Global Markets’ Plumbing Problem

Doug Nolan

“Goldilocks with a capital ‘J’,” exclaimed an enthusiastic Bloomberg Television analyst. The Dow was up 747 points in Friday trading (more than erasing Thursday’s 660-point drubbing) on the back of a stellar jobs report and market-soothing comments from Fed Chairman “Jay” Powell.

December non-farm payrolls surged 312,000. The strongest job gains since February blew away both estimates (184k) and November’s job creation (revised up 21k to 176k). Manufacturing jobs jumped 32,000 (3-month gain 88k), the biggest increase since December 2017’s 39,000. Average Hourly Earnings rose a stronger-than-expected 0.4% for the month (high since August), pushing y-o-y gains to 3.2%, near the high going back to April 2009.

Just 90 minutes following the jobs data, Chairman Powell joined Janet Yellen and Ben Bernanke for a panel discussion at an American Economic Association meeting in Atlanta. Powell’s comments were not expected to be policy focused (his post-FOMC press conference only two weeks ago). But the Fed Chairman immediately pulled out some prepared comments, perhaps crafted over the previous 24 hours (of rapidly deteriorating global market conditions).

Chairman Powell: “Financial markets have been sending different signals – signals of concern about downside risks, about slowing global growth particularly related to China, about ongoing trade negotiations, about – let’s call - general policy uncertainty coming out of Washington, among other factors. You do have this difference between, on the one hand, strong data, and some tension between financial markets that are signaling concern and downside risks. And the question is, within those contrasting set of factors, how should we think about the outlook and how should we think about monetary policy going forward. When we get conflicting signals, as is not infrequently the case, policy is very much about risk management. And I’ll offer a couple thoughts on that… First, as always, there is no preset path for policy. And particularly, with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves. But we’re always prepared to shift the stance of policy and to shift it significantly if necessary, in order to promote our statutory goals of maximum employment and stable prices. And I’d like to point to a recent example when the committee did just that in early 2016… As many of you will recall, in December 2015 when we lifted off from the zero bound, the median FOMC participant expected four rate increases for 2016. But very early in the year, in 2016, financial conditions tightened quite sharply and under Janet’s leadership, the committee nimbly – and I would say flexibly – adjusted our expected rate path. We did eventually raise rates a full year later in December 2016. Meanwhile, the economy weathered a soft patch in the first half of 2016 and then got back on track. And gradual policy normalization resumed. No one knows whether this year will be like 2016, but what I do know is that we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2%.”

Powell heedfully hit the key market hot buttons: “…Policy is very much about risk management.” “We will be patient as we watch to see how the economy evolves…” “…Always prepared to shift the stance of policy and to shift it significantly if necessary…” “We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy…” A Bloomberg headline: “Powell Shows He Cares About Markets.” Markets heard assurances of an operative “Fed put” - with rate cuts and QE (“all of our tools”) available when demanded – and it was off to the races. The Nasdaq Composite surged 4.3%, the small cap Russell 2000 3.8% and the S&P500 3.4%. The Goldman Sachs Most Short index rose 3.8% in Friday trading.

Treasury investors, of late fixated on mounting global fragilities, saw the data, listened intently to Powell, glared at surging stock prices - and recoiled. Ten-year yields jumped 11 bps in Friday trading, with five-yields surging 14 bps. Friday’s equities buyers’ panic masked troubling market behavior over the previous week – important developments not to be swept under the rug.

January 4 – Financial Times (Robin Wigglesworth): “Housebuyers always carefully study the kitchen fittings and measure up the airy living room, but often neglect to check whether the pipes are up to scratch. Investors act similarly, often forgetting that dodgy market plumbing can lead to a smelly catastrophe. There has been no shortage of culprits offered up to explain the worst month for US markets since the financial crisis, with conveniently nebulous ‘algorithms’ emerging as a particularly popular bogeyman. But on New Year’s Eve a little-watched corner of the US money markets offered up clues as to another, arguably stronger candidate as a contributor to the recent volatility. On Dec 31, the rate on ‘general collateral’ overnight repurchase agreements suddenly rocketed from 2.56% to 6.125%, its highest level since 2001. This was a huge move, the single biggest outright percentage jump since at least 1998. The repo rate has since normalised, but the severity of the spike indicates that at least part of the market’s plumbing gummed up.”

