of short-dated Treasury bills every month. That is in addition to pouring billions of dollars of cash into the repo market, where banks and investors borrow cash for short periods of time in exchange for high quality collateral such as Treasuries.

Why is it doing this?

In September the repo market seized up, pushing borrowing costs sharply higher and sending shockwaves through the financial system.

The Fed swung into action because control over short-term lending markets is crucial to its ability to implement monetary policy and effect changes in interest rates.

The Fed’s verdict was that bank reserves, or cash held at the central bank, had fallen too low, squeezing the amount of money that could be lent out into the repo market.

From October 2017 the Fed had begun unwinding QE and reducing the size of its balance sheet.

As it stopped replenishing its stock of Treasuries, someone else had to buy them, pulling cash out of the banks and reducing reserves.

The Fed is now buying Treasuries again to rebuild its balance sheet — and in turn increase the level of reserves — back to a level where the repo market can function as it should.

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So the Fed is buying Treasuries again. How is this not QE?

Quantitative easing was not just about the Fed buying Treasuries and mortgage bonds. The programme was designed to lower longer-dated interest rates to ease financial conditions, and so encourage investors out of safe assets such as Treasuries and into riskier investments like stocks and corporate bonds.

The Fed has explicitly said that this time around, it is not trying to alter its monetary policy through its purchases. It is not buying Treasuries to affect interest rates.

This is why it is buying short-dated bills only. By limiting its purchases to debt that has a maturity of less than 12 months, the Fed is anticipating that the effect on longer-dated Treasury yields will be minimal. Still, some struggle to see the difference.

“They are not doing QE but the market doesn’t believe them,” said Priya Misra, an interest rate strategist at TD Securities. “[Investors] are saying it looks like QE, smells like QE, so therefore why is it not QE? It’s a tough one for the Fed to push back on.”

Why is the market so sceptical?

Intention is one thing, but how a policy plays out in the market is another. Some analysts and investors say regardless of the Fed’s stated rationale, the purchase of Treasury bills is pushing asset prices higher as investors flood into corporate bonds and equities.

Since October 11, when the Fed announced it would begin buying Treasury bills, the S&P 500 has risen about 12 per cent, investment-grade corporate bonds have returned 2.4 per cent and high-yield bonds have returned 3.5 per cent.

This might not be because of any effect on interest rates. In fact, 10-year Treasury yields have risen since October. It could simply be that the Fed is removing Treasuries from the market at the same time as adding cash, said Matt King, a strategist at Citigroup. Investors have to put this cash somewhere and if there are fewer Treasuries in circulation, it is more likely to go into stocks and corporate bonds.

“Central bankers sometimes like to think of the theory first and then look for market impact later,” said Mr King. “I prefer to do it the other way around and the impact on asset prices appears to be very QE-like.”

Dallas Fed president Robert Kaplan admits there may be some unintended consequences to the central bank’s repo fix.

“On the one hand this is not QE, but I think it is having some QE-like effects,” he told the Financial Times last week.

Why does it matter? Isn’t it irrelevant what it’s called?

No. The Fed has been keen to emphasise that its bill purchases do not represent a shift in its monetary policy, but simply address a technical problem in the plumbing of financial markets.

The problem is that the Fed explicitly described quantitative easing as a way to ease monetary policy using its balance sheet, a programme the central bank said it halted five years ago. But the new purchases have the same effect: expanding the balance sheet.

The risk is that when the Fed begins to slow or stop these purchases, as it intends to do, it will be read by the market as a policy tightening. That could weigh on stocks and bonds, regardless of what the central bank does with interest rates.

“Since they struggled in communicating that reserve growth is not QE, stopping balance sheet expansion will be even more difficult to communicate,” said Ms Misra. “It will be seen as tightening.”

What Investors Need to Watch for in 2020

Wharton’s Jeremy Siegel, Allianz’s Mohamed El-Erian, and Jeremy Schwartz from WisdomTree discuss what lies ahead for investors in 2020 on ‘Behind the Markets’ on Sirius XM.

In the coming year, U.S. investors will have to shift tracks as they adjust to a different set of risks and opportunities.

Many of the concerns relating to the trade war with China and uncertainty over Brexit have diminished, but new ones have surfaced.

Globalization is no longer about just economics, but also about national security and human rights — and it could take a 180-degree turn, potentially hurting emerging economies.

Investors have in recent years experienced buoyant stock markets, especially in the U.S., as central banks persisted with expanding liquidity.

But the liquidity spigot could be turned off as central banks step back, increasing volatility and making stock-picking more challenging. Investors would then gravitate away from passive, index investing to more actively manage their portfolios.

Mohamed El-Erian, chief economic adviser at Allianz, listed those and other factors as the key imponderables for investors in the year ahead in a discussion with Wharton finance professor Jeremy Siegel on Wharton Business Radio’s Behind the Markets show on Sirius XM.

El-Erian was recently named a senior global fellow at the Joseph H. Lauder Institute of Management and International Studies and is also a part-time professor of practice at Wharton. Siegel was joined by his co-host on the show, Jeremy Schwartz, director of research at WisdomTree, a New York City-based investment advisory services firm.

A Strengthening Economy

Latest economic indicators have lifted expectations for U.S. economic growth in the near term.

Both the Dow and the S&P 500 began the new year on a high, continuing their trend from 2019, a year in which they they rose 22% and 29%, respectively. Stock prices could continue that uptrend this year as well, according to an analysis by Instinet cited by The Wall Street Journal.

