Latin America

The loss of El Dorado

After the commodity boom, the region needs a new formula for growth

Jun 27th 2015

IT WAS wonderful while it lasted. For much of this century Latin America saw robust economic growth, a big fall in poverty and a swelling of the middle classes. Now the good times are over.

Emerging markets everywhere are subsiding like a cooling soufflé. But Latin America has gone stone cold. The IMF expects growth of just 0.9% in 2015, which would be the fifth successive year of deceleration. Many economists are talking of a new normal of growth of only 2% or so a year—less than half the region’s pace during the boom.

What has gone wrong? The short answer is that the great commodity supercycle triggered by the industrialisation of China is over. Rising exports of minerals, soya beans and fuels lifted many South American economies. Without that fillip the region has converged downwards to the 2.4% long-term growth rate of Mexico, which is not a big commodity exporter.

Worse, the commodity bonanza prompted distortions that may limit new sources of growth. Many Latin currencies became overvalued, wounding the competitiveness of non-commodity firms. Consumption soared; investment sagged. While Asia built factories, Latin America erected shopping centres.

The net result is not wholly negative. Past Latin American commodity booms ineluctably ended in financial busts. This time only countries, such as Venezuela, that have repeated old mistakes—fiscal populism, protectionism and government meddling—face a crisis. Most of the region has become more resilient after years of responsible macroeconomic policies, with stronger banks and lower public debt.

For a boom-bust continent, resilience is not to be sniffed at. But it will not ensure faster growth that endures. To get rich, Latin America must boost its abysmally low rate of productivity growth and diversify its economies. That, in turn, means moving beyond the tired ideological debate between market and state that still bedevils the region’s politics. Latin America needs both better-functioning markets, with more competition, and much smarter government.

Start with productivity. In 1960 the efficiency with which Latin America combined capital and labour was three-quarters that of the United States. Now it is just over half. The obvious causes of this gap are the lack of transport, the paucity of innovation and of skills; and a swollen informal sector.

Dealing with this requires more than just education and infrastructure. The lack of appropriate housing and urban-planning policies, for instance, means that many workers must spend hours a day commuting. Many don’t bother, preferring to set up subsistence businesses in their own back yards. Similarly, improving child care or tackling violent crime would boost growth (by letting women seek more productive work and reducing the extortion that deters businesses from expanding).

A golden opportunity
The second priority is to take regional integration seriously. Economies become more diversified and sophisticated when their businesses join regional supply chains. That process has powered East Asia’s growth, and that of northern Mexico (though not its south) thanks to its ties to the United States. In South America too many leaders talk about unity while practising protectionism. A good start would be to turn Mercosur, based on Brazil and Argentina, from a largely fictional customs union into a proper rules-based free-trade area.

None of these reforms will pay off quickly. None will be easy to get through, especially since many of the region’s presidents are unpopular and their governments tarnished by corruption. But without the easy pickings of the boom, the hard work of structural reforms is the only way to boost growth and welfare. The sooner its leaders realise that, the better the region’s prospects.

Markets Insight

June 24, 2015 6:08 am
Greek problems mask the rising risks in Italy and France
Problems the countries face are structural, rather than attributable to the eurozone debt crisis
MUNICH, GERMANY - JUNE 05: Activists have installed balloons decorated with the portraits of (L-R) Japanese Prime Minister Shinzo Abe, French President Francois Hollande, Italian Prime Minister Matteo Renzi, German Chancellor Angela Merkel, Canadian Prime Minister Stephen Harper, British Prime Minister David Cameron and US President Barack Obama during a protest activity against the G7 summit on June 5, 2015 in Munich, Germany. Germany will host the G7 summit at Elmau Castle near Garmisch Partenkirchen, southern Germany, on June 7 and June 8, 2015. (Photo by Joerg Koch/Getty Images)©Getty
Protest against the G7 summit on June 5 in Munich
According to John Maynard Keynes “the expected never happens; it is the unexpected always”.
Obsessed with the problems of Greece and the European periphery, financial markets are ignoring the rising risks of the core, especially Italy and France.
Italy and France face mounting problems of high debt, slow growth, unemployment, poor public finances, lack of competitiveness and an inability to undertake necessary adjustments.

Reductions in energy prices combined with low borrowing costs and a weaker euro, engineered by the European Central Bank, cannot hide deep-seated and unresolved problems forever.

Italian total real economy debt (government, household and business) is about 259 per cent of gross domestic product, up 55 per cent since 2007. France’s equivalent debt is about 280 per cent of GDP, up 66 per cent since 2007. This ignores unfunded pension and healthcare obligations as well as contingent commitments to eurozone bailouts.

Italy is running a budget deficit of 2.9 per cent. Government debt is around €2.1tn, or 132 per cent of GDP. French public debt is just above €2tn, or 95 per cent of GDP. The current budget deficit is 4.2 per cent of GDP. France’s budget has not been balanced in any single year since 1974.
Italy’s economy has shrunk about 10 per cent since 2007, as the country endured a triple-dip recession. Italy’s unemployment is more than 12 per cent, with youth unemployment about 44 per cent. French GDP growth is anaemic, with unemployment above 10 per cent and youth unemployment of more than 25 per cent.

Trade performance is lacklustre. Italy’s current account surplus of 1.9 per cent reflects deterioration of the domestic economy rather than export prowess. France’s current account deficit is about 0.9 per cent of GDP, reflecting a declining share of the global export market.

Italy and France’s problems are structural, rather than attributable to the eurozone debt crisis.

High wages, inflexible labour markets, generous welfare benefits, large public sectors and restrictive trade practices are major issues.

