martes, noviembre 08, 2016




The dry facts

Water is scarce because it is badly managed

“THOUSANDS have lived without love; not one without water,” observed W.H. Auden. He omitted to add that, as with love, many people have a strong moral aversion to paying for the life-sustaining liquid. Some feel that water is a right, and should therefore be free. Others lobby governments to subsidise its distribution to favoured groups. All this results in vast and preventable waste.

Water covers two-thirds of the Earth’s surface. It is not used up when consumed: it just keeps circulating. So why do researchers from MIT predict that by the middle of the century, more than half of humanity will live in water-stressed areas, where people are extracting unsustainable amounts from available freshwater sources?

One reason is that as the world’s population grows larger and richer, it uses more water.

Another is climate change, which accelerates hydrologic cycles, making wet places wetter and dry places drier.

The World Resources Institute, a think-tank, ranked 167 countries, and found that 33 face extremely high water stress by 2040 (see map). But a lot of the problem stems from lousy water management, and that is something the officials who meet in dusty Marrakesh this week for the next round of annual UN climate talks should ponder. A crucial part of adapting to a warmer world is to work out how to allocate water more efficiently.

Each person needs to drink only a few litres a day, but it takes hundreds of litres to grow food—and thousands to put a joint of beef or pork on the table. Farming accounts for 70% of water withdrawals and industry accounts for most of the rest. Because farmers and factory bosses are politically powerful, they typically pay far too little for their water. Some pay for the operational costs of supplying it, but not the infrastructure that enabled it to flow from the tap.

Many pay nothing to raid underground aquifers—India pumps two-thirds of its irrigation-water this way. When something is too cheap, people squander it. Chinese industry uses ten times more water per unit of production than the average in rich countries, for example.

Farmers in parched places like California grow thirsty cash crops such as avocados, which could easily be imported from somewhere wetter.

The key to managing water better is to price it properly, giving consumers a reason not to waste it and investors an incentive to build infrastructure to supply it. Vast sums are needed: over $26trn between 2010 and 2030, by one estimate. Before water can be properly priced, however, it needs to be clear who owns it (or, more precisely, who has the right to extract how much from rivers, aquifers and so on). Australia has led the way in creating such a system of tradable water rights.

Current accounts
The aim is to ensure that water winds its way to those who can make the best use of it.

Calculating how much is being used, and how much actually ought to be used, is essential. In Australia old rights (typically belonging to landowners) were replaced with shares in perpetuity that grant holders a proportion of any annual allocations. This means that the only way one person can have more of the liquid is if another person has less. Two markets have emerged: one in which seasonal allocations of available water can be traded, and another in which shares themselves can be.

For the system to work, extra care should be taken to ensure that tradable water rights are allocated in a fair and open way. The “blockchain”, a cryptographic technology that allows strangers to make fiddle-proof records of who owns what, could help.

Getting water policy right will not only encourage everyday conservation; it will also stimulate the development of technologies such as artificial meat (which uses far less water than the real stuff) and cheaper desalination. The alternative is to prove Mark Twain right when he said: “Whiskey is for drinking; water is for fighting over.”