U.S. manufacturing seems to have stabilized after a soft patch last summer, and home prices ticked up encouragingly in the second half of last year. Economists surveyed by the WSJ expected the U.S. to continue its economic expansion in 2020, the 12th year after the last recession, citing a “healthy labor market,” among other factors.

However, fears of a recession and uncertainty over the U.S. trade war with China persist. To be sure, unanticipated events could rock the markets, such as last Thursday’s oil price surge after U.S. forces killed Iran’s top general.

Siegel, too, cited the strong employment report for November 2019, which continued the trend from October. “There are not usually two wows in a row,” he said during his conversation with El-Erian, which took place in December.

He pointed also to “a strong start to the Christmas season and a good consumer sentiment report” as harbingers of GDP growth above 2%. He predicted that corporate earnings would increase 5% in 2020, adding that “a lot depends on the U.S. economy and foreign economies, but also exchange rates between the dollar and the euro and other currencies.”

“The U.S. economy is fine,” said El-Erian. “You cannot get a recession with the household sector so strong. The U.S. market on a stand-alone basis is in a good place,” he added. “The problem is the rest of the world.

“I have been against the view that investors should fade [from] the U.S. markets in favor of the rest of the world,” El-Erian continued.

“I’ve been saying, ‘Stick with the U.S. Stick with the U.S.’ But at some point over the medium term, the uncertainties from the rest of the world, I fear, are going to have an impact for the market — less for the economy, and more for the market.”

Why Europe Lags

El-Erian pointed to the latest sign of trouble in Europe: reports that Germany’s industrial output saw a 5.3% year-over-year drop in October to log its biggest downturn since 2009. The divergence between the U.S. and Europe in economic growth is related mainly – and not entirely – to three factors, he noted.

“One is that the U.S. has had some pro-growth policies, whether you agree that they were efficient and fair.” Most economists agree that deregulation and the tax cuts that took effect last year in the U.S. have produced a short-term growth boost, he noted. “Europe has done very little, if anything, to promote economic growth policy-wise, and that relates to politics.”

Secondly, the U.S. economy is doing better because “it is less open than Europe,” El-Erian continued. “So, [the U.S.] has been less vulnerable to the spillover from the U.S.-China trade war. Europe is very open to trade and has taken the hit hard.”

Thirdly, “the U.S. is just inherently more dynamic in terms of economic activities,” he said.

“Put these three things together, and the U.S. continues to outperform the rest of the world, both for internal reasons and because it’s less exposed to external vulnerabilities.”

Is a Rebound in Sight?

Siegel pointed to buzz that a turnaround might be underway in some stock markets elsewhere in the world. For instance, “European stocks have done well recently, [although] they don’t have the record of U.S. stocks,” he added. There have been “some tentative signs that maybe [the downturn in] Germany had bottomed,” he added.

At the same time, as concerns persisted over Brexit, he wondered if the so-called recovery was “a little false turnaround,” and if Europe would continue to see a deepening slump. (A few days after the Wharton Business Daily interview, Boris Johnson led the Conservative Party to a landslide win in the U.K., with a promise to “get Brexit done” and lowering some of the concerns around it.)

El-Erian read the early signs of an uptick in Europe as the beginning of an L-shaped recovery instead of the V-shaped recovery that some experts have visualized. “[With a growth rate of] 1% or below being stall speed (the slowest speed a plane can fly to maintain level flight), you’re not going fast enough to overcome a lot of the structural and debt weaknesses that are embedded in different countries in the Eurozone,” he said. He worried that an L-shaped recovery might make “the likelihood of a recession in Europe higher.”

Europe’s Growth Challenges

Schwartz wondered if the European Commercial Bank’s policy of negative interest rates could stimulate the economy. The ECB’s negative interest rate policy requires financial institutions to pay interest for parking excess reserves with the central bank, which should prompt them to boost lending to businesses and consumers, as a Reuters article noted.

“The ECB is in a lose-lose-lose situation,” said El-Erian. “We have crossed a line between negative interest rates having a beneficial impact, and now we talk about collateral damage and unintended consequences. These negative rates undermine economic activity in several ways.”

One outcome of the negative rates is an increase in German savings, said El-Erian. “Rather than stimulate consumption, what’s happening is very cautious German savers, who are targeting a certain terminal income level, are simply saving more because they’re not getting paid on their savings.”

Two, he saw “excessive risk-taking” in some sectors of the financial system. Three, “we’re seeing zombie companies continue to operate,” he said, noting that they are pressuring down productivity growth. Zombie companies typically exit a competitive market, are typically connected to weak banks, congest markets and constrain the growth of more productive firms, according to an ECB research paper.

“Four, I worry that we’re going to find that there has been a misallocation of resources. Market-based economies don’t function well in a prolonged period of negative rates. I think that the Eurozone is discovering this.”

El-Erian explained why he called it a lose-lose-lose case for the ECB. “Getting out is not an option, because if they were to raise interest rates right now, it would cause financial market disruptions, and that in itself could spill back. Doing more is not going to help, either.”

So what are the options?

“What we need is a policy hand-off from excessive reliance on unconventional policies by central banks to a more comprehensive, pro-growth policy approach,” said El-Erian. “It’s a political implementation issue. And the politics in Germany right now suggest that we are just going to continue hoping for a policy response, but it’s not going to happen.”

