An upswing in the world economy is not sustained growth

The question is whether politics will give the necessary support to long-term recovery
by: Martin Wolf 
The world economy is improving. The question is how strong and long-lasting this improvement will be. The recovery could disappoint, last for a time or mark the beginning of a period of rapid and sustained growth. The last seems the least likely outcome. But failure is not predestined.

The International Monetary Fund’s World Economic Outlook lays out the issues. It had expected the economy to improve and it may be doing so. Last year, the world economy grew 3.1 per cent (at purchasing power parity). The IMF now forecasts growth will be 3.5 per cent in 2017 and 3.6 per cent in 2018. These forecasts are more or less identical to those published last October. As the WEO notes, even global trade is strengthening. Yet this upswing has to be put in context: it comes after many years of downgrades to the forecasts. The future looks far worse than it did just a few years ago.

The most important reason for the recovery is that three successive shocks — the financial crisis of 2007-09, the eurozone crisis of 2009-13 and the commodity price falls of 2014-15 — are moving well into the past. Most affected economies are enjoying cyclical recoveries: indeed, all regions and most significant economies are forecast to enjoy some growth. As these shocks fade, confidence has returned. Financial crises, in particular, have long-lasting effects. But even these do not last for ever. Strongly supportive monetary policies have also helped. We may at last be seeing the end of the post-crisis malaise.

In all, states the WEO, “barring unforeseen developments, continued recovery and gradual closing of output gaps are projected to keep growth modestly above potential in many advanced economies over the next few years”. Among emerging economies, the turnround in commodity exporters has been particularly noteworthy.What then might determine the length and strength of this upswing?

A happy story would build on the notion of strengthening confidence and rising investment in high-income and emerging economies (with the notable exception of China, where the pace of investment needs to slacken). This would strengthen productivity growth, as newer and more efficient capital replaced the old and outmoded stock of today. With productive investment and potential growth rising, it would also become easier to grow out of debt.

That is a pleasing story. Alas, it is far from the only possibility. We can easily identify significant downside risks.

The first such set of risks is political. The backlash against an open world economy in the high-income countries is real and, in the case of the election of Donald Trump, already significant. Yet rising protectionism and a consequent slowdown in world trade are not the only dangers. An even bigger risk is a breakdown in co-operation and even open conflict among great powers.

The second set of risks is the new US policy agenda. Probably the biggest danger is that overambitious hopes for economic growth are taken to justify excessively expansionary fiscal policies and unduly lax monetary policy. In the short to medium run, that might generate a boom and even secure re-election for Mr Trump, as similar policies did for Richard Nixon in 1972. In the longer term this could be hugely destabilising.

A third set of risks, again closely linked to the agenda of the Republicans, is irresponsible financial deregulation. The short-term effects of taking the brakes off an unstable financial system might also be positive. The longer-term ones might include a more devastating crisis even than the one of a decade ago.

A fourth set of risks concerns the longer-term evolution of the Chinese economy. In the short term, the authorities have the ability to sustain growth in line with targets. But growth remains credit-dependent. In the longer term, they seem to have a choice between ever more debt or far slower growth. How the Chinese manage this remains vital for global economic prospects.

A fifth set of risks arises in the other emerging economies. In particular, the impact of the Trump administration might be highly destabilising, via rising interest rates and a rising US dollar.

A sixth set of risks is in Europe. As the WEO notes, in the eurozone’s lagging economies, persistently poor economic performance might link up with financial sector weaknesses to depress demand — and so supply — permanently. The large European country most vulnerable to this malaise is Italy. But even France is not immune. Meanwhile, there is a risk that a hard or even chaotic Brexit will end up damaging the UK economy substantially.

Finally, there are political factors, apart from the ascendancy of a rightwing demagogue in the US. The rise of plebiscitary dictatorship in Hungary, Poland, Russia and Turkey does not bode well for their economies. Not dissimilar concerns arise in South Africa. Good policy depends on sensible policymakers. The supply of the latter cannot be taken for granted, especially now.