In the World Economic Forum’s competitiveness rankings, Italy and France ranked 49th and 23rd respectively, well behind Germany (fourth) and Britain (10th). In World Bank studies, Italy and France rank 56th and 31st in terms of ease of doing business. Transparency International ranks Italy 69 out of 175 countries in perceived levels of public corruption, comparable to Romania, Greece and Bulgaria.
The lack of competitiveness is exacerbated by the single currency. Italy and France faced a 15-25 per cent overvalued currency until the recent decline in the euro. Denied the historically preferred option of devaluation of the lira or franc to improve international competitiveness, both countries have relied increasingly in recent times on debt-funded public spending to maintain economic activity and living standards.

Progress on proposed structural changes is slow. Irrespective of whether the economy improves or deteriorates, reforms are frequently shelved as the time is not considered propitious. A deep antipathy towards markets and business impedes change.

France and Italy may not be able to avoid a financial crisis. Real GDP would need to increase at more than twice projected rates to stabilise and then reduce government debt-to-GDP ratios.

Alternatively, deep reductions in fiscal deficits would be required to start deleveraging. The necessary fiscal adjustment of about 2 per cent of GDP would be self-defeating, creating a familiar cycle of lower growth, rising budget deficits and higher borrowings.

A weak economy and low inflation will ultimately cause debt to increase beyond critical levels, triggering a climactic moment.

President François Mitterrand believed that “il faut donner du temps au temps” (time must be given time to do its work). But for the past 15-20 years, Italy and France have been promising essential reform. Unfortunately, time is running out, with serious consequences for the nations, the European project and investors in Italian and French debt and equity securities.

Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money

Why Small Booms Cause Big Busts

J. Bradford DeLong

JUN 22, 2015
 housing development

BERKELEY – As bubbles go, it was not a very big one. From 2002 to 2006, the share of the American economy devoted to residential construction rose by 1.2 percentage points of GDP above its previous trend value, before plunging as the United States entered the greatest economic crisis in nearly a century. According to my rough calculations, the excess investment in the housing sector during this period totaled some $500 billion – by any measure a tiny fraction of the world economy at the time of the crash.
The resulting damage, however, has been enormous. The economies of Europe and North America are roughly 6% smaller than we would have expected them to be had there been no crisis. In other words, a relatively small amount of overinvestment is responsible for some $1.8 trillion in lost production every year. Given that the gap shows no signs of closing, and accounting for expected growth rates and equity returns, I estimate that the total loss to production will eventually reach nearly $3 quadrillion. For each dollar of overinvestment in the housing market, the world economy will have suffered $6,000 in losses. How can this be?
It is important to note that not all recessions cause so much pain. Financial blows in 1987, 1991, 1997, 1998, and 2001 (when some $4 trillion of excess investment was lost when the dot-com bubble burst) had little impact on the broader real economy. The reason why things were different this time can be found in a recently published paper by Òscar Jordà, Moritz Schularick, and Alan M. Taylor. Large credit booms, the authors show, can greatly worsen the damage caused by the collapse of an asset bubble.
Historically, when a recession is caused by the collapse of an asset bubble that was not fueled by a credit boom, the economy is roughly 1-1.5% below what it otherwise would have been five years after the start of the downturn. When a credit boom is involved, however, the damage is significantly greater. When the bubble is in equity prices, the economy performs 4% below par, on average, after five years – and as much as 9% below par when the bubble is in the housing market. Given these findings, it is clear that the distress experienced since the beginning of the economic crisis is not far out of line with historical experience.
For many economists, recessions are an inevitable part of the business cycle – the bust that necessarily follows, like a hangover, from any boom. John Maynard Keynes, however, had little time for this view. “It seems an extraordinary imbecility that this wonderful outburst of productive energy should be the prelude to impoverishment and depression,” Keynes wrote in 1931, after the boom years of the 1920s had given way to the Great Depression. “I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment.”
A few years later, Keynes proposed a fix to the problem. In The General Theory of Employment, Interest, and Money, Keynes explained how booms are created when “investments which will in fact yield, say, 2% in conditions of full employment are made in the expectation of a yield of, say, 6% and are valued accordingly.” In a recession, the problem is flipped. Investments that would yield 2% are “expected to yield less than nothing.”
The result is a self-fulfilling prophecy, in which widespread unemployment does indeed drive the returns of those investments below zero. “We reach a condition where there is a shortage of houses,” Keynes wrote, “but where nevertheless no one can afford to live in the houses that there are.”
His solution was simple: “The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.” For Keynes, the underlying problem was a failure of the economy’s credit channels. The financial reaction to the collapse of a bubble and the resulting wave of bankruptcies drives the natural rate of interest below zero, even though there are still many ways to put people productively to work.
Today, we recognize that clogged credit channels can cause an economic downturn. There are three commonly proposed responses. The first is expansionary fiscal policies, with governments taking up the slack in the face of weak private investment. The second is a higher inflation target, giving central banks more room to respond to financial shocks. And the third is tight restrictions on debt and leverage, especially in the housing market, in order to prevent a credit-fueled price bubble from forming. To these solutions, Keynes would have added a fourth, one known to us today as the “Greenspan put” – using monetary policy to validate the asset prices reached at the height of the bubble.
Unfortunately, in a world in which fiscal austerity appears to exert a mesmerizing hold over politicians, and in which a 2% inflation target seems set in stone, our policy options are rather limited. And that, ultimately, is how a relatively small boom can lead to such a large bust.