Meanwhile, Europe’s reliance on negative interest rates may be coming to an end, if it takes a cue from Sweden. On December 18, Sweden’s central bank Riksbank dropped its policy of negative interest rates and raised its key rate to zero from minus 0.25%. El-Erian said in a tweet that other central banks should follow the lead set by Riksbank.

Among the “positive signals” the Riksbank cited were the election outcome in the U.K., which has eliminated of the risk that the U.K. might exit the EU without a deal; and signs of a thawing in U.S.-China trade relations.

“The major reason for the big decline in interest rates — even negative interest rates — is really not the central bank policy, but fundamental demographic factors,” said Siegel. He pointed to the continued intervention of central banks with quantitative easing, which spurred demand for high-quality assets, which in turn depressed interest rates to zero.

“All of us are falling into the low interest rate world,” he said, noting that it is difficult “get out of it,” unless it results in sufficient economic growth.

“The risk is that you succeed in promoting asset prices, and you don’t succeed in promoting economic activity to the same extent,” said El-Erian. The result of that scenario is the likelihood of volatility. “Unless fundamentals improve quickly in the rest of the world to validate where asset prices are today, we are going to have more liquidity-induced volatility.”

U.S. investors have done well in recent years with passive index investing, but may now switch to more active investing, El-Erian noted. “This is living the dream for investors – high returns, no volatility and correlations that favor you – even though it doesn’t make sense that both risk-free and risky assets go up,” he said.

“That is the period we’ve come from, and it has been a very good period for passive index investing. I’m not sure we can extrapolate that for the next five years.”

Navigating Uncertainties Ahead

El-Erian pointed to “major uncertainties” facing investors in the year ahead. One is over the pace of globalization. “I don’t know whether we have just pressed the pause button on globalization and that we’re simply going to press play again and the world will continue to globalize economically and financially on better footing,” he said.

“And, by ‘better footing’ I mean not just a fair trade, but a fairer trade that remains free.” Another view out there is that the world might “de-globalize, because it’s not just about economics anymore, it’s also about national security,” he added.

El-Erian said he has been “very pro-American markets” and cautioned investors against re-allocating their funds away from the U.S. towards emerging markets generally. “Picking certain spots in emerging markets – that I’m OK with,” he said. “But general exposure to emerging markets vis-a-vis the U.S., I say, ‘Not yet.’”

He pointed to one big danger: “If we press pause on globalization, emerging markets are the most vulnerable segment of the marketplace. The risk of de-globalization is a major headwind for emerging markets; it can actually derail the more vulnerable of them.”

Trade issues with China continue to be a big factor, and a durable solution” to the trade conflict is harder to achieve, especially because the issues are not just economic, but also involve national security and human rights. The U.S. has “weaponized tariffs” as a means of getting to a fairer trade system, El-Erian noted, and wondered if more countries might resort to similar actions.

Any country, a company or even a household needs three attributes to navigate uncertainties, El-Erian said. “You need resilience…. You need the options to be able to update your information set and your probabilities of potential outcomes using scenario analyses. And then you need agility, and the ability to move quickly.”

For companies, those attributes translate into “a solid balance-sheet position, cash generation, a solid business model and good management,” said El-Erian, adding that those are the most likely to reward investors. The volatility he expected in the markets would allow investors to find pick those stocks cheaply.

His advice for investors: “Maintain your structural and secular inclinations, and positions in the portfolio. But you have somewhat more of a tactical or opportunistic side to it, and you slowly evolve your portfolio from what has worked very well – which is general market exposure – to making it somewhat more focused and more targeted as the opportunities arise.”

He said those opportunities could be found in not just “value stocks” (which trade at lower prices relative to their fundamentals such as earnings and dividends), but also elsewhere.

Will Eurozone Policymakers Take the Long View?

The 2010s were an exceptional decade that called for unprecedented economic policies. Now, however, the eurozone's fiscal and monetary policymakers must think more long-term and accept that continued stimulus measures are unlikely to offset the effects of Europe's demographic decline.

Daniel Gros


BRUSSELS – The beginning of a new year, and the start of a new decade, is a good time for longer-term reflection on economic policy. In the 2010s, a decade dominated by the aftermath of a once-in-a-lifetime financial crisis, a strong monetary and fiscal stimulus was clearly justified.

In fact, there is now general agreement that large fiscal expansions by governments almost everywhere, followed by unconventional monetary policies, were instrumental in preventing the Great Recession from turning into a repeat of the Great Depression of the 1930s.

But now that the crisis has been overcome, the question for eurozone policymakers in particular is whether to continue with emergency measures into the 2020s, and, if so, what long-run effects one should expect.

And that is where we quickly bump up against the limits of economic knowledge.

Both economic theory and much evidence suggest that a fiscal stimulus will lead to more demand and employment in the short run, especially when financial markets are in disarray.

But economists fundamentally disagree as to the longer-term effects of fiscal policy when markets are working normally. Although theory suggests that expansionary fiscal policy can induce a forward shift in household expenditure, in the long run, consumers will spend only what they earn. Moreover, the long-term empirical evidence is thin, because few countries have run persistently large fiscal deficits or surpluses over decades.

Japan provides the most obvious example of using fiscal policy to combat a protracted economic slowdown, which started after the country’s real-estate bubble burst almost exactly 30 years ago. But although successive Japanese governments have run large budget deficits since then, headline GDP growth has remained lackluster. And while Japan’s per capita growth has held up much better, it has merely been in line with that of other developed economies running much smaller fiscal deficits.