The Global Markets’ Plumbing Problem didn’t unclog with the passing of year-end funding issues.

January 3 – Bloomberg (Ruth Carson and Michael G Wilson): “It took seven minutes for the yen to surge through levels that have held through almost a decade. In those wild minutes from about 9:30 a.m. Sydney, the yen jumped almost 8% against the Australian dollar to its strongest since 2009, and surged 10% versus the Turkish lira. The Japanese currency rose at least 1% versus all its Group-of-10 peers, bursting through the 72 per Aussie level that has held through a trade war, a stock rout, Italy’s budget dispute and Federal Reserve rate hikes. Traders across Asia and Europe are still seeking to piece together what happened in those minutes when orders flooded in to sell Australia’s dollar and Turkey’s lira against the yen… Whatever the cause, the moves were exacerbated by algorithmic programs and thin liquidity with Japan on holiday.”

Thursday’s market gyrations hinted at a quite disconcerting scenario: illiquidity, dislocation and a “seizing up” of global markets. Thursday saw an 8% move in the yen vs. Australian dollar – two major – and supposedly highly liquid - global currencies. Trading in the yen dislocated across the currencies market, a so-called “flash crash.” We’ve seen the occasional “flash crash” in equities over the past decade. These abrupt bouts of selling reversed in relatively short order, with recovery only emboldening animal spirits. These recoveries, in contrast the current backdrop, were supported by expanding global central bank balance sheets (QE/liquidity).

I’m concerned that Thursday’s currency “flash crash” has potentially dire implications. Together with other key market indicators, evidence of systemic illiquidity risk is mounting. De-risking/deleveraging dynamics continue to gain momentum globally. Moreover, there are literally hundreds of Trillions of currency-related derivatives transactions – a byzantine edifice fabricated on a flimsy assumption of “liquid and continuous markets.”

I suspect the “global” derivatives marketplace is today much more global than the U.S.-dominated market as it heading into the 2008 crisis. This implies scores of new players, certainly including Chinese and Asian institutions. This suggests different types of strategies, complexities, counterparties and risks more generally. It certainly raises the issue of regulatory oversight along with potential policy challenges in the event of a globalized market dislocation. Interestingly, the AIG bailout was mentioned in Friday’s Fed head panel discussion. It’s been about a decade of derivative risk complacency.

When it comes to current global systemic liquidity risks, the Japanese yen may be the single-most critical global currency. Trillions have flowed out of Japan to play higher global yields. Zero Japanese rates and, importantly, negative market yields forced so-called “Mrs. Watanabe” to forage global securities markets in search of positive returns.

Years of radical monetary policies coerced enormous quantities of Japanese household savings into the realm of international securities and currency speculation. Likely an even greater source of global liquidity materialized from “carry trade” speculations – borrowing at zero (or negative yields) in Japan to finance levered holdings in higher-yielding instruments around the world – certainly including in Australia.

Keep in mind also that massive (reckless) BOJ balance sheet growth seemed to ensure a weak Japanese currency. Prospective yen devaluation has been integral to the yen becoming a prevailing “funding” currency for global speculation throughout this historic global government finance Bubble period (what’s better than borrowing for free in a currency you expect to be worth less in the future?). “King dollar,” with its positive rate differentials, shrinking Fed balance sheet and booming markets, bolstered the case for the yen as dominant global funding currency.

Thursday’s yen dislocation was quickly transmitted across global bond markets. After beginning the new year at an incredibly meager 0.005%, Japanese 10-year “JGB” yields in Friday trading dropped to a low of negative 0.054%, before closing at negative 0.045% - a 13-month low. Ten-year Treasury yields began Wednesday trading at 2.69%. Yields then sank to as low as 2.54% in late-Thursday trading, an almost one-year low. At that point, Treasury yields had collapsed 70 bps since the 3.24% closing yield on November 8th. And after beginning 2019 at 23bps, German 10-year bund yields sank to as low as 15 bps in Thursday trading (down 30bps since Nov. 8th).