The biggest question then is whether politics will give the necessary support to economics. There is now a reasonable chance of a cyclical recovery. But turning that into something more durable will mean a delicate balancing act. Policymakers must support private and public investment, further innovation, maintain open and competitive economies and reduce regulation where it is excessive, while maintaining it where it is essential. Yet policymakers must also ensure that the benefits of growth are far more widely shared than before.

The upswing is an opportunity. If this is not exploited, it could prove just a temporary upward economic blip. But it could (and should) be more than that.

 The Housing Bubble Is Back 

Last week I ran into a friend whom I’d been worrying about. He’s a real estate appraiser and his work had been drying up as interest rates rose and homeowners stopped refinancing their mortgages.

But now he’s back to being happily swamped because instead of refinancing, everyone is buying — often, he says, for above the asking price.

A couple of days later my wife and I were at a slide show put on by friends just back from New Zealand. They’d heard that a neighbor was thinking about selling his house and on an impulse made him an offer. He accepted, and our friends became instant homeowners.

The very next day my wife’s father called to say that the company running a gas station next to his house wants to expand in his direction. They made him an unsolicited – and very generous — offer, which he accepted.

Then, I did an interview with Gordon T. Long’s Macro Analytics website in which Gordon told the following story:
My brother just sold one of his properties in Toronto [Ontario]. He had bidding war with 11 bidders so he demanded cash. Several of the Chinese buyers were on the phone overnight raising the money, which they got. My brother’s still partying after that sale.
It definitely feels like the housing bubble is back. Here’s part of a (factual rather than anecdotal) overview of the subject from Charles Hugh Smith:

Housing’s Echo Bubble Now Exceeds the 2006-07 Bubble Peak
If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden’s housing bubble. 
A funny thing often occurs after a mania-fueled asset bubble pops: an echo-bubble inflates a few years later, as monetary authorities and all the institutions that depend on rising asset valuations go all-in to reflate the crushed asset class. 
Take a quick look at the Case-Shiller Home Price Index charts for San Francisco, Seattle and Portland, OR. Each now exceeds its previous Housing Bubble #1 peak: 

Is an asset bubble merely in the eye of the beholder? This is what the multitudes of monetary authorities (central banks, realty industry analysts, etc.) are claiming: there’s no bubble here, just a “normal market” in action. 
This self-serving justification–a bubble isn’t a bubble because we need soaring asset prices–ignores the tell-tale characteristics of bubbles. Even a cursory glance at these charts reveals various characteristics of bubbles: a steep, sustained lift-off, a defined peak, a sharp decline that retraces much or all of the bubble’s rise, and a symmetrical duration of the time needed to inflate and deflate the bubble extremes. 
It seems housing bubbles take about 5 to 6 years to reach their bubble peaks, and about half that time to retrace much or all of the gains. 
Bubbles have a habit of overshooting on the downside when they finally burst. The Federal Reserve acted quickly in 2009-10 to re-inflate the housing bubble by lowering interest rates to near-zero and buying over $1 trillion of mortgage-backed securities. 
When bubbles are followed by echo-bubbles, the bursting of the second bubble tends to signal the end of the speculative cycle in that asset class. There is no fundamental reason why housing could not round-trip to levels below the 2011 post-bubble #1 trough. 
If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden’s housing bubble. Oops, did I say bubble? I meant “normal market in action.” 

Who is prepared for the inevitable bursting of the echo bubble in housing?  
Certainly not those who cling to the fantasy that there is no bubble in housing.

Dozens of other stats and charts are out there to support this assertion. With one big departure from 2007: This time around housing is just part of a constellation of bubbles that includes government bonds around the world, equities (the Nasdaq just hit 6000) and all manner of trophy assets like fine art.

Predicting the imminent end of this mother of all financial manias is tiresome for both writers and readers, so let’s just assume it will end eventually, and that its demise will be spectacular.