Some argue that without this fiscal expansion, Japan’s growth would have been much weaker still. But this proposition can be neither proven nor disproven, because we cannot rerun the last 30 years under a different policy.

The difference between Japan’s headline and per capita growth rates underscores the importance of demographic trends for longer-term economic policymaking. Whereas the country’s working-age population increased by about 1% annually during the boom years, it now is declining at a similar rate. This implies that, holding productivity constant, Japan’s potential growth rate must have declined by about 2%.

The eurozone is now experiencing a similar trend, with the working-age population of its 19 member countries projected to fall by about 0.4% per yearover the next decades. Although this decline is less pronounced than in Japan, it is set to continue, implying that the eurozone is also likely to face a decade of low headline growth (although income per capita in the bloc will continue to grow because productivity is increasing, albeit slowly).

Accepting the economic implications of demographic decline is difficult, especially when political systems revolve around distributing ever more economic gains to voters. One logical way to ease the growth constraints imposed by a shrinking working-age population would of course be to raise the retirement age. In principle, this should be possible, given the increase in healthy life expectancy. But the current wave of strikes in France in response to President Emmanuel Macron’s planned pension reforms once again highlights the tenacity of public opposition to such measures.

Increasing infrastructure investment would seem to be a more politically palatable way of boosting sluggish eurozone growth, and would be fiscally painless if financed by issuing more debt. But Japan’s experience is a warning to eurozone policymakers not to regard infrastructure investment a miracle cure. When Japan’s growth rates began to decline in the early 1990s, governments massively increased public infrastructure spending to as much as 6% of GDP, about twice the level of other developed economies with a similar GDP per capita. Yet Japan’s growth rates continued to decline, with subsequent reports pointing out that much of the additional spending had financed the construction of “bridges to nowhere.”

Of course, any government embarking today on an infrastructure spending spree will claim that its investments will be much more focused and productive. But this is likely to be an empty promise, because there are simply not that many economically viable infrastructure projects remaining in advanced economies.

Even public investment in “green” infrastructure is useful only as a backup option, needed only if it proves impossible to raise carbon prices sufficiently high to induce the private sector to reduce emissions fast enough to achieve Europe’s ambitious new climate targets. In any case, the returns from such green investment would not be higher GDP growth, but lower emissions – good for the planet, not for raising wages and incomes in Europe.

More broadly, the returns from infrastructure investment decline rather quickly. Although a moderate increase in infrastructure spending might be useful after a period of underinvestment, one should not expect more than a temporary impact on growth.

Barring higher inflows of working-age immigrants – a political nonstarter – Europe, and the eurozone in particular, therefore has little choice but to settle for an “age of diminished expectations.” Although national governments will be strongly tempted to maintain for too long the expansionary policies that seemingly proved effective during the crisis, they will run up against the eurozone’s fiscal rules.

True, the 3%-of-GDP upper limit on national fiscal deficits enshrined in the Maastricht Treaty was much criticized (and effectively ignored) during the crisis. But this limit can now prove useful in forestalling excessive accumulation of debt by governments vainly attempting to offset the inevitable consequences of demographic decline.

The European Central Bank also will need to lower its sights. At the peak of the crisis, the ECB needed to vow to do “whatever it takes” to preserve the euro. But today, it makes little sense for monetary policymakers to insist on additional bond purchases to achieve an elusive inflation target.

The 2010s were an exceptional decade that called for unprecedented economic policies in the eurozone. Now, however, the ECB and fiscal policymakers must think more long-term and accept that continued economic stimulus is unlikely to offset the effects of a shrinking population.

Daniel Gros is Director of the Centre for European Policy Studies.

In Egypt, el-Sissi’s Economic Vision Falls Flat

By: Hilal Khashan

Since the 1952 military coup that overthrew the Egyptian monarchy, Egypt has had a long tradition of rule by military officers.

The first three presidents from 1954 until 1981 (Mohammad Naguib, Gamal Abdel Nasser and Anwar Sadat) were members of the Free Officers movement, which carried out the 1952 coup.

After Sadat’s assassination in 1981, air force commander and vice president Hosni Mubarak took office.

In 2012, however, the election of Mohammed Morsi, a civilian with links to the Muslim Brotherhood, ended decades of military leadership.

The Egyptian military viewed Morsi with disdain; from its perspective, having a civilian president, especially one hailing from the Muslim Brotherhood, was unacceptable.

And so, a year after Morsi’s election, he was ousted in a coup that involved the chief of General Staff and current President Abdel-Fattah el-Sissi, restoring the military’s prominent role in the country’s political affairs.

Since then, el-Sissi has allowed the military to assume an ever-larger role in Egypt’s economy and introduced two massive projects that he promised would revive the country’s stagnant finances. These projects, however, have fallen flat.

A Legacy of Suspicion and Betrayal

El-Sissi has tried to avoid his predecessors’ mistakes. In 1953, Gen. Mohammad Naguib abrogated the monarchy and declared Egypt a republic. He believed the mission of the army had ended with the overthrow of King Farouk and wanted it to surrender political authority to civilians. Naguib’s preference for a civilian government did not suit Nasser, who overthrew him in 1954 and placed him under house arrest.