Gold and Silver Update

By: Florian Grummes

Sunday, June 21, 2015

As expected Gold posted a rally towards US$1,205.70. While many market participants became extremely bearish two weeks ago I clearly pointed towards the important contrarian buy signals in CoT and sentiment. As well it looks like the Euro could continue to recover towards US$1.17 which should support the precious metal sector.

I still think that the bear market is not yet over but I am bullish for the next 1-3 months....

Gold COT
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During the last five weeks the professionals (=commercial hedgers) have cut down their short positions to a relatively low level. They did the same in the silver market. Therefore I think the coast is clear for the immediate future.

Midas Touch Gold Model
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Midas Touch Gold Model Summary

Last Monday my model switched to a Buy/Bull Mode for the first time since mid of march!

There are new buy signals for Gold in USD-Daily Chart, Seasonality, Gold in Indian Rupee-Daily Chart, Gold in Chinese Yuan-Daily Chart and GDX Goldmines-Daily Chart. But the real kicker is the dramatic change in US Real Interest Rates which have fallen from 0.71% down to 0.25%. This is an extremely bullish development for Gold. There are no new sell signals.

Overall the model is in Buy/Bull Mode and Gold CoT-Report as well as Gold Sentiment are supporting a summer-rally.

Daily Gold Chart

Gold Daily Chart

Short-term Gold is meeting strong resistance around US$1,205-US$1,210. The falling 200-MA (US$1,207.58) as well as the upper Bollinger Band (US$1,203.63) will certainly force some consolidation/minor setback. Especially as the Slow Stochastic is getting slightly overbought.

But due to the strong seasonality, the very pessimistic sentiment and a friendly CoT-report I see very good chances for a summer-rally in the coming weeks that could take Gold towards the next strong zone of resistance around US$1,240. Of course, as the overall bear market is still in place I would not expect too much of Gold and this summer-rally will surely not be an easy ride. As I have already explained the bears need a "fully staffed pain-train" again to push Gold sustainably below $1,170. Unlike last expected at US$1,205 this train is not yet ready.

If you don't need to be active in this market I continue to suggest that you´d be better staying at the sidelines and avoid any short-term trading. A new low-risk/high-reward trading opportunity could present itself later this summer if Gold indeed can post a rally in the coming weeks towards $1,240.

As an investor I suggest you to wait for another chance to accumulate physical Gold below $1,150 until you hold 10-20% of your net-worth in physical Gold and Silver as an insurance.

Long-term personal believes

The return of the precious metals secular bull market is moving step by step closer and should lead to the final parabolic phase (could start later in 2015 or 2016 and last for 2-5 years or even longer).

Before this can start Gold will need a final selloff down to $1,050-$980.

Long-term price target DowJones/Gold-Ratio remains around 1:1.

Long-term price target Gold/Silver-Ratio remains around 10:1 (for every ounce of gold there are 9 ounces of silver mined, historically the ratio was at 15:1 during the roman empire).

Long-term price target for Gold remains at US$5,000 to US$8,900 per ounce within the next 5-8 years.

Fundamentally, as soon as the current bear market is over Gold should start the final 3rd phase of this long-term secular bull market. 1st stage saw the miners closing their hedge books, the 2nd stage continuously presented us news about institutions and central banks buying or repatriating gold. The coming 3rd and finally parabolic stage will end in the distribution to small inexperienced new traders & investors who will be subject to blind greed and frenzied panic.

Peru: Recovery And Growth Ahead
by: Dylan Waller            

  • Peru has consistently been one of the best performing countries in Latin America.
  • The country is on track for recovery from decreased GDP growth experienced in 2014 and the beginning of 2015.
  • The currently valuation of the iShares MSCI All Peru Capped ETF, combined with the future potential for growth, makes it a current attractive buy.
  • The mining and banking industries will experience significant growth in the future; around 78% of the fund's assets are invested in these industries.
For those bullish on Latin America and searching for opportunities in this geographical location, Peru may be one of the best options at the moment. The best way to gain access to Peru is through the iShares MSCI All Peru Capped ETF (NYSEARCA:EPU). In addition to the fund being attractively valued, with a P/E ratio of 12, it is also trading very close to its 52 week low.
Examining economic development in Peru, it is clear that growth is ahead and that the country is on track for recovery in areas that are currently unattractive.
  • According to Peru's monetary authority, Peru's GDP will grow by 5.5% in 2015. This will represent a significant recovery from GDP growth in 2014.
  • Peru currently has a trade deficit of 647 USD million. Low commodity prices in 2014 attributed to Peru's decrease in export earnings.
  • Inflation has averaged at 3%.
  • Poverty rates have fallen by more than half between 2005 and 2013, and the amount of people living in extreme poverty has fallen from 15.8% to 4.7%.GDP Growth 2012-2015

GDP Growth 2012-2015

(click to enlarge)

GDP growth has declined significantly since 2014. The sharp decline in GDP growth is attributed to the decline of the fishing and mining industries. A decline in metal prices and poor weather conditions attributed to the poor performance of these industries. Because of this, growth in 2014 was significantly lower than its average growth rate of 6.4%. Recovery of these industries is crucial for Peru to continue on its path as a key player in Latin America.

Latin America GDP Growth

GDP Growth in Peru has consistently outperformed Latin America, and has only been rivaled by Colombia. Even with slower growth in 2014-2015, Peru demonstrates tremendous potential compared to other countries in Latin America. The relatively poor performance of 2014 presents opportunity for investors who believe that Peru can rebound, and has the potential for higher growth in the future.

iShares MSCI All Peru Capped ETF

The easiest way to gain access to Peru is through the iShares MSCI All Peru Capped ETF, which provides exposure to a variety of industries in Peru that have the potential for growth.