Italian yields, after trading Wednesday at a five-month low 2.66%, abruptly reversed course Thursday to close the session 20 bps higher at 2.86% (ending the week up 16bps to 2.90%). With their relatively high yields, Italian bonds have likely been a target of Japanese savers and yen “carry trade” speculators. Curiously, Portuguese 10-year yields, trading down to 1.69% Wednesday, reversed course and traded as high at 1.82% Friday before ending the week up nine bps to 1.81%. This week saw spreads to German bunds widen 19 bps in Italy, 12 bps in Portugal, nine bps in Spain and seven bps in Greece. European high-yield (iTraxx Crossover) CDS was up 12 bps for the week at Thursday’s close, the high going back to June 2016. European bank index CDS prices also rose to two-year highs in Thursday trading.

It’s worth noting that Goldman Sachs Credit default swap (5yr CDS) prices surged an eye-opening 19 bps in Thursday trading to 129 bps, the high going back to the early-2016 market tumult period. Goldman CDS traded below 60 in early-October, before ending October at 77 bps, November at 87 bps and closing out 2018 at 106 bps. Deutsche Bank CDS rose seven bps Thursday to 218 bps, near the highest level since 2016. Many large financial institutions saw CDS prices rise this week to highs going back to 2016 (Goldman up 17bps, Morgan Stanley 14 bps, Nomura 11 bps, Citigroup 9 bps and BofA 8 bps).

U.S. junk bonds were under significant pressure. U.S. high-yield corporate bond yields (Bloomberg Barclays average OAS index) jumped 10 bps Thursday to 5.37%, the high going back to July 2016. Energy-related debt was not helped by WTI crude trading as low as $44.35 in Wednesday trading, before reversing course and ending the week up almost 6% to $47.96. Investment-grade corporate spreads to Treasuries traded Thursday to new two-year highs (and narrowed little Friday).

Gold is worthy of a mention. Spot bullion traded to $1,299 Friday morning (pre-payrolls/Powell), the high since June. Bullion gained $10 in Thursday trading and was up $18 for the week at Friday highs (before closing the week up $4 to $1,285). As global systemic risk builds, Gold is demonstrating safe haven attributes.

And speaking of global systemic risk: China.

January 2 – Wall Street Journal (Nathaniel Taplin): “Champagne or no, New Year’s Eve must have been a somber affair for China’s top leadership, with word that manufacturing activity declined in December for the first time since 2016. The bad news from the official purchasing managers index was confirmed Wednesday by the privately compiled Caixin index, which further showed new orders in December down for the first time in 2½ years. It’s a sign that nine months of monetary easing by the central bank has failed to boost lending to the real economy, though it has succeeded in pushing housing and government-bond prices into bubbly territory. This kink in China’s monetary-policy machinery bodes ill for 2019, and makes predictions that growth could bottom out in the first quarter look optimistic. Where banks are lending again, it’s mostly to other financial institutions and the government, not the cash-starved private companies that really drive growth.”

Hong Kong’s Hang Seng index dropped 2.8% during the first trading session of 2019 (down 3.6% y-t-d at Thursday’s lows). The Shanghai Composite was down more than 2% y-t-d as of early Friday, trading at the lowest level since November 2014. An abrupt 3% rally pushed the index positive (up 0.8%) for the first few sessions 2019. The People’s Bank of China Friday announced another reduction in reserve requirements (0.5%).

From Reuters (Kevin Yao and Lusha Zhang): “The announcement came just hours after Premier Li Keqiang said China would take further action to bolster the economy, including reserve requirement ratio (RRR) cuts and more cuts in taxes and fees, highlighting the urgency to cope with increasing headwinds. ‘This speedy RRR cut with great intensity fully demonstrates the determination of policymakers to stabilize growth,’ said Yang Hao, an analyst at Nanjing Securities.”

It's hardly coincidence that Powell’s market-pleasing comments followed by only a few hours the PBOC’s policy move. The situation has turned more serious – in China, in global finance and in U.S. markets. Apple’s Thursday cut in earning guidance was one more important indication of rapidly slowing Chinese demand. That China’s economic slowdown is occurring in the facing of an historic apartment Bubble significantly complicates policymaking. Beijing would surely prefer to cautiously deflate this colossal Bubble. But, at this point, aggressive measures to stimulate China’s economy would further extend the precarious “Terminal Phase” of mortgage and housing excess.