A Little-Noticed Fact About Trade: It’s No Longer Rising

Binyamin Appelbaum

A Hanjin Shipping container at the Port of Long Beach in California in September. The company’s bankruptcy filing briefly halted the flow of goods from Asia to the United States. Credit Lucy Nicholson/Reuters
The constant flow of goods from Asia to the United States was briefly interrupted last month after Hanjin, the South Korean shipping line, filed for bankruptcy, stranding several dozen of its cargo ships on the high seas.
It was a moment that made literal the stagnation of globalization.
The growth of trade among nations is among the most consequential and controversial economic developments of recent decades. Yet despite the noisy debates, which have reached new heights during this presidential campaign, it is a little-noticed fact that trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8 percent in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.
The United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion.
It is the first time since World War II that trade with other nations has declined during a period of economic growth.
Sluggish global economic growth is both a cause and a result of the slowdown. In better times, prosperity increased trade and trade increased prosperity. Now the wheel is turning in the opposite direction. Reduced consumption and investment are dragging on trade, which is slowing growth.
The World Trade Organization’s most recent round of global trade talks ended in failure last year. The Trans-Pacific Partnership, an attempt to forge a regional agreement among Pacific Rim nations, also is foundering. It is opposed by both major-party American presidential candidates. Meanwhile, new barriers are rising. Britain is leaving the European Union. The World Trade Organization said in July that its members had put in place more than 2,100 new restrictions on trade since 2008.
“Curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades,” Christine Lagarde, managing director of the International Monetary Fund, wrote in a recent call for nations to renew their commitment to trade.
Against the tide, the European Union and Canada signed a new trade deal on Sunday.
It may be hard, however, to muster public enthusiasm in the United States and other developed nations. The benefits of globalization have accrued disproportionately to the wealthy, while the costs have fallen on displaced workers, and governments have failed to ease their pain.
The Walmart revolution is over. During the 1990s, global trade grew more than twice as fast as the global economy. Europe united. China became a factory town. Tariffs came down. Transportation costs plummeted. It was the Walmart Era.
But those changes have played out. Europe is fraying around the edges; low tariffs and transportation costs cannot get much lower. And China’s role in the global economy is changing. The country is making more of what it consumes, and consuming more of what it makes. In addition, China’s maturing industrial sector increasingly makes its own parts. The International Monetary Fund reported last year that the share of imported components in products “Made in China” has fallen to 35 percent from 60 percent in the 1990s.
The result: The I.M.F. study calculated that a 1 percent increase in global growth increased trade volumes by 2.5 percent in the 1990s, while in recent years, the same growth has increased trade by just 0.7 percent.
Hanjin, like other big shipping companies, bet that global trade would continue to expand rapidly. In 2009, the world’s cargo lines had enough room to carry 12.1 million of the standardized shipping containers that have played a crucial, if quiet, role in the rise of global trade. By last year, they had room for 19.9 million — much of it unneeded.
India is not China redux. Most trade flows among developed nations. The McKinsey Global Institute calculates that 15 countries account for roughly 63 percent of the global traffic in goods and services, and for an even larger share of financial investment.
The weakness of the global economy is exacerbating the trend. Infrastructure investment by multinational corporations declined for the third straight year in 2015, according to the United Nations. It predicts a further decline this year. But even if growth rebounds, automation reduces the incentives to invest in the low-labor-cost developing world, and it reduces the benefits of such investments for the residents of developing countries.
The political reaction is global, too. The economist Branko Milanovic published a chart in 2012 that is sometimes called the elephant chart, because there is a certain resemblance. It shows real incomes rose significantly for most of the world’s population between 1988 and 2008, but not for most residents of the United States and other developed countries.
The chart is often presented as a depiction of the consequences of globalization. The reality is more complicated, but perception is undeniable. Voters in developed nations increasingly view themselves as the victims of trade with the developing world — and a backlash is brewing.

Donald J. Trump’s presidential campaign is an obvious manifestation, as is Hillary Clinton’s backing off from her support of the Trans-Pacific Partnership trade deal. A study published in April found that voters in congressional districts hit hardest by job losses are more likely to reject moderate candidates, turning instead to candidates who take more extreme positions.
Economic stagnation is turning European voters against trade, too.
Professor Rodrik said that proponents of free trade were guilty of overstating the benefits and understating the costs. “Because they failed to provide those distinctions and caveats, now trade gets tarred with all kinds of ills even when it’s not deserved,” he said. “If the demagogues and nativists making nonsensical claims about trade are getting a hearing, it is trade’s cheerleaders that deserve some of the blame.”

Wall Street's Best Minds

Byron Wien’s Key Fears About the Stock Market

The veteran strategist discusses the looming negatives that could undermine his bullish case for stocks.

When the presidential election is over, investors can focus on what is going on in the world economy and what future investment opportunities are lurking out there. If Donald Trump were to win, the outlook would be very uncertain because of his maverick ideas on both domestic and foreign policy. Though Hillary Clinton’s victory is likely, we should not assume a seamless transition from the policies of the Obama administration. She will focus on infrastructure, improving the Affordable Care Act, job creation, revising the tax code and immigration. The question will be how much of her agenda will she be able to get passed by a Republican-held House of Representatives.

Probably the most important lesson of the last six months is the importance of populism in the political process. A large segment of the population in the United States and Europe believes that their future economic opportunities are limited, and they want change from the path being followed by their governments. This discontent fueled the political success of Bernie Sanders and Donald Trump. Populism and immigration reform were the key factors abroad, influencing U.K. voters to leave the European Union.