The holdings for this ETF are in the following industries:
  • Basic Materials (Mining): 47.75%
  • Financial Services: 30.1%
  • Utilities: 7.2%
  • The remaining companies are in the following industries: consumer defensive, consumer cyclical, industrials, and energy.
It is very evident that the poor performance of the fund is correlated to the recent negative performance of the mining industry, as top holdings in the mining industry have not performed well in the past year. Southern Copper Corp (NYSE:SCCO) has lost 0.68% in the past year, and Buenaventura Mining Company Inc (NYSE:BVN) lost 4.93% in the past year. Future recovery of this industry would provide substantial returns for investors. Moreover, the financial services industry is a large component of this ETF, and its future potential for growth is also strong.

Recovery in GDP growth seems to be ahead, as the ministry of finance has projected 4.2% economic growth for 2015. Moreover, the Andean Development Corporation expects Peru to lead Latin America in growth this year, which will result from increased mining and infrastructure projects. Recovery and growth of the mining and banking industries in Peru are both two of the most important factors for a turnaround in this fund's performance.

Mining Industry Overview

Peru is one of the most mineralized countries in the world, and currently hosts some of the largest metal mines in the world. Peru is the world's third largest producer of copper, silver, tin, and zinc, and is also the world's seventh largest producer of gold. The majority of the world's largest mining companies have a presence in Peru; this includes Xstrata, Newmont Mining Corporation (NYSE:NEM), Glencore (OTCPK:GLNCY), Gold Fields (NYSE:GFI), Freeport-McMoRan (NYSE:FCX), Rio Tinto (NYSE:RIO), Anglo American (OTCPK:AAUKY), and Barrick Gold Corporation (NYSE:ABX).

Copper mining presents the most potential in Peru, as Peru is expected to double its copper output from 1.3 million MT to 2.8 million MT by 2016. Moreover, out of all the mining investments expected to take place by 2020, $35 billion will be allocated towards copper projects; this represents 62% of the total investment. Five copper mines are expected to begin production before 2016, with a total investment of $13 billion. It is shocking to note that although Peru has large mineral resources, only approximately 0.32% of the country's total territory was being explored in 2013.

Risks in this industry that investors should be aware of and constantly investigate include the government's response to illegal mining operations and negative local perception of mining operations. Illegal operations identified by the police are not only shut down, but the equipment is also destroyed. Mining operations have also resulted in protests from local citizens, who oppose the operations and seek to protect their farming and water resources. A large number of conflicts have resulted in local citizens being injured or killed. Lack of local cooperation has resulted in the delay of operations of some companies. Most recently, Southern Copper Corp plans to extend its initial 60 day pause so that it can build local support.

The full potential of Peru's mining industry is clearly not being realized, and there is growth ahead. Investors can profit long term by the turnaround in Peru's economic performance and the development of the mining industry.


The completion of infrastructure projects is another factor that is anticipated to attribute to Peru's future economic recovery and growth. Credit Suisse projected economic growth of 5.6% in 2016, which would be attributed to the vast infrastructure projects undertaken. Some of these projects include:
  • Southern Gas Pipeline: This project consists of more than 1,700 kilometers of gas pipeline, designed to transport gas from the Camisea Field to Southern Peru.
  • The Peru government, with the support of a consortium, agreed to invest $5.7 billion to build the capital's first subway line.
Recovery of the construction industry in 2015 may be one pillar of the economy in Peru that attributes to the country's recovery. The government plans to embark on 22 large-scale projects in 2015 with a total value of $7 billion; some of these projects will be in the construction industry. Although it currently only accounts for 5% of the country's GDP, its growth is significant, as it has consistently outperformed the country's annual GDP growth.

The construction industry is also expected to rebound for the following reasons:
  • The Work for Taxes Law, which seeks to accelerate the growth of construction projects, by allowing private companies to implement projects chosen by regional and local governments.
  • Peru's president, Ollanta Humala, plans to pave 85% of the country's roads by 2016.
  • In 2015, the government expressed its plans to invest $2.8 billion in new hospital infrastructure, and to invest further into schools.


The banking industry has the advantage of high potential for expansion, due to the large unbanked population in Peru. This is also combined with the threat of overconcentration of banks in the industry, which attributed to the 1998 financial crisis the country experienced.

Performance of the industry in 2014 makes it evident that the economic adversity in 2014 did not negatively impact the banking industry:
  • Total direct loans expanded by 14.8%
  • Total deposits increased by 18.4%
  • Equity increased by 11.2%
The industry is still in its infant stages, as only 20% of the population in Peru holds an account at a financial institution. The high growth potential of this industry has consequently encouraged the entrance of major foreign banks. Moreover, a 15-20% growth in the microfinance industry has been projected for 2015; microfinance will not only be beneficial for increasing the socioeconomic status of citizens of Peru, but will also increase their access to banking services. The growth of the microfinance industry will provide a major benefit to the banking industry as a whole, by increasing the banked population.

The recovery and future growth of this industry is highly feasible, and the fund's top holding in this industry is attractive based on its past financial performance. Credicorp Ltd. (NYSE:BAP), the fund's top holding in the banking industry, has had a negative return of 9.53% in the past year. However, the company was able to increase its net revenue by 46.1% in 2014.


It is reasonable to assume that a rebound of Peru's economy is highly feasible in the future, and that Peru is one of the most promising countries in Latin America. Recovery and growth for the country is inevitable, specifically in the industries that this fund invests into. Therefore, investing in the iShares MSCI All Peru Capped ETF is a wise endeavor for those having a long term vision for Peru's economic growth and recovery.