Nasser also attempted to dismiss the chief of the General Staff, Marshal Abdel Hakim Amer, whom he blamed for the 1961 coup in Damascus that led to the dissolution of the United Arab Republic, a unified state consisting of Egypt and Syria. Nasser accused Amer of negligence and mistreatment of Syrian army officers. Amer, who enjoyed the full support of the Egyptian army, threatened to stage a coup and overthrow Nasser.

The two men reached a compromise according to which Amer would not seek to oust Nasser from office, provided that he stayed out of military affairs. This arrangement worked until the 1967 Six-Day War, when Nasser finally decided to get rid of Amer after the humiliating military defeat. When Amer attempted to launch a coup, Nasser had him arrested and eliminated him with a lethal dose of cyanide.

Sadat, who took over after Nasser’s death in 1970, had no tolerance for sharing power with political and military competitors. In May 1971, he launched what he called the Corrective Revolution and purged all rivals. After the 1973 war with Israel, Minister of Defense Gen. Ahmad Badawi, whom Egyptians admired as a war hero and a man of good intentions, disapproved of Sadat’s decision to turn to the U.S. and downscale Egypt’s political and military ties with the Soviet Union.

Many Egyptians claim that Sadat orchestrated Badawi’s death in a helicopter crash that also killed 13 ranking officers in March 1981. Following Sadat’s assassination in October 1981, his successor, Hosni Mubarak, immediately discharged 18 ranking officers because he had suspicions about their loyalty to him.

The Army Shifts Gear

In 1954, Nasser introduced sweeping social, political and economic reforms. After his adoption of socialist reforms in 1962, he appointed army officers as bank and plant managers, in part because he thought they cared about the well-being of fellow Egyptians but also to dissuade them from seeking political power.

But Nasser did not transform the army into a political or economic player. Under Amer’s command, the military retained its autonomy and generous financial allocations.

The military’s shift in focus to economic matters occurred soon after Mubarak took office and Israel completed its withdrawal from Sinai following the Camp David Accords. Mubarak was worried that, after Egypt’s disengagement from the Arab-Israeli conflict, the Egyptian Armed Forces might refocus its attention from war to domestic politics. He understood the implications of the army perceiving itself as the guardian of society and the instrument of social change.

Mubarak built on Sadat’s 1975 infitah (open-door policy) and adopted neoliberalism. The implementation of the new economic orientation relied on an alliance between a small group of businesspeople close to Mubarak and the top military brass.

Preparing the Egyptian Armed Forces to assume an economic role required adding civilian lines of production to existing military industries. The strategy of the Ministry of Military Production that Nasser founded in 1954 needed revision.  
During the Cold War, Nasser was unsuccessful in securing weapons from the West because he refused to join the anti-Soviet Baghdad Pact. To achieve a modicum of self-sufficiency in military procurement, he launched a modest weapons industry program. Signing the peace treaty with Israel and adopting neoliberal economics created new opportunities for the EAF.

No longer content with manufacturing light weapons, such as grenade launchers, rifles and machine guns, military plants expanded their lines of production to include consumer items. For example, Al-Maadi Company for Engineering Industries, which has links to the Ministry of Military Production, began manufacturing a wide range of civilian goods, such as culinary and electrical appliances, agricultural equipment and medical instruments.

Mubarak took advantage of the high social regard for the military and arranged for the establishment of lucrative joint ventures with the EAF. The military’s role in the economy grew at the same time that the EAF’s mission shifted from preparing for war against Israel to counterterrorism and special operations.

Still, Mubarak’s economic alliance with the military failed to protect his regime against a massive popular uprising in 2011 that led to his political demise.

El-Sissi Transforms the Military Into an Economic Driver

When el-Sissi assumed the presidency in 2014, he chose to cement his ties with the military establishment and gradually broke ties with the business elite. Egyptians had come to believe that the Mubarak government and its partners in the business world robbed the country blind. El-Sissi used this as an opportunity to give senior military officers a greater role in the country’s economic affairs.

He reasoned that the armed forces are more trustworthy and committed to the public good than greedy civilian entrepreneurs. The military’s commercial operations do play a social justice role by making strategic staple foods – such as meat, poultry, cooking oil and formula milk – available to the public at affordable prices, though not for noble reasons.

El-Sissi insists that the military’s commercial projects do not exceed 3 percent of Egypt’s gross national product, but in reality, they account for more than 50 percent. Since Morsi’s ouster in 2013, military sector companies have flourished.

El-Sissi has pushed to list army business establishments on the stock exchange, a sign of their growing role in the Egyptian economy. The move would have significant implications, establishing a firm link between the interests of the army and those of the people, and potentially preventing another uprising.

The army now owns 600 hotels and resorts, major asphalt and concrete batching plants, and organic fertilizer facilities. It also constructs roads and highways, bridges, sewage treatment plants, swimming pools and irrigation systems.

The range of civilian goods produced by the army covers nearly every part of daily life, from food to medicines and clothing. All 16 factories owned by the Ministry of Military Production likely are now involved in manufacturing civilian goods, and this number does not include many private companies run by the military.

Army businesses don’t disclose financial information to government agencies, so their finances are shrouded in secrecy. All army enterprises are exempt from import fees and income taxes, and those that build their plants on free land owned by the EAF are not subject to taxation.

Investors both at home and abroad therefore feel discouraged from investing in the economy.

Army companies are often awarded no-bid contracts for government infrastructure projects, allowing the military to increase its share of the Egyptian economy steadily. The Armed Forces Engineering Authority, an agency of the Ministry of Defense, has expanded its non-military projects to include psychological rehabilitation and supply of civil servants.