December 31 – New York Times (Alexandra Stevenson and Cao Li): “Unwanted apartments are weighing on China’s economy — and, by extension, dragging down growth around the world. Property sales are dropping. Apartments are going unsold. Developers who bet big on continued good times are now staggering under billions of dollars of debt. ‘The prospects of the property market are grim,’ said Xiang Songzuo, a senior economist at Renmin University, said… ‘The property market is the biggest gray rhino,’ he said, referring to a term the government has used to describe visibly big problems in the Chinese economy that are disregarded until they start gaining momentum… More than one in five apartments in Chinese cities — roughly 65 million — sit unoccupied, estimates Gan Li, a professor at Southwestern University of Finance and Economics in Chengdu.”

It's difficult to fathom 65 million vacant apartment units – more than 20% of China’s housing stock. What is the scope of future bad debts and bank impairment associated with such a fiasco? Economic impact – China and globally? Financial ramifications? With a bear market in Chinese equities, China’s vulnerable Bubble Economy and waning global growth, it’s perfectly reasonable for the world to start really worrying about China’s vulnerable apartment Bubble. With all the Friday excitement surrounding Powell and rallying U.S. equities, it’s worth noting that Asian shares underperformed this week. Copper declined another 1.3%.

Along with sinking Treasury and bund yields, there’s ample evidence that something lurking out there is stirring up a palpable degree of angst. And I would like to be more sanguine about U.S. economic prospects, especially considering strong December payroll data. I’m actually not expecting the economy to just fall off a cliff. Tightened financial conditions are a relatively recent development. Barring an accident, it might take some time for faltering markets to feed into the real economy. Yet the U.S. has a Bubble Economy structure unusually vulnerable to deflating securities and asset markets. It also faces perilous structural issues throughout its securities markets and financial system more generally. I certainly believe the U.S. is highly exposed to the unfolding issue of illiquidity afflicting global financial markets.

January 4 – Bloomberg (Rizal Tupaz): “Investors pulled the most money out of investment-grade bond funds in three years last week amid the ongoing turmoil in credit markets. The funds lost $4.5 billion for the weekly reporting period ending Jan. 2, the biggest outflow since December 2015, according to Lipper. That marks the sixth straight retreat by investors. High-yield funds saw a seventh week in a row of outflows as investors yanked $628 million versus the previous period’s $3.9 billion.”

Asset Management’s Squeezed Middle Faces a Bleak 2019

Nervous, cost-conscious investors aren’t making it easy for fund managers to grow profits

By Paul J. Davies

It was a rough year for listed asset managers in 2018 and things likely won’t get easier this year. Deals to build scale may be investors’ best hope.

As stock and bond markets wobbled in 2018, the shares of listed fund managers performed far worse. That’s even before their clients started redeeming money in greater numbers in the third quarter.

The simplest explanation is that investors haven’t faced such uncertainty about the direction of global growth and geopolitics arguably since 2008. That has hit asset prices and hence the profits of asset managers. But there are also business pressures; above all, the competition for assets and fees brought by the rise of index investing.

Those suffering most are old-fashioned active managers, comprising the industry’s squeezed middle. On one side, cheap index managers are winning investors’ funds with good-enough performance. On the other, expensive alternative managers claim much higher returns from being properly active owners of often illiquid investments.

Traditional managers are both losing assets and being forced to cut fees—a double hit to revenues. Active managers’ share of global industry revenues shrank to 41% by the end of 2017, from 64% in 2003, according to the Boston Consulting Group, while their share of assets under management shrank to 52% from 76%. The consulting firm forecasts a revenue share of just 36% and asset share of 45% by 2022.

Regulatory changes are also piling pressure on costs and profitability. Both in the U.S. and Europe, reforms have forced more transparency on financial-services fees, which often come back to how savings products like funds are sold.

The shares of U.S. fund managers have done worse than those of banks. While the S&P 500 was down 7% in 2018, banks in the index dropped nearly 20% and asset managers more than 25%.

Even a monster asset-gatherer like BlackRock was down 23%, although Franklin Resources and Legg Mason both did worse, falling 35% and 38% respectively.

In Europe, GAM of Switzerland fell 76% after a profits warning relating to an acquisition and a scandal at its bond funds that led to the suspension of one manager. Several rivals’ shares lost between 30% and 50% even without such tribulations.