Wall Street's Best Minds

Will Economy Come to Stock Market’s Rescue?

A Charles Schwab strategist expects that economic performance in the second half will best the first half’s.

By Jeffrey Kleintop

June 23, 2015

During the first half of 2015, global economic data have generally been worse than expected.

The Citigroup Economic Surprise index (CESI) for the so-called group of 10 countries rises when data exceed expectations and falls when it comes in below the consensus forecast. This index has been falling steadily this year until June. (The G10 is actually composed of 11 countries: United States, United Kingdom, Germany, France, Japan, Italy, Canada, Sweden, Switzerland, the Netherlands, and Belgium.)
While economic data are always important, how they fare relative to expectations is what matters most about it to investors. Even data that reflect lackluster economic growth can be welcome news for a market braced for something worse. Likewise, the same data points may not be such good news if market participants had priced in expectations for a stronger pace of growth.      
It isn’t surprising that the CESI has been falling during the first half of 2015. After all, this is the fifth year in a row that economic data have been disappointing in the first half of the year. The reasons for this pattern include first half increases in taxes and cutbacks in government spending, natural disasters and extreme weather, debt-related political showdowns, and the end of central bank stimulus programs, among others. Some of these drivers appeared again and impacted 2015.
Fortunately, in every one of these recent years the data turned around during the summer months and the CESI bottomed around midyear and generally rose during the second half, ending the year back near where it started.
We expect better second half economic performance again this year.
In recent years the bottom in the CESI has come as early as April and as late as August. This year it may have bottomed in June. Another recent year that saw an early bottom in the CESI was 2013. In fact, the pattern of the CESI in 2015 is increasingly starting to resemble that of 2013. This similarity has extended to the stock market, as well. The performance of the MSCI World Index has so far been similar to the pattern it took in 2013.
There are plenty of reasons why the similar pattern may not continue over the remainder of the year including the potential impact of rate hikes by the Federal Reserve (Fed), fallout from a potential Greek default, the changes that may come from European elections later this year, among others.
On the other hand, solid economic data that support rate hikes by a data-dependent Fed, a resolution to the Greek “crisis” one way or another that brings an end to the uncertainty, and the return of earnings growth as the drags from currency and falling oil prices begin to ease may support the global stock market and result in a repeat of the 2013 pattern.
If the MSCI World Index does continue to track the 2013 pattern, we could see a further dip in the weeks ahead but the pattern suggests the index could go on to post mid-single digit gains by year-end. [Editor’s Note: One way to play this index is with the iShares MSCI World exchange-traded fund.]

Kleintop is the chief global investment strategist with Charles Schwab.

Op-Ed Contributor

Brazil’s Shaken Optimism


JUNE 23, 2015

In the last decade, for the first time in my life, it was exciting to be Brazilian. Despite the global crisis, the country’s economy was growing and inequality was decreasing. “That’s the guy!” United States President Barack Obama was heard to say while patting the shoulder of President da Silva.
Brazil played host to the soccer World Cup in 2014 and is going to hold the Summer Olympics in 2016. The statue of Christ the Redeemer, a major national symbol, was on the cover of the British magazine The Economist, lifting off like a rocket. It seemed that we had outgrown our old fate of being a rich country inhabited by poor people. It seemed that the prophecy of the Austrian writer Stefan Zweig, the one that said Brazil was “the country of the future,” had been fulfilled. The future, finally, had arrived.
I was born in 1977, during the military dictatorship. One of my earliest memories is of a rally in 1984 where 400,000 people called for direct presidential elections. At one point, my father put me on his shoulders so I could see my childhood hero on the stage: Socrates, who played for Corinthians, São Paulo’s best soccer team, and the Brazilian national team. Next to him was a chubby, bearded, floppy-eared guy to whom I didn’t pay any attention: Lula. During my adolescence, though, Lula would become one of my heroes as well.
Partido dos Trabalhadores, or P.T., was founded in 1980, as a union of workers, intellectuals and artists. Lula, a migrant from one of the poorest regions in the country, a former metalworker and union leader, led many critical strikes and helped bring down the military dictatorship in 1985.
The dictatorship had only deepened our historical inequality. While taking the bus to and from school as a child, I could see the social apartheid. My friends and I on our way to a private school — white kids with braces on our teeth, Walkmans in our backpacks, Nike sneakers on our feet — while most passengers, black or biracial, had missing teeth, wore cheap Havaiana flip-flops, and carried their belongings in plastic bags.
For the elections after the dictatorship, I wore P.T. T-shirts or pins with the same conviction I wore the Corinthians jersey on game days. Unfortunately, that bearded guy’s speeches were not as effective as Socrates’ backheel passes, so P.T. ended up losing more elections than Corinthians won games. Only in late 2002, running in his fourth consecutive election, striking a much softer tone, did Lula finally win the office of president.
To some extent, the party fulfilled our expectations after 13 years in power. Lula — and Dilma Rousseff after him — created social programs and raised the minimum wage to hoist more than 40 million people out of poverty and into the middle class. When I was born, many people were still plagued by hunger; now one of Brazil’s major health issues is obesity. The buses now are full of people playing on their smartphones, with mouths full of teeth, and Mizuno sneakers on their feet. If you see someone wearing Havaianas here in São Paulo, it’s probably a foreigner.
The problem is that beyond material goods, not much has changed for the poor. The educational system is weak, and access to good health care is limited. Many homes have flat-screen TVs, but are not hooked up to public sewers. Many say these 40 million whose living standards have been raised are not a new middle class but are just “poor people with money.”
Because being middle class means more than just being able to buy things; it means having access to the common repertoire of civilized society. It means knowing, for example, that Picasso was the Spanish artist who painted “Guernica”; that Freud is the “cigar guy” who created psychoanalysis; that “The Girl From Ipanema” is a bossa nova classic written by Antônio Carlos Jobim and Vinicius de Moraes.
The current economic and political crisis raises many fears. Will all the recent gains be washed down the drain? Will the Mizuno sneakers and smartphones disappear, to be replaced by flip-flops and plastic bags?
Many believe that the recession and recent political upheavals will soon be overcome. A new finance minister is putting the economy in order, and economic growth is predicted to return in 2016. An independent prosecutor has been investigating cases of corruption and has already sent several politicians and businessmen to jail.
On the streets, protesters shout “P.T. Out!” as if the party were responsible for all our problems. It is not. P.T. has done the most to reduce inequality in Brazil — but its efforts have come up short.
Perhaps as important as overcoming the current crisis is finding new paths to ensure that Brazil is a country where everyone has a fair chance. A country with a middle class that not only can buy imported shoes and mobile phones, but also be moved by a Picasso painting or get distracted by whistling “The Girl From Ipanema.”
This Brazil, unfortunately, remains in the future.