In addition to expanding the military’s economic role, el-Sissi embarked on two massive, controversial projects. Two months into his presidency, he ordered the construction of a parallel Suez Canal, which he claimed would more than double the canal’s revenue of $5.5 billion.

Government officials described the expansion, undertaken by seven foreign contractors, as Egypt’s gift to the world. One year after completing the controversial project, which cost more than $8 billion and depleted Egypt’s foreign currency reserves, revenue from the two parallel canals dropped to $5 billion.

In 2016, revenue started to rise modestly, not because of increased traffic but because of rising toll fees. After seeing the disappointing economic returns, el-Sissi changed the objective of the project from invigorating the stagnant economy into giving the Egyptian people a morale boost.

The second controversial project was a new administrative capital near Cairo at the edge of the Nile Delta. The army owns 51 percent of the shares of the company that is currently developing the new administrative capital at an estimated cost of $45 billion. In January 2019, el-Sissi inaugurated the largest cathedral in the Middle East and a large mosque, second only to the Grand Mosque in Mecca, in the new city.

Dubai Ports World was granted a concession to operate the Ain Sokhna transit port near the southern terminus of the Suez Canal, angering Egyptians who know that the UAE would never develop the port to the point that it could compete with Dubai’s Port of Jebel Ali.

El-Sissi compromised the economic development of the Suez Canal area in exchange for receiving UAE financial aid and recognition of his political legitimacy. For the same reasons, he also relinquished Tiran and Sanafir islands – seen as national icons because Egypt fought two wars with Israel in 1956 and 1967 over the Tiran Passes – to Saudi Arabia.

El-Sissi’s ambitions are personal. He has no economic vision that promotes investments. He is interested more in glorifying himself than in embarking on real economic development. He follows in the footsteps of Nasser but lacks his charisma.

Egyptians remember Nasser for nationalizing the Suez Canal and constructing the High Dam.

El-Sissi, on the other hand, has built two unnecessary projects and failed to defend Egypt’s vital interests in the waters of the Nile River.

Looking on the Bright Side

By John Mauldin

We haven’t had a lot of good news lately. Or, more precisely, we haven’t seen a lot of good news lately, though it does exist. We don’t see it because both regular media and social media usually focus on the bad.

That’s not entirely wrong. The survival imperative makes humans watch for threats, and sometimes threats are real. I write about them often, most recently in my Decade of Living Dangerously forecast (see Part 1 and Part 2).

Yet good things are happening, too, and will keep happening as we move through the 2020s. Occasionally I like to note them, and that’s what we will do today.
I often say I’m short-term bearish and long-term bullish, but I’m not short-term bearish on everything. Positive events are occurring right now, all over the world. Lives are being saved, living standards are rising, children are learning. Good and bad can happen concurrently, sometimes in the same place. It’s not either/or.
Looking on the bright side also helps us discern the future. Things that work are usually things that will sell. When someone solves an important problem, it might be an investment opportunity.
So, let’s review some good news.
But first, at one point I had a connection to Bridgewater and Ray Dalio, but that email seems to have stopped working. I want to invite Ray to speak at my conference and be part of a documentary series on how we address the problems he’s highlighted. If someone from Bridgewater (I know some of you read my letter) or elsewhere could connect us, please contact my staff. I don’t want to be a bother…

Disappearing Stuff
We’ll start with the man who literally wrote the book on optimism, Matt Ridley.

He explained in The Rational Optimist how history shows the world getting constantly better even as bad things happen. This shouldn’t surprise us. It’s actually quite normal.
In a Spectator column last month, Matt zeroed in on a common fallacy. Some people think all our technology and progress simply generate more “stuff” that harms the environment and eventually us, too. Certainly, some of our stuff is harmful. But the broader idea—that we consume too much—is simply wrong. We are consuming less

Here’s Ridley.
In 2011 Chris Goodall, an investor in electric vehicles, published research showing that the UK was now using not just relatively less ‘stuff’ every year, but absolutely less. Events have since vindicated his thesis. The quantity of all resources consumed per person in Britain (domestic extraction of biomass, metals, minerals and fossil fuels, plus imports minus exports) fell by a third between 2000 and 2017, from 12.5 tonnes to 8.5 tonnes. That’s a faster decline than the increase in the number of people, so it means fewer resources consumed overall.
If this doesn’t seem to make sense, then think about your own home. Mobile phones have the computing power of room-sized computers of the 1970s. I use mine instead of a camera, radio, torch, compass, map, calendar, watch, CD player, newspaper and pack of cards. LED light bulbs consume about a quarter as much electricity as incandescent bulbs for the same light. Modern buildings generally contain less steel and more of it is recycled. Offices are not yet paperless, but they use much less paper.
Even in cases when the use of stuff is not falling, it is rising more slowly than expected. For instance, experts in the 1970s forecast how much water the world would consume in the year 2000. In fact, the total usage that year was half as much as predicted. Not because there were fewer humans, but because human inventiveness allowed more efficient irrigation for agriculture, the biggest user of water.
Until recently, most economists assumed that these improvements were almost always in vain, because of rebound effects: if you cut the cost of something, people would just use more of it. Make lights less energy-hungry and people leave them on for longer. This is known as the Jevons paradox, after the 19th-century economist William Stanley Jevons, who first described it. But Andrew McAfee argues that the Jevons paradox doesn’t hold up. Suppose you switch from incandescent to LED bulbs in your house and save about three-quarters of your electricity bill for lighting. You might leave more lights on for longer, but surely not four times as long.