Most observers would agree we are in a period of secular economic stagnation, but the equity market in the United States is near an all-time high and initial unemployment claims are at a 43-year low. If Hillary Clinton wins the presidency, it may not be because a plurality of American voters embraced her policies, but because many were adverse to the prospect of a Donald Trump–led White House. A majority of voters actually distrust her, and she might have lost to John Kasich, Marco Rubio or even Jeb Bush had they been nominated.
While we all support the concept of improving infrastructure, the Obama administration actually got very little done, despite being committed from the beginning to “shovel ready” projects. To get infrastructure work implemented effectively and quickly is hard. Although Larry Summers believes infrastructure should account for 1% of GDP, we can’t count on fiscal spending to contribute in a major way to overall economic growth in the United States anytime soon, even if these programs get through Congress. There is also the question of how many new jobs would be created by increased government spending. Given the doubts that exist about the benefits of revising the tax code and modernizing immigration policy, these challenges reinforce the futility of looking to the new administration to get the economy on a much stronger growth path right away.

We do know we are facing some headwinds. The Federal Reserve and other central banks are beginning to doubt the effectiveness of continued monetary expansion as a way to stimulate the economy, despite increased liquidity having been an important factor in driving the equity market higher since the end of the recession in 2009. We are also seeing the early signs of inflation. Both the Consumer Price Index and the Personal Consumption Expenditures indicators are still below 2%, but average hourly earnings are up 2.6%, the availability of skilled workers is getting tighter and inflation could become a negative factor some time during the next year. Rising rates and more inflation are likely to be interpreted negatively by equity investors.

The question puzzling investors is whether equities can continue to move higher when the economy is struggling. Real GNP has been growing at less than 2% and both short and long term interest rates are likely to rise, dampening price earnings ratios. The price of oil is moving higher, taking some money out of the pockets of consumers. Data on housing have generally been favorable to growth, but recent reports on starts were disappointing. The oil drilling rig count has increased (as the price of oil has come off its lows), and there is the prospect of improved capital spending from the energy sector, but it hasn’t appeared yet.

Fracking has picked up but it is not as vigorous as it was when oil was above $70 a barrel.

There are, however, countervailing winds. Commodity prices are rising, which should be good for emerging markets. The producer price index is rising in China, which usually coincides with improved growth there. No “hard landing” talk any more. Earnings for the Standard & Poor’s 500 have been essentially flat since 2014, but analysts believe they will be up sharply next year. That echoes their optimism in previous years.

While I believe we are in a period of secular stagnation where valuations are high and profits are likely to be disappointing, I do think there is a bull case out there: Hillary Clinton is elected president by a wide margin and at the top of her agenda is infrastructure spending. She persuades Paul Ryan to rally Republicans in Congress to pass an ambitious program to upgrade our roads, bridges, airports and tunnels. Her argument is that a bipartisan effort will benefit both political parties. Jobs are created as the projects get underway.

Consumer spending improves because the infrastructure workers now have the resources to buy what they had postponed. The price of gasoline edges up and inflation moves above 2% but this gives companies some pricing power which had been lacking. The Federal Reserve begins to raise rates, putting more money in the hands of retirees. Energy companies are heartened by the improvement in the economy and the rise in oil prices and they begin to spend money on capital projects, creating more jobs. The minimum wage begins to rise across the country. With real growth above 2%, corporate profits begin to rise, justifying higher stock prices. Investors become enthusiastic about opportunities in equities. Entrepreneurship flourishes and the initial public offering market becomes strong again.

You could also argue that historical multiples that indicate the market is expensive don’t apply because interest rates were much higher in earlier cycles. At these yields, equities should sell at somewhere between 25 and 30 times earnings. The public has been selling equity mutual funds and buying bond funds for several years. Hedge funds also have a low equity exposure compared to historical levels. Even long only investors are cautious. This kind of negative market mood generally creates opportunity. Another positive is the fact that no recession seems to be in sight even though the present expansion is 88 months old. Excesses like an inverted yield curve, investor euphoria, a hostile Federal Reserve and bloated inventories do not appear to be present. Even so, some prominent economists think there is a 70% chance of a recession in 2017. I would estimate the probability of the bull market continuing into 2017 at something like 35%.