America, China, and the Productivity Paradox

Stephen S. Roach

JUN 23, 2015

electronics factory workers

NEW HAVEN – In the late 1980s, there was intense debate about the so-called productivity paradox – when massive investments in information technology (IT) were not delivering measureable productivity improvements. That paradox is now back, posing a problem for both the United States and China – one that may well come up in their annual Strategic and Economic Dialogue.
Back in 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere except in the productivity statistics.” The productivity paradox seemed to be resolved in the 1990s, when America experienced a spectacular productivity renaissance. Average annual productivity growth in the country’s nonfarm business sector accelerated to 2.5% from 1991 to 2007, from the 1.5% trend in the preceding 15 years. The benefits of the Internet Age had finally materialized. Concern about the paradox all but vanished.
But the celebration appears to have been premature. Despite another technological revolution, productivity growth is slumping again. And this time the downturn is global in scope, affecting the world’s two largest economies, the US and China, most of all.
Over the past five years, from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9%. It actually fell at a 2.6% annual rate in the two most recent quarters (in late 2014 and early 2015). Barring a major data revision, America’s productivity renaissance seems to have run into serious trouble.
China is witnessing a similar pattern. Although the government does not publish regular productivity statistics, there is no mistaking the problem: Overall urban employment growth has been steady, at around 13.2 million workers per year since 2013 – well in excess of the government’s targeted growth rate of ten million. Moreover, hiring seems to be holding at that brisk pace in early 2015.
At the same time, output growth has slowed from the 10% trend of the 33 years ending in 2011 to around 7% today. That downshift, in the face of sustained rapid job creation, implies an unmistakable deceleration of productivity.
Therein lies the latest paradox. With revolutionary technologies now driving the creation of new markets (digital media and computerized wearables), services (energy management and DNA sequencing), products (smartphones and robotics), and technology companies (Alibaba and Apple), surely productivity growth must be surging. As a modern-day Solow might say, the “Internet of Everything” is everywhere except in the productivity statistics.
But is there really a paradox? Northwestern University’s Robert Gordon has argued that IT- and Internet-led innovations like automated high-speed data processing and e-commerce pale in comparison to the breakthroughs of the Industrial Revolution, including the steam engine, electricity, and indoor plumbing. He maintains that, although these innovations led to dramatic transformations of the major advanced economies – such as higher female labor-force participation, increased transportation speed, urbanization, and normalized temperature control – these changes will be extremely hard to replicate.
Indeed, as taken with today’s revolutionary technologies as we are – I say this staring at my sleek new Apple Watch – I am sympathetic to Gordon’s argument. If US productivity figures are to be taken at anything close to face value – a persistently sluggish trend interrupted by a 16-year spurt that now appears to have faded – it is possible that all America has accomplished are transitional efficiency improvements associated with the IT-enabled shift from one technology platform to another.
Optimists maintain that the official statistics fail to capture marked quality-of-life improvements, which may be true, especially in the light of promising advances in biotechnology and online education. But this overlooks a much more important aspect of the productivity-measurement critique: the undercounting of work time associated with the widespread use of portable information appliances.
In the US, the Bureau of Labor Statistics estimates that the length of the average workweek has held steady at about 34 hours since the advent of the Internet two decades ago. Yet nothing could be further from the truth: knowledge workers continually toil outside the traditional office, checking their email, updating spreadsheets, writing reports, and engaging in collective brainstorming. Indeed, white-collar knowledge workers – that is, most workers in advanced economies – are now tethered to their workplaces essentially 24 hours a day, seven days a week, a reality that is not reflected in the official statistics.
Productivity growth is not about working longer; it is about generating more output per unit of labor input. Any undercounting of output pales in comparison with the IT-assisted undercounting of working hours.
China’s productivity slowdown is probably more benign. It is an outgrowth of the Chinese economy’s nascent structural transformation from capital-intensive manufacturing to labor-intensive services. Indeed, it was only in 2013 that services supplanted manufacturing and construction as the economy’s largest sector. Now the gap is widening, and that is likely to continue. With Chinese services requiring about 30% more workers per unit of output than manufacturing and construction, combined, the economy’s structural rebalancing is now shifting growth to China’s lower-productivity services sector.
China has time before this becomes a problem. As Gordon notes, there have been long-lasting productivity dividends associated with urbanization – a trend that could continue for at least another decade in China. But there will come a time when this tailwind subsides and China begins to converge on the so-called frontier of the advanced economies.
At that point, China will face the same productivity challenges that confront America and others. Chinese policymakers’ new focus on innovation-led growth seems to recognize this risk. Without powerful innovations, sustaining productivity growth will be an uphill battle. China’s recent shift to a slower-productivity trajectory is an early warning of what may well be one of its most daunting economic challenges.
There is no escaping the key role that productivity growth plays in any country’s economic performance. Yet, for advanced economies, periods of sustained rapid productivity growth have been the exception, not the rule. Recent signs of slowing productivity growth in both the US and China underscore this reality. For a world flirting with secular stagnation, that is disturbing news, to say the least.