One likely consequence of this industry shakeout is more deals that boost scale and produce administrative cost savings, such as Invesco’s recent purchase of OppenheimerFunds from MassMutual, the U.S. insurer.

Banks in the S&P 500 dropped nearly 20% last year and asset managers more than 25%. Even a monster asset-gatherer like BlackRock was down 23%.
Banks in the S&P 500 dropped nearly 20% last year and asset managers more than 25%. Even a monster asset-gatherer like BlackRock was down 23%. Photo: Rudnik,Christian/Zuma Press 

Fund deals have a mixed track record. Active managers often rely on individuals for their performance or their reputation, and takeovers can lead to bust-ups or overlapping roles, prompting managers to leave and clients to leave with them. Deals tend to work better when the acquiring company lets those it acquired retain independence, as Pittsburgh-based Federated Investorsis doing with Hermes in the U.K., or when the target is more technology-oriented, as was the case in BlackRock’s 2009 deal for iShares, the ETF manager.

Premiums for potential takeovers aren’t yet reflected in the share prices of smaller listed managers that would make natural targets, according to UBS analysts. Bid interest could be the only thing that boosts asset management’s squeezed middle in 2019.

Fed Will Be the Bearer of Bad News

Markets and the Fed disagree about the odds of rate increases this year now that stocks have retreated

By Justin Lahart

Declines in the stock market have led investors to expect the Fed will ease up on interest-rate increases in 2019.
Declines in the stock market have led investors to expect the Fed will ease up on interest-rate increases in 2019. Photo: Andrew Harnik/Associated Press

Investors have convinced themselves that the Federal Reserve probably won’t be raising rates this year. Even if that bet turns out to be right, it presents a big problem for the Fed.

At their meeting last month, Fed policy makers projected they would raise rates twice in 2019.

That was a step down from the three 2019 hikes they projected in September, reflecting how trade tensions, slowing growth overseas and unsettled markets have thrown more uncertainty into the rate-setting equation.

Investors, staring at the steep declines in the stock market, now expect the Fed to do even less.

Interest rate futures imply there is only about a 10% chance that the Fed will raise rates at all this year, with a nearly equal chance that the central bank ends up cutting rates instead. In early November, the futures put the odds of at least one 2019 rate increase at close to 90%, with almost no chance of a cut.

But as long as the economic data continue to look decent, the Fed may want to at least maintain the option of raising rates as soon as its March meeting, points out Morgan Stanley economist Ellen Zentner. The risk, though, is that Fed policy makers decide there is a case for raising rates and the market continues to disagree.

“Right now, it’s just an extraordinary amount of heavy lifting they have to do if they want to go in March,” says Ms. Zentner.

That heavy lifting would most likely take the form of more hawkish commentary from Fed officials than investors are prepared for. Given how fragile markets are, it is a message that would be difficult to deliver without breaking something.

How to Crush Your Habits in the New Year With the Help of Science

Make 2019 the year you actually do all the things you want to do. We asked the experts and checked the journals for the most useful tips you can take to heart.

By Susan Shain
Credit Cristina Spanò

It’s the shiniest time of year: that hopeful period when we imagine how remarkable — how fit and kind, how fiscally responsible — our future selves could be. And while you may think “new year, new you” is nothing more than a cringey, magazine-cover trope, research supports its legitimacy.

“It’s not like there’s something magical about Dec. 31,” explained Charles Duhigg, the author of “The Power of Habit.” “What is magical is our mind’s capacity to create new narratives for ourselves, and to look for events as an opportunity to change the narrative.”

One such opportunity? January. Since most of us consider it a fresh start, Mr. Duhigg said New Year’s resolutions can be “very, very powerful” — as long as they’re backed by science, patience and planning.

At the core of every resolution are habits: good ones, bad ones, stop-biting-your-nails ones. So if you want to change yourself, that’s where you need to start. Here are seven science-based strategies for making sure your new habits endure.

Think big

Imagine it’s the next New Year’s Eve. What change are you going to be most grateful you made?

Kelly McGonigal, a health psychologist and author of “The Willpower Instinct,” suggested asking yourself this question before making any resolutions. “It’s crazy to me how often people work from the opposite,” she said. “They pick some behavior they’ve heard is good for them, and then they try to force it on themselves and hope it will lead to greater health or happiness.”