My principal worry is earnings disappointment. According to Bianco Research, revenues in 2017 for the S&P 500 are only expected to increase 2%. Energy is a key part of the revenue problem, but even if you leave the energy sector out of the tally, the increase in revenues is only 3%. Up until the end of 2015 revenues were increasing at a 6% (5% without energy) rate and they have been on a downward slope ever since then. Earnings show a similar pattern. For 2017 earnings for the S&P 500 are expected to increase 1%.
Without energy the increase is 3%. Until the middle of 2015, earnings were showing an annual increase of 12% and they have been trending downward ever since. There are many more optimistic forecasts for earnings out there, some estimating earnings at $120 to $125 for 2016 and $125 to $130 for 2017. I am skeptical because modest revenue growth and rising wages will compress margins. We’ll know more when the third quarter results are in. While Microsoft (ticker: MSFT) and other technology stocks, along with General Motors  , United Technologies (UTX) and some financial stocks, have favorably surprised, General Electric (GE) and Honeywell International (HON) have disappointed. So far however, the general tone of earnings is positive but not resoundingly so.
The other key challenge to the bull market is monetary policy. I have long argued that the accommodative policies of the Federal Reserve have played a major role in the increase in equity prices since 2009. We know that the next Fed move is likely to be toward higher rates and we are likely to see a 25 basis point increase in December. If earnings were generally disappointing and monetary policy were more restrictive, I am hard pressed to see equities moving much higher. Marty Zweig, who has passed away, was famous for his warning, “Don’t fight the Fed.”
Perhaps the positive market performance is related to events taking place abroad. China is reporting better economic performance. Nominal growth has increased from 7.8% to 8.6%, encouraging investors. China is a major contributor to overall world growth and stronger numbers from there form a positive backdrop for the global outlook. According to my former Morgan Stanley colleague Steve Roach (now at Yale), China is contributing 1.2 percentage points to world growth which is only expected to be 3% at most. Almost every aspect of the Chinese economy is showing double-digit year over year increases, according to Evercore ISI. Vehicle sales are up 27%, house prices up 17%, government spending up 14%, bank loans up 13% and retail sales up 11%.

Other positive factors that may be influencing investors are the continuing increase in average hourly earnings which the Atlanta Federal Reserve Bank projects at 3% next year. In addition, the increase in oil prices should push inflation somewhat higher, and with inflation having been so low for so long, this could be a positive for earnings. The price of existing homes has been rising and this should encourage prospective buyers to make a commitment before the house they want gets to a price they cannot afford. The enormous AT&T / Time Warner deal shows that “animal spirits” are still around. While there is excitement about this example of vertical integration, there are many regulatory hurdles that have to be surmounted. I continue to be suspicious of the synergies that come from merger and acquisition activity. While earnings per share increases may occur as a result of cutting duplicate sales and administrative people, the growth prospects of the combined companies are not necessarily improved.

The Saudi Arabian $17.5 billion bond issue was also viewed as a positive because it showed an appetite for large fixed income offerings. The negative aspect is that the country needs the money to meet its internal obligations with oil prices at relatively depressed levels. U.S. rail car loadings have moved up sharply from a recent low, as has industrial production. While these industrial data points are impressive, they represent an improvement from a depressed condition and must continue in order to indicate the economy is on solid footing.

The consumer is the most important factor in the economy and if wages increase 2.6% and employment is up 1.7%, the nominal income proxy would increase 4.3%. Using the more optimistic Atlanta Fed numbers, you get to a 5.3% nominal increase. We’re only at 2.5% now so that’s a big change. The Goldman Sachs Commodity index is up sharply. Junk bond yields are down. Both of these indicate optimism about the economy. The Economic Cycle Research Institute, which has an excellent past record, forecasts a sharp rise in economic growth, but operating rates are 75% of capacity so there is plenty of slack that needs to be filled.

With so much good news, why am I cautious? I still worry that valuations are high and earnings will be disappointing in spite of the recent positives. I also am concerned that a strong dollar, partly resulting from the Fed tightening in December might be a negative. Many investment managers have had lackluster performance this year and they want the market to go up before 2017 begins to give their clients confidence, but over the years I have found that the market rarely provides what most of its participants desire. In this environment, knowing where to put your money is difficult. In equities, I still like several of the dominant Internet companies that will have open-ended earnings for some time, depressed biotechnology with strong pipelines and the emerging markets that are undervalued relative to the developed world.

Wien is vice chairman of Blackstone Advisory Partners, a subsidiary of the Blackstone Group.                               