The Forgotten History (and Potential Future) of Silver as Money

 By: Stefan Gleason
Tuesday, June 23, 2015

In contemporary discussions of sound money, silver tends to get short shrift. Even among staunch sound money advocates, the historic role of silver as money is often marginalized or ignored altogether.

People who equate sound money with gold and tout the advantages of returning to a gold standard should also embrace silver as a complementary - and necessary - partner with gold in re-establishing sound money.

The Founders wrote a bi-metallic gold-silver standard into the United States Constitution. Article 1, Section 10 makes it explicit: "No State shall... make any Thing but gold and silver Coin a Tender in Payment of Debts..."

The U.S. Dollar was established
as 371.25 grains of silver, just
like the Spanish Milled Dollar
The Coinage Act of 1792 defined a dollar in terms of silver. Specifically, a dollar was to be 371.25 grains (equivalent to about three-fourths of an ounce) of silver, in harmony with the Spanish milled dollar. Thus, the true foundation for U.S.
circulating currency was not gold but silver. The dollar value of gold coins was ultimately pegged to silver, and one ounce of gold was therefore valued at about 16 ounces of silver, or $20.

The Federal Reserve Notes in circulation today that are colloquially called "dollars" aren't Constitutional dollars. They are bank notes accorded monopoly "legal tender" status by government fiat.

When Congress authorized the secretive Federal Reserve System in 1913, the Fed was sold to the public merely as a lender of last resort. The Federal Reserve wouldn't function as a central bank and wouldn't replace gold and silver as money - or so its proponents promised.

The Fed didn't eviscerate all sound money precepts immediately. That would have generated too much of a backlash. After all, the American people have always had a sentimental attachment to precious metals and a healthy suspicion of vested banking interests.

In the words of Thomas Jefferson, "I believe that banking institutions are more dangerous to our liberties than standing armies." He also wrote, "The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals." You'll notice that Jefferson identified "the precious metals" (plural) - meaning gold and silver - as being superior to paper currencies.

But even before the creation of the Federal Reserve in 1913, certain banking and political interests had worked to undermine silver and re-conceive of the gold-silver standard as monometallic gold standard. In 1873, Congress moved to sideline the silver dollar. That sparked the so-called Free Silver Movement, which stood for allowing the supply of silver coins to be increased in accord with demand.

In 1878, the Free Silver Movement got the silver dollar restored as legal tender. Silver continued to be a hot-button issue of the day.

In 1896, William Jennings Bryan gave his famous "Cross of Gold" speech before the Democratic National Convention. The populist orator advocated free coinage of silver at a ratio to gold of 16:1 (the classic ratio) and a full restoration of the bi-metallic standard.

The words of William Jennings Bryan still strike a chord: "...instead of having a gold standard because England has, we shall restore bimetallism, and then let England have bimetallism because the United States have. If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost... by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

Bryan saw gold at the time as the metal of the elites; silver as the metal of the masses. But he understood that having both metals function freely as money was vital. Where gold and silver compete with each other, internal checks and balances are built into the system. But Bryan couldn't have foreseen that the banking and political elites would acquire the ability to crucify the people upon a digitized cross of Quantitative Easing!

We are, no doubt, living in a completely different era than the ones William Jennings Bryan and Thomas Jefferson lived in.

Credit cards, e-commerce, and smartphone payments are here and here to stay. But that doesn't mean that silver has been rendered irrelevant. To the contrary, there are more ways than ever for silver to reassert itself as the money of the people.

It isn't necessary for actual silver dimes and quarters to be re-introduced into circulation in order for silver to function again as money. Debit cards and smartphone apps linked to accounts backed by silver are in development. Some governments are even considering proposals to link their currencies partially back to silver.

Given silver's low price ratio versus gold (currently only 1:73 versus the classic 1:16), it makes a lot of sense to favor silver as an undervalued monetary asset.

In the battle to resurrect sound money, both silver and gold will play a role. Gold is necessary because it represents a highly concentrated form of wealth. Gold is more practical than silver for hoarding by wealthy individuals, large institutions, and, yes, central banks. (Despite their push for a 100% electronic cashless global economy, central banks still hold the world's largest gold stockpiles. And more central banks today are net buyers of gold than net sellers.)

Silver is necessary because it's the historic, and still most practical, basis for defining a "dollar." A sound dollar (or a unit of an alternative private currency) can be a silver coin, a paper certificate, or a digital credit as long as it's ultimately backed by and redeemable in physical silver.

In an era of runaway government debt levels, zero-to-negative interest rates, and systemic risks in the artificially propped-up banking system, the case for a new monetary order based on a gold-silver standard is as strong as ever.

Utah Senator Reed Smoot in 1930 expressed his view that "something will happen to place silver back in its rightful place beside gold in the commerce of the world." Perhaps that something will be a global loss of confidence in debt-based fiat currencies that are all racing to the bottom.