Efficiencies in agriculture mean the world is now approaching ‘peak farmland’—despite the growing number of people and their demand for more and better food, the productivity of agriculture is rising so fast that human needs can be supplied by a shrinking amount of land. In 2012, Jesse Ausubel of Rockefeller University and his colleagues argued that, thanks to modern technology, we use 65 per cent less land to produce a given quantity of food compared with 50 years ago. By 2050, it’s estimated that an area the size of India will have been released from the plough and the cow.
I’ve actually had a number of conversations personally with good friend and brilliant scientist Jesse Ausubel (mentioned above) about this. The late, great Andy Marshall of the Pentagon’s Net Assessment Office invited us both to his Naval War College gatherings where we brainstormed possible future scenarios. Great times. Jesse and I still meet occasionally when I’m in New York.
Jesse wrote a very important report that I highlighted a few years ago (you can read it in our archives). He explains how things are getting better by almost every measurable statistic. We are using less water to grow the same amount of food. “Water withdrawals” for agricultural purposes have been flat since 1975 while production of corn and soybeans has grown 300%, wheat 60%, and potatoes 25%. The chart below shows that we are producing about five times the amount of corn per acre vs. 70 years ago. We are literally feeding a good portion of the world, and using less land to do so.
Interestingly, the use of fertilizer skyrocketed from 1940 to about 1970 and then plateaued and is actually beginning to fall. So we’re producing far more with less fertilizer.

Source: Jesse Ausubel

It’s not just corn. You can see the same in potatoes or any other crop. Jesse argues that the world is at “peak farmland,” and will be able to feed a growing world population using current acreage or less.
Forests and woodlands have expanded in the past 50 years, and are still doing so. It is hard for us to imagine that around 1900 Connecticut had almost no forest. Logging, farming, livestock, and other human activities had decimated the forests. Yet today you can fly over Connecticut and all over New England and see large, lush, forested areas. One reason is that humans are using 70% less wood for fuel. Wood used for paper is about the same, but comes from far more efficiently managed forests.
In fact, we have seen consumption of many basic commodities peak and begin to fall over the last 10–20 years.

Source: Jesse Ausubel

Air quality is improving all over the US and Europe, and actually most of the developed world and much of the developing world. In the US, despite dramatic population and GDP growth in the past 50 years, sulfur emissions dropped 50%.

That is absolutely stunning when you think about it.
The impact isn’t just on land. Here in the US, dolphins now inhabit the once-polluted Potomac River for the first time since the 1880s. The urbanization we sometimes decry (with good reasons) has a bright side. Concentrating most people in small areas reduces population density elsewhere, giving wildlife space to flourish.
Of course we have environmental challenges. But we’re learning to reduce our impact and share the planet with other creatures. I should note that, despite general optimism, Jesse Ausubel is extremely concerned for oceans and fish populations. As an example, Cape Cod’s total cod population today is a fraction of where it was two centuries ago. The pollution in the ocean is simply disgusting in many places. There are frankly some cities in Asia where I do not want to eat locally caught fish.

The concerns about mercury and tuna aren’t imaginary.
We have plenty of room to do better… but we’re doing a lot.

Saved Lives
You can find a treasure trove of positivity at Future Crunch’s Good News page.

They collect short snippets with links to the original sources. You can spend days clicking through to fascinating info. It’s really good therapy if you’re discouraged about the world. I look forward to getting their email every week or so.
Many of the stories are about medical breakthroughs. The number of diseases we are learning to control, cure, or even eliminate is staggering.
  • In the UK, most people diagnosed with late-stage melanoma 10 years ago would die within months. Only one in 20 lived five years. Now the five-year survival rate is 52%, or 10 times higher than it was a decade ago, thanks to new treatments.
  • The US Food & Drug Administration last year approved a new cystic fibrosis drug combination that shows amazing results. It doesn’t just relieve symptoms but attacks the disease’s genetic root. The Washington Post reports, “Patients who were unsure about whether they should bother attending college because they had always known they would die young are now being told they should think about planning for retirement.” (I am personally quite familiar with this drug as one of my biotech investments owns a significant chunk of it. With 2020 hindsight (pardon the pun), I wish I had bought a great deal more.)
  • In the US we think of pneumonia as an older-people condition, but worldwide it is a major child killer. As recently as the 1990s, pneumonia killed more than two million children a year. That number has since dropped by almost two-thirds, thanks to better treatments as well as wider vaccination against the pathogens that cause it. The death rates are still far too high, but science is saving millions of young lives.
  • The terrifying Ebola virus is on the run. The disease that once killed thousands of Africans and threatened to spread quickly through airports around the world is becoming treatable. A new triple-antibody cocktail developed by US scientists reduces the mortality rate from 70% to as low as 6% when administered early enough.
  • The number of malaria cases in India dropped 50% from 2017 to 2018, and mortality decreased among the smaller number of people who were infected. A lot of it comes from simple mosquito nets reaching people who never had them. Treatments improved as well.
  • The American Cancer Society just reported the largest-ever one-year drop in the US cancer death rate, driven mainly by lower lung cancer mortality. Newer drugs, better surgical techniques, and better diagnosis are all helping.
I am personally following a private company (Bexion Pharmaceuticals) which is now in phase 2 trials for what looks like a “silver bullet” against all types of tumors. They are now focusing on brain tumors, pancreatic and recently colorectal cancer.
I truly believe we will see cancer become a treatable nuisance by 2030. (Disclosure: I have an investment in Bexion. I now think the greater risk to my investment isn’t whether the drug works, as the evidence is pretty strong that it does, but that other therapies may be better, faster, and less expensive.)
I could list dozens of similar stories. Many more breakthroughs are coming, too, some even more impressive. They will help you even if yours isn’t one of the lives saved. People and their brains are the most important natural resource. If not stopped by disease, they become workers, have families, and occasionally do things to change the world.
And that’s before the impact of new therapies on aging and what I believe will be actual age reversal by the end of this decade or the mid-2030s at the latest. Pat Cox and I are currently exploring the possibility of funding some of these ventures.