High Altitude Ballooning Experiment

By: Captain Hook

It's a record; the global debt colossus is now in excess of $152 trillion. And derivatives monster - you better be sitting down for this one - because it's grown to in excess of a staggering $2 quadrillion. There's no putting this into perspective anymore other than characterizing the situation as a high altitude ballooning experiment that has spiraled out of control - dangerously out of control. Don't try and tell this to the globalists of the world however; they want to borrow more in perpetuity (see example here), and they hope you are sufficiently distracted not to notice (see example here). What's more, with Trump on the rise, looking like he will get the populist vote, the globalists are turning up the volume while they still can via propaganda, bad policy initiatives, and trickery - making their current make work (debt) program (and distraction) the most dangerous ever undertaken (in desperation) - the manufacture of World War III (WWIII). (i.e. the Dems will never follow through.)

Visions of sugar cookies are dancing in neocons heads on this prospect - after all - it's almost Christmas right.

And if that doesn't work to scare the plebs into voting for Hillary, the status quo will just have to blame Putin if the election doesn't turn out right, which is why they demonize him, every chance they get. No doubt they will continue this ploy. The question is 'would they get away with it?' Because calling the election a fraud on this basis and instituting martial law would not go over well - big time.

This is big idea behind keeping non-internal polls close, so when the deep state attempts to steel the election from Trump via fraud (they will play the Electoral College card again), it will look plausible esthetically / logistically in the mainstream. Because if the true popular vote was allowed to be reflected in the poles today - Trump would have his landslide (not just a marginal lead) - where he would get the 'swing vote' at the end. A surprisingly large percentage of voters are incredibly insecure social creatures that need to be on the 'winning team' no matter who they are - believe it or not.

This is of course part and parcel of the same social dynamic that builds bubbles. The Fedsters enable them, and the crazies do the rest. If present margin debt levels are any indication, being at all-time highs, the enabling bubble (of the other [public] bubbles), the larger debt bubble is primed for a popping, coincident with the US election cycle. So no matter who wins, Trump or Clinton, if this assessment is correct, it won't matter who is in the White House, because the damage has already been done. The debt needs to be unwound at some point, which looks to be dead ahead if interest rates keep rising in earnest, a likelihood not going un-noticed by the chief bubble blowers. On this basis, the future of the stock market bull appears perilous, with bubble dynamics here well into The Twilight Zone. No worries though, because the status quo has your back - honest - that's why 7 of 10 Americans have less than $1000 in savings.

It's Houdini himself at work ladies and gentlemen, saying one thing to distract a gullible public, all the while still serving their masters in the grandest high altitude ballooning experiment ever.   

And if this level of distraction doesn't work, they just turn the screws on the 'Wag The Dog' routine, which unfortunately might involve WWIII this time around - for reals - no really - this is not just Hollywood fiction. The ultimatums are being thrown around now by both the US and Russians. Thing is, while American's think everything is a big joke, and you were put on this earth to be exploited by them because they are superior, the Russians never joke about such things - so it should get interesting at a minimum, if not lethal by accident. But hey - nobody would dare shoot back at American's right? They'll float one of their aircraft carrier groups your way and bomb the hell out of you. Thing is, with the state of Russian missile technology today, air craft carriers are nothing more than large floating targets - a reality know all too well to US intelligence. (i.e. again, why the manufacture of WWIII directly in front of the election is just more Wag The Dog.)

So you have to wonder what's rally going on with all this nuclear war talk - no? Is this just more Wag The Dog on bad drugs - or do American elitists intend to take everybody down with them? It's no coincidence all this war talk is happening right in front of the election, I can assure you. The idea is not just distraction, but to scare the bejesus out of people so they will do something stupid, like vote for Hillary because she will save them. This is the purpose of the mainstream narrative accusing Trump of being in cahoots with Putin / Russia. It's an alienation technique - who would vote for an alien - right? Of course it's 'just fine' for freshly landed aliens to vote (numerous times) in America, but that helps the deep state, so a bought and paid for mainstream media (MSM) is mum on this subject. So it's a good thing the public is catching on to just how corrupt these characters are, which is destroying not just their own credibility, but also that of the status quo at large. What's more, this is also having a permanent effect on culture, the markets, etc. (See Figure 1)

Figure 1
Gold/CRB Monthly Chart

One possible unexpected result of a popping of the larger debt bubble could be continued pressure on the precious metals complex, where not only do they have more 'natural pressures' such as the above working on them, but man made as well. Above we see that gold is at an elevated level against commodities in general, which means it's at risk of bubble dynamics. Of course if central banks continue to turn the screws in money creation this condition could change rapidly, where a close over $1500 would be viewed as 'constructive' on this basis, signaling a continuation of present bubble economies. In this regard it should be noted the Gold / CRB Ratio is presently testing important Fibonacci related support, which if successful, could propel this relationship to the Fibonacci resonance related target denoted on the monthly plot above. It's important to note odds favor such a result, with the Fed rolling out increasingly inflationary policy, policy that would likely bring on stagflation as process unfolds, and commodity prices take off. It should be noted this is the message in the chart below, the monthly Dow / CRB Ratio plot. (See Figure 2)