Read This, Spike That

The Stock Market’s Wall of Worry Stands Tall

While French election results and U.S. earnings are bullish, concerns about economy and Trump linger.   

By John Kimelman 

Getty Images
With the results of the first round of France’s presidential election on the books, it seems that one pillar of the U.S. stock market’s wall of worry is crumbling.

Though Marine Le Pen, a market-unfriendly right-wing candidate, made it to the second and final round of voting on May 7, so did Emmanuel Macron, the former investment banker and centrist candidate who stands for market-friendly virtues like globalization and an even more powerful European economic union.

And odds-makers including FiveThirtyEight’s Nate Silver, and the stock market itself, see Macron, who came in first in Sunday’s voting, as a solid favorite to defeat Le Pen in two weeks.

As Silver points out, Le Pen finds herself in a far deeper hole than Trump ever was on the eve of his upset victory over Hillary Clinton.

(Though Silver was among the many handicappers who thought Clinton would win the presidency, he at least did a better job than most in his profession in showing Trump’s last minute strength. He also did a better job of eating humble pie than most. )

Add to that the news about a strong U.S. earnings recovery based on a slew of fresh announcements and it’s a wonder what’s keeping the U.S. stock market from making an assault on the next big milestone, Dow 22,000. 
But if you’re a believer that worrisome news about markets provides the healthy resistance necessary for sober market gains, then you’ll be satisfied that the “wall of worry” remains strong in the form of concerns about the economy and the questionable pace of the Trump agenda.

Articles by two veteran financial writers, the New Yorker’s John Cassidy and the Washington Post’s Robert Samuelson, lay out these concerns.

The New Yorker’s Cassidy writes the pace of the economy isn’t living up to the president’s lofty predictions.

He writes that the Commerce Department will soon release its initial estimate of how the U.S. economy did in the first three months of 2017, a period in which Trump was President for all but nineteen and a half days.

“Far from showing a quantum leap in G.D.P. growth, the official figures are expected to show a slowdown,” Cassidy writes. “In January, when Trump took office, Wall Street economists were expecting first-quarter G.D.P. growth of about 2.3% on an annualized basis, a respectable if unspectacular rate that would have surpassed the 2.1% recorded in the final three months of last year. Since February, however, many economists have been downgrading their forecasts.
With retail sales softening and auto production falling, the widely followed Blue Chip consensus of forecasts projects that first-quarter growth will come in at under 1.5 per cent—and some experts believe even that number could be overestimated.”

Cassidy then goes on to describe the troubles that the Trump administration will likely have in pushing legislation through Congress that will help the economy.
For example, “the timetable for tax reform, which would likely have a bigger immediate effect on over-all economic growth, is also highly uncertain,” he writes.

In his latest column for the Washington Post, Samuelson also questions whether the economy will undermine current stock valuations.

But before anyone concludes whether these words are the rantings of sour-grape-eating anti-Trump writers, here are some comments about the economy from Larry Fink, the CEO of BlackRock, the world’s largest asset management firm.

“There are some warning signs that are getting darker,” said Fink, in an interview Wednesday on Bloomberg Television, referring to the economy.

Fink mentioned a pullback in car sales and a slowdown in merger and acquisition activity as indications that uncertainty is rising. The slowest economy among the G-7 nations is the U.S., he said.

“If we don’t have earnings validated in these higher P/Es we could adjust downward 5 or 10 percent from here,” Fink told Bloomberg. “If the administration does succeed on some of these items then the market will then reassert itself going higher.”