Unlocking the Door
We are making progress above the Earth, too. If all goes well, NASA could send astronauts back to space this year for the first time since the space shuttle retired in 2011. They’ve been relying on Russian rockets for manned flights.
Several countries will be launching Mars probes this year, including another US rover that will carry a small helicopter, Yes, a robot helicopter flying over Mars. Did you imagine living long enough to see such a thing?
Perhaps even more exciting, private companies could soon start taking private passengers to space—or at least the edge of it. Richard Branson’s Virgin Galactic and Blue Origin, founded by Jeff Bezos, are in advanced testing.
But the biggest breakthrough doesn’t involve sending anyone anywhere. Two companies, SpaceX and OneWeb, are building large networks of low-orbiting satellites to deliver seamless, fast internet service across the entire globe. That may seem like a small thing. It’s actually huge.
Depending on whose numbers you consult, something like half the world population still doesn’t have reliable web access. Often it’s because they live in remote areas where the infrastructure doesn’t exist and no one has a financial interest in building it. The new satellites could change the economics. Google’s high balloon project is making significant headway, too.
Getting the rest of the world online matters because among these disconnected billions are people whose ideas and talents could create even more breakthroughs. This vast, untapped resource will be a whole new market for today’s businesses and others that we can’t presently imagine. By 2030 I expect we will have unlocked that door and had a peek inside.

A Better World, by the Numbers
The late Swedish professor Hans Rosling’s book Factfulness: 10 Reasons Why We Are Wrong About the World and Why Things Are Better Than You Think is a masterpiece everyone should read.

He describes our evolutionary bias to think in dichotomies: good versus evil, heroes versus villains, my country versus yours.
Dividing the world into two distinct sides is simple and intuitive, and also dramatic because it implies conflict, and we do it without thinking, all the time.
Journalists know this. They set up their narratives as conflicts between two opposing people, views, or groups… Journalists are storytellers.

We evolved as a species sitting around fires, hearing other people tell stories. It created trust and had an evolutionary purpose. And we still love our stories and storytellers. But the constant reminders of conflict and negativity infect our brains and bias our views.

We extrapolate what we recently read or saw on the news to apply everywhere. It’s part of our dichotomous nature and called “recency bias.”
Rosling did a number of TED talks, but my favorite (and fun) is How Not to Be Ignorant About the World. He shows the enormous negative bias humans have about the world around them. We consistently assume things are worse than they actually are, while ignoring progress like the huge drop in global poverty.

Child mortality is down significantly, as is the number of people without an improved drinking water source. Life expectancy is up everywhere (except for middle-age white males in the US). Genocide and war deaths are down significantly. So is crime in the US. The number of deaths from natural disasters plummeted well over 90% in the last hundred years. Death rates from air pollution are down significantly in the last 25 years.
I could go on many more pages about the world getting better. In fact, I will do so in my next book. But I hope you get the point: Good things are happening and we should celebrate them. It doesn’t mean we should ignore less pleasant realities, nor does it excuse us from helping those who need it right now. Some problems can’t wait.
We should do what humans always have: Welcome good when we see it, and face problems head-on. That’s how we will get through the Decade of Living Dangerously.
And here’s one more piece of good news: This year, we have added even more value to our most exclusive Mauldin Economics club, the Alpha Society.
New members will receive complimentary access to the SIC 2020, which will take place at the iconic Phoenician in Scottsdale, AZ, from May 11–14. They are also invited to our brand-new members-only event, the Wealth Preservation Symposium on March 31 at the Yale Club in New York City.
Add to that lifetime access to all of our best research, and you have an unbeatable package. However, we can only accept 100 new members at this time, so please apply now.

Miami and New York
I will make a quick trip to Miami next week to meet with Dr. Mike West of AgeX (where I am currently on the Board of Directors) to discuss some of the latest developments in the age reversal space. Stay tuned. And I still have to get to New York sooner rather than later.
Many readers know I use software called Dragon to dictate these letters straight into Microsoft Word. Sometimes, words get mixed up in strange ways. We call them Dragon errors and this letter had an amusing one.
Late last night when I said corn production was up 300%, Dragon heard it as “porn production.” My editor Patrick Watson noticed this and told me, “No, John, porn production is actually up more like 50X.” Anyway, he fixed it and I saw again why we still need human editors and proofers, even with the best technology.
This whole letter has felt like my personal section, because I truly am an optimist. I feel like I am letting that side of me out to share with my friends. I am really looking forward to 2020 and I’m glad you are with me.
And with that I will hit the send button and wish you a great week!
Your walking on the sunny side of the street analyst,

John Mauldin
Co-Founder, Mauldin Economics