Figure 2
Dow Industrials/CRB Monthly Chart

Concerning the above, it's important to note that while one more impulse higher is possible, meaning stocks can outperform commodities a bit more, a meaningful reversal should be expected sooner rather than later, signaling an overturn in the stock market's dominance, and quite possibly absolute gains. This is the picture that supports stagflation possibilities in no uncertain terms, the view the Fed will continue to stay ahead of the curve in bubble maintenance, meaning more desperate means of QE, such as helicopter money (HM) will be employed. As pointed out previously, if HM is employed by central planners, it would be a 'last resort' because this would likely unleash money multipliers and hyperinflationary fears as increasing money velocity would send general price levels through the roof, up hundreds of percentage points in a short period of time, making business conditions increasingly difficult, and eventually impossible - just ask Venezuela. This is why the TNX triggered a buy signal last week in anticipation of such an outcome. (See Figure 3)

Figure 3
Dow Industrials/XAU Monthly Chart

Technical Note: The Dow / XAU Ratio (see above) might need to correct back up more than the originally anticipated (38.2%), possibly even 100%, or thereabouts. (i.e. will the bottoming pattern be an ending diagonal?) Because in the initial phase of the process, rising interest rates will devastate all things equity for a period of time - usually a year or so.

So precious metal shares might need to correct for a while longer with the larger equity complex due to wholesale de-leveraging (stock market margin contraction), with margin levels currently at all-time highs. That's the way it played out the last two times bursting bubbles of this magnitude had to be digested in the US economy - in the tech wreck of 2000 (see here) and derivatives / subprime meltdown of 2008. This time, it will be much worse you should know, because it will be the big one coming unglued, the bond bubble, which will take everything else with it, as ultimately interest rates rise dramatically in an attempt to stop the dollar($) from imploding. This will be devastating to over-indebted American's already suffering the slings and arrows of outrageous fortune, with the big question being do we see irreversible collapse this time around? We are of course already seeing this not only on the periphery, but also now in core countries, with the US no exception. All we need now is for China's debt bubble to burst, and it would be all over.

Because if you didn't know, Chinese central planners have already been stepping up efforts to stay ahead of the curve - leaving them few options now.

Looks like the Clinton scandals are finally coming home to roost this week. Should be interesting - no?

See you next time.