At the very least, he has articulated a wall of worry for markets to hopefully climb.

miércoles, mayo 17, 2017


The Making of Macron

Dominique Moisi
. Emmanuel Macron voting

PARIS – Relief and pride are the main emotions many French citizens are feeling after the first round of the French presidential election, in which Emmanuel Macron finished first. For once, the pollsters were right: the two favored candidates – Macron and the National Front’s Marine Le Pen – advanced to the second-round runoff on May 7. Gone is the sense of anxiety that had attended the weeks, days, and hours before the election, owing to fears that France would wake up to a second-round choice between the far-right Le Pen and the far-left candidate Jean-Luc Mélenchon.
Many observers saw France as economically, socially, and politically vulnerable – even more so than the United Kingdom, the United States, or Germany – to such a choice. After the UK’s Brexit vote and Donald Trump’s victory in the US presidential election, surely this was Le Pen’s window of opportunity. Some of us, only half-jokingly, have even mused about where we would flee if Le Pen won. Between a Great Britain that is leaving the European Union, and a US under Trump, there are few good options.
Fortunately, reason and hope prevailed over anger and fear, and French citizens defied those who warned that populism might triumph in the land of the French Revolution. While a Le Pen victory is technically possible, the composition of the French electorate makes it highly unlikely.
Very few of Mélenchon’s leftist voters will cross over to the extreme right. And while some of the center-right candidate François Fillon’s supporters may now vote for Le Pen, it will not be enough to sway the election in her favor.
In other words, the French exception is alive and well. France’s contrarian electorate has demonstrated to the world – and especially to the Anglo-Saxon world – that one need not betray one’s defining values to defeat populism. Despite a recent wave of terror attacks, the French have proved their resilience against the politics of fear. And even with Euroskepticism on the rise, the pro-European candidate, Macron, received more votes than any other.
Exceptional circumstances sometimes give rise to exceptional characters. Without the French Revolution, Napoleon Bonaparte would have remained a junior officer in the French Royal Army.
Similarly, albeit less dramatically, if France’s two main political parties had not collapsed, the 39-year-old Macron, who was unknown to most French voters a year ago, would still be just another economic whiz kid.
Macron looks like a French John F. Kennedy and he campaigned in the mode of Barack Obama. But he got where he is because the Socialist Party of François Mitterrand is dead, and the conservative Les Républicains are in shambles. The Socialists, for their part, could not come up with a modern political agenda. And the Republicans failed to tap another candidate after Fillon became tainted by scandal.
As a result, France, despite its reputation for melancholy, self-doubt, and pessimism, is about to elect its youngest-ever president. At that point, however, Macron will face a whole new set of challenges, starting with legislative elections that are scheduled for June. Will Macron end up with a governing majority in the National Assembly, or will the right present a united front and force him into the uniquely French practice of cohabitation?
In France’s semi-presidential system, cohabitation means that the executive branch can become paralyzed if the president and the prime minister represent different political factions. But Macron wants to prove that he can implement the majority-coalition model followed in parliamentary systems, with an “alliance of the willing,” comprising different but compatible political sensitivities, pursuing a common goal.
To my mind, France is ripe for a coalition government that can transcend increasingly anachronistic left-right political lines. The real political divide in France, as in so much of the West, is now between those who defend global openness and those who favor a return to nationalist isolation.
Macron will have to acknowledge the cultural roots of traditional left-right divisions, while also addressing the deep-seated, revolutionary anger that now exists in France. Despite Macron’s strong showing in the first round, some 40% of the French electorate voted for the Euroskeptic candidates Le Pen and Mélenchon. Restoring these voters’ confidence in existing institutions, and reintegrating them into the political mainstream, will not be easy. Defeated parties will be tempted to take to the streets and block attempts at reform. Having failed at the ballot box, they may – in traditional French revolutionary fashion – resort to “the barricades.”
Macron has demonstrated his immense qualities as a candidate. After May 7, he will have to prove that, despite his youth and lack of experience, he can become a great president. Winning power is one thing; but it is another matter to exercise power effectively, while avoiding the authoritarian tendencies that can emerge under extraordinary circumstances.
That is the task facing Macron. Driven by a sense of destiny, he must resist the temptations of Bonapartism. In the meantime, the democratic world should see Macron for what he is: a beacon of hope in a sea of doubt and despair.