Are You at Risk for a Heart Attack After Exercise?

People active during middle age and later years need to take precautions

By Ron Winslow

Updated June 23, 2015 8:20 a.m. ET

Dying during or immediately after physical activity occurs rarely. But the exercise-related death of a prominent Wall Street executive last week nevertheless raises concerns for people who want to keep active during middle age and later years.

Regular exercise is a cornerstone of good health, and its long-term benefits for both longevity and protection against heart attacks, cancer and other ailments are supported in many studies. Doctors say there are strategies to reduce the already low likelihood of a workout turning into a tragedy.

James B. Lee Jr., the 62-year-old vice chairman of J.P. Morgan Chase & Co., last week became short of breath while exercising and went to a hospital, where he died, his company has said. Photo: Rick Wilking/Reuters

James B. Lee Jr., the 62-year-old vice chairman of J.P. Morgan Chase JPM 1.29 % & Co., who regularly exercised, became short of breath while exercising and went to a hospital, where he died, his company has said. No further details have been provided. Such events could result from an aortic aneurysm or another cause, but they typically raise questions about a heart condition.

“Exercise is not a vaccine against heart disease,” says Michael Joyner, an exercise physiologist at Mayo Clinic, in Rochester, Minn. While not specifically addressing Mr. Lee’s case, Dr. Joyner noted that risk factors such as high blood pressure and high cholesterol are increasingly common as people age.

“You need to get them treated,” he says. “Middle-aged men in high-stress jobs need to get a checkup once in a while.”

Growing numbers of people are moving through middle age determined to stay active with competitive sports and regular exercise. Doctors urge others who are on the sidelines to join in to improve their health. But high-profile events such as Mr. Lee’s death may stir anxiety. Researchers say not to worry.

“There is unequivocal evidence that regular physical activity and exercise have multiple benefits that far outweigh any risk of the exercise itself,” says Jonathan A. Drezner, director of the Center for Sports Cardiology at the University of Washington, in Seattle.

But, while a person is doing it, rigorous exercise, whether on a treadmill, a road race or a basketball court, does elevate risk for sudden cardiac arrest, a typically fatal event that can be triggered by a heart attack but is the immediate result of an out-of-control arrhythmia that causes the heart to stop beating.

The majority of sports-related sudden cardiac arrests occur among people above 35 years old. Most victims are men and most already have heart disease whether they know it or not.

“The risk is much greater for people who don’t exercise on a regular basis,” Dr. Drezner says. “The weekend warrior who goes out to crush it once a week” or less often is much more vulnerable than the person who gets three to five cardio workouts a week.

For a sedentary middle-age person who wakes up one morning and suddenly decides to become a “lean, mean fighting machine in a month, that’s a bad idea,” says Sumeet Chugh, associate director of the Heart Institute at Cedars Sinai Medical Center, in Los Angeles. “You should make fitness a goal, but a gradual goal,” slowly increasing intensity over several weeks or more.

Another worry is that heart disease often goes undetected. In as many as half the cases, a heart attack is a person’s first symptom of significant coronary artery disease. That raises the stakes on controlling cholesterol, blood pressure and other risk factors. A potentially troublesome aortic aneurysm, a bulging in the main blood vessel that carries blood away from the heart, rarely causes symptoms and poses a challenge for early detection.

Dr. Chugh, co-author of a recent article titled “Sudden Cardiac Death in the Older Athlete” in the Journal of the American College of Cardiology, lists these markers for high risk: a 10-year risk of coronary artery disease greater than 5%; very high cholesterol; diabetes; a strong family history of sudden cardiac death or early heart disease; or a body-mass index, a measure of obesity based on height and weight, over 28.

A sedentary person who checks any of these boxes should get a thorough cardiac evaluation before participating in sports or embarking on an exercise program, he says.

Victims of sudden cardiac arrest often miss or ignore signals of heart risk, researchers say. A recent study found more than one-third of people experienced typical heart symptoms in the week before the event.

“Everyone who is exercising needs to be aware of symptoms that don’t feel right,” says Dr. Drezner.

A little chest pain or shortness of breath, a heart palpitation or feeling more fatigued than usual might seem trivial, but they are warning signs that should prompt people to “definitely see a physician to be evaluated,” Dr. Brezner says.

Fitness experts also point to studies showing the benefits of physical activity come from frequency, not intensity. People get more than 50% of the payoff of rigorous exercise just by walking, says Michael Roizen, chief wellness officer at the Cleveland Clinic.

A gradual warm-up and a cool-down period are important components of a more rigorous workout, he says. And he especially cautioned against being too competitive on a workout. “A guy will say, ‘If I can do 30 minutes, why can’t I do 40 minutes,’ ” Dr. Roizen says. “Every guy will go too far, too fast unless you yell at them.”

A recent study Dr. Chugh led of cardiac-arrest cases in the Portland, Ore., area illustrates how rare such events are. It examined 1,247 sudden cardiac arrests that occurred among people ages 35 to 65 during an 11-year period ending in 2013. Researchers found that just 5%—63 cases—were associated with sports activity, including 17 arrests during jogging, seven during gym exercise and others during such activities as basketball, cycling, golf, volleyball and soccer.

The analysis, published in April in the journal Circulation, said the incidence of sports-associated sudden cardiac arrests was 21.7 per million residents per year, compared with 555 per million for arrests not associated with sports. Extrapolating the findings to the entire U.S. population, researchers estimated that 2,269 men and 136 women suffer a sudden cardiac arrest associated with physical activity each year.

“You can’t really use the risk of sudden death as an excuse not to exercise,” says Dr. Chugh.