How Inequality Found a Political Voice

Michael Spence
. Newsart for How Inequality Found a Political Voice

MILAN – It took a long time for widening inequality to have an impact on politics, as it suddenly has done in recent years. Now that it is a central issue, national economic priorities will need to shift substantially to create more equitable, inclusive economies and societies. If they do not, people could embrace explosive alternatives to their current governments, such as the populist movements now sweeping many countries.
Political leaders often speak of growth patterns that unfairly distribute the benefits of growth; but then they do relatively little about it when they are in power. When countries go down the path of non-inclusive growth patterns, it usually results in disrespect for expertise, disillusionment with the political system and shared cultural values, and even greater social fragmentation and polarization.
Acknowledging the importance of how economic benefits are distributed is of course not new.
In developing countries, economic exclusion and extreme inequality have always been unconducive to long-term high-growth patterns. Under these conditions, pro-growth policies are politically unsustainable, and they are ultimately disrupted by political dislocations, social unrest, or even violence.
In the United States, rising inequality has been a fact of life at least since the 1970s, when the relatively equitable distribution of economic benefits from the early post-World War II era started to become skewed. In the late 1990s, when digital technologies began to automate and disintermediate more routine jobs, the shift toward higher wealth and income inequality became turbocharged.
Globalization played a role. In the 20 years before the 2008 financial crisis, manufacturing employment in the US rapidly declined in every sector except pharmaceuticals, even as added value in manufacturing rose. Net jobs loss was kept roughly at zero only because employment in services increased.
In fact, much of the added value in manufacturing actually comes from services such as product design, research and development, and marketing. So, if we account for this value-chain composition, the decline in manufacturing – the production of tangible goods – is even more pronounced.
Economists have been tracking these trends for some time. Massachusetts Institute of Technology economist David Autor and his colleagues have carefully documented the impact of globalization and labor-saving digital technologies on routine jobs. More recently, French economist Thomas Piketty’s international bestseller, Capital in the Twenty-First Century, dramatically widened our awareness of wealth inequality and described possible underlying forces driving it. The brilliant, award-winning young economists Raj Chetty and Emmanuel Saez have enriched the discussion with new research. And I have written about some of the structural economic shifts associated with these problems.
Eventually, journalists picked up on these trends, too, and it would now be hard to find anyone who has not heard of the “1%” – shorthand for those at the top of the global wealth and income scales. Many people now worry about a bifurcated society: a thriving global class of elites at the top and a stressed-out class comprising everyone else. Still, despite these long trends, the political and policy status quo remained largely unchallenged until 2008.
To understand why it took politics so long to catch up to economic realities, we should look at incentives and ideology. With respect to incentives, politicians have not been given a good enough reason to address unequal distribution patterns. The US has relatively weak campaign-finance limits, so corporations and wealthy individuals – neither of which generally prioritizes income redistribution – have contributed a disproportionate share to politicians’ campaign war chests.
Ideologically, many people are simply suspicious of expansive government. They recognize inequality as a problem, and in principle they support government policies that provide high-quality education and health-care services, but they do not trust politicians or bureaucrats. In their eyes, governments are inefficient and self-interested at best, and dictatorial and oppressive at worst.
All of this began to change with the rise of digital technologies and the Internet, but especially with the advent of social media. As US President Barack Obama showed in the 2008 election cycle – followed by Bernie Sanders and Donald Trump in the current cycle – it is now possible to finance a very expensive campaign without “big money.”
As a result, there is a growing disconnect between big money and political incentives; and while money is still a part of the political process, influence itself no longer belongs exclusively to corporations and wealthy individuals. Social-media platforms now enable large groups of people to mobilize in ways reminiscent of mass political movements in earlier eras. Such platforms may have reduced the cost of political organizing, and thus candidates’ overall dependence on money, while providing an efficient alternative fund-raising channel.
This new reality is here to stay, and, regardless of who wins the US election this year, anyone who is unhappy with high inequality will have a voice, the ability to finance it, and the power to affect policymaking. So, too, will other groups that focus on similar issues, such as environmental sustainability, which has not been a major focus in the current US presidential campaign (the three debates between the candidates included no discussion of climate change, for example), but surely will be in the future.
All told, digital technology is shuffling economic structures and rebalancing power relationships in the world’s democracies – even in institutions once thought to be dominated by money and wealth.
A large, newly influential constituency should be welcomed. But it cannot be a substitute for wise leadership, and its existence does not guarantee prudent policies. As political priorities continue to rebalance, we will need to devise creative solutions to solve our hardest problems, and to prevent populist misrule. One hopes that this is the course we are on now.

Welcome to the Counterfeit Economy

By Patrick Watson

Little things add up.

A bunch of bricks add up to a house. Too many drinks add up to a hangover.

So it is with the economy: small, seemingly unrelated events can add up to important information—if you just connect the dots.

Today, I’ll show you some dots like that. They add up to a disturbing conclusion for both consumers and investors.

Dot #1: Counterfeit Cotton

Retail giant Target (TGT) said in August it was severing ties with textile company Welspun India Ltd. Target said Welspun had sold it counterfeit Egyptian cotton towels and sheets. They were cotton, but not from Egypt.

That matters because people think Egyptian cotton is the world’s best. It sells at a premium price—as much as three times more than other cotton varieties.

Photo: Getty Images

Two weeks later, Wal-Mart (WMT) also stopped buying Welspun products for the same reason.

More retailers followed: Bed Bath & Beyond (BBBY), JCPenney (JCP) and Macy’s (M) all pulled supposedly Egyptian cotton sheets off the shelves.

All these companies had been using Welspun for years. They have expert buyers who ought to know their cotton. Yet apparently, no one noticed a problem until Target’s action made them investigate.

That makes me wonder: What other counterfeit products do these big chains sell?

After all, we now know the companies can’t police their suppliers—or they just don’t want to.

Dot #2: Rotten Apple Cords

Last month Apple (AAPL) ran a sting operation against (AMZN). Apple’s investigators ordered iPhone cords and other accessories that were portrayed as genuine Apple products.

Their finding: Nearly 90% of alleged Apple accessories were counterfeit—not made by Apple at all.

They were labeled Apple. They looked like Apple products. People paid Apple-like premium prices for them. But they were fake.

Most of the fakes traced back to Mobile Star LLC, a small New Jersey company. Amazon stopped selling them, but no one knows how many more are floating around, possibly for sale elsewhere.

Photo: Getty Images

If you’ve ever bought anything on Amazon, you know it’s not especially clear whether you are buying from Amazon itself or one of the many other companies that use its platform. We just think it’s all Amazon. You click a button, then the product magically shows up at your door.

In this case, Mobile Star had engaged Amazon Fulfillment to store and ship the alleged Apple products. But even then, no one at Amazon thought to check whether the products were real or not.

So again, I must ask: What else is Amazon selling and/or shipping that isn’t what it claims to be?

The answer is, “A lot of stuff.” Which brings us to…

Dot #3: Smoking Diesel

Last year, the owners of supposedly clean-burning diesel cars made by Volkswagen (VLKAY) found out their cars weren’t so clean after all. In fact, they were downright dirty.

Worse, it turned out Volkswagen knew it was selling vehicles whose actual emissions bore no resemblance to the way it advertised them.

VW engineers cleverly designed their software to detect if the emissions system was in “test” mode.

The cars would cut emissions during a test, then start spewing fumes again so drivers would get better fuel economy and performance.

Photo: Getty Images

This wasn’t a minor oversight. The main selling point was that VW had “clean diesel” technology. It pitched them to consumers who wanted exactly that feature. What they got were vehicles that spewed up to 40 times more nitrogen oxides than US law allowed.

Nor was it a temporary practice. VW made and sold vehicles like this from 2009 to 2015, leaving millions of customers blissfully unaware.

VW denied what it was doing even when researchers in both Europe and the US started asking awkward questions. They admitted it only after US regulators threatened to withhold approval for 2016 VW and Audi models.

More studies showed it wasn’t just VW. Suspicious emission levels were found in cars from other makers, including Volvo, Renault, Hyundai, and Fiat.

Knowing all this, you must wonder what other features in your car don’t do what the manufacturer claims.

How would you know? Today’s vehicles are too complex to just look under the hood. They could have hamsters running on the wheels, and most of us would stay clueless.

Is Anything Real Anymore?

Maybe, maybe not. Whether it’s sheets, phone chargers, or automobiles, it seems likely we’ve all unwittingly bought counterfeit goods. That great deal you think you found may not be so great. And that’s a problem.

It’s a problem for consumers, obviously. People are spending their money and not getting what they bought.

Are the amounts small? Usually, yes. But few of us have money to burn in this slow-growing economy. Millions of people count every penny. Deceiving them into spending it is wrong.

Photo: Getty Images

It’s also an economic problem. Inflation can show itself as either higher prices or lower quality at the same price.

Suppose you buy a tool or appliance that should last five years. You get only three years out of it because it’s a shoddily built fake. Prices didn’t go up—but you still paid too much. That’s a kind of camouflaged inflation. It casts doubt on official numbers, which are often dubious in the first place.

I know—this is nothing new. People have been selling fake stuff forever.

True enough, but we’ve come to believe that major brands are trustworthy. That’s why they are major brands! We go to Walmart and assume whatever we buy is what the label says it is.

Yet sometimes it isn’t.

That is a problem for investors.

Volkswagen stock lost a third of its value within days after the emission scandal hit headlines. It went on to recover, but how many scared investors had sold by then? The company still ended up paying billions in damages and penalties. Not to mention the damage to its brand name and the loss of talented workers and executives.

We want to think that these things are aberrations. No rational CEO would risk the entire company by incorporating fraud into the business model, right?

But some have done it. The only question is how widespread it has become. Connecting the dots suggests it happens more than most people think.

The global supply chains that keep so many companies humming look increasingly stretched.

Unscrupulous vendors are duping major retailers, and the retailers seem unable to stop it. Or, even worse, they know what’s happening and just don’t care.

To me, this looks remarkably like subprime mortgages a decade ago. The banks made good money, and first-time homebuyers achieved the American Dream. It was great for everyone. Until suddenly it wasn’t.

We rightly watch the banking system for another crisis, but what if the next crisis is brewing somewhere else? We assume “defensive” dividend payers like Walmart will be okay if the economy weakens… but we might be wrong.

Does that mean you should sell all your big-box retail stocks? Of course not. But keep a close eye on them, especially in a market downturn—they may not be as “crisis-proof” as most people think.

See you at the top,