Sounds familiar, right? To avoid that trap, Dr. McGonigal recommended reflecting on what changes would make you happiest, then picking a “theme” for your year. That way, even if a particular habit doesn’t stick, your overarching intention will.

Take the theme of reducing stress, for example. You might try meditating and hate it. But, since your goal wasn’t “meditate 10 minutes a day,” you don’t have to abandon the resolution completely. Maybe you try yoga next.

Electing a unifying theme will also stimulate your brain to look for additional opportunities to advance your goal, said Dr. McGonigal, whereas narrowing yourself to a single behavior will cause your brain to “shut off once you check it off the list.”

Be patient

According to Mr. Duhigg, research shows that rather than “breaking” bad habits, you should attempt to transform them into better ones. To do so, you need to determine your habit’s trigger (cue) and reward, and then find a new behavior that satisfies both.

While Mr. Duhigg said cues usually fall into one of five categories — time, location, people, emotion or ritual — rewards are more difficult to ascertain. Do you always get an afternoon snack because you’re hungry? Because you’re bored? Or is it because you’re starved for office gossip? To determine an effective replacement habit, it’s vital to understand what reward you crave.

“Any habit can be diagnosed and shifted,” Mr. Duhigg said. “You need to give yourself time to really figure out the cues and rewards that are driving that behavior — and oftentimes the only way … is through a process of experimentation.”

Break it down

You may have heard the key to habit formation is starting small. But you’ve likely never considered starting as small as James Clear suggests in his new book “Atomic Habits.”

His “two-minute rule” prescribes only completing the outset of any new habit. So if you want to read a book a month, you read a page a day. If you want to play the piano, you sit at the bench and open your songbook.

Although he admitted it might sound frivolous, Mr. Clear said mastering “the art of showing up” helps put a behavior on autopilot. He shared the story of one man who drove to the gym every day, then exercised for a few minutes before going home. By performing that seemingly futile action for six weeks, Mr. Clear said the man slowly became “the type of person who works out every day.”

Embrace snappy rewards

For a habit to abide, it must have immediate rewards. But before you go buying a smoothie after every workout, note that, according to Dr. McGonigal, the most effective rewards are intrinsic, or the ones you feel, not the ones you procure.

So maybe, instead of that frozen strawberry-kale-hemp delight, you simply notice the renewed energy you have after lifting weights. Or the pride you feel when you don’t smoke cigarettes. Naming the payoff, she said, helps your brain build positive associations with the activity.

If you can’t find an intrinsic reward, it might not be the right habit. You shouldn’t, obviously, volunteer to build trails if you dislike being outside. If your goal is to give back to your community, volunteer with animals or at a homeless shelter instead. “Choose the form of the habit that brings you joy in the moment,” Mr. Clear added. “Because if it has some immediate satisfaction, you’ll be much more likely to repeat it in the future.”

Prime your environment

We humans are weak. Which means environment design is our “best lever” for improving habits, according to Mr. Clear.

“The people who exhibit the most self-control are not actually those who have superhuman willpower,” he explained. “They’re the people who are tempted the least.” If you want to save more money, unfollow retailers’ social media accounts. If you want to watch less mindless television, unplug your TV. Dr. McGonigal also recommended displaying physical reminders of your goals — yes, that includes motivational Post-its.

Your environment encompasses the people around you, too. Mr. Clear suggested finding a group “where your desired behavior is the normal behavior,” and then forging friendships with its members (which will really get the habit to stick).

Plan to fail…

Despite your best intentions, chances are you’ll fail at some point along your new-year-new-you journey.

“The question isn’t ‘Are you going to be able to avoid that?’” said Mr. Duhigg. “The question is ‘What are you going to do next?’” If you have a recovery plan, or if you can learn from your failure, he said you’re “much more likely to succeed” in your goal.

So write down the obstacles you foresee and how you’ll surmount them. If you’re trying to drink less wine, for example, you should probably outline a plan for after your mother-in-law’s next visit.

Also effective, said Dr. McGonigal, is sharing your goals with other people, and then telling them how best to support you. By “outsourcing your willpower,” she explained, others can “hold your intention” for you, “even when you’re exhausted or you’re feeling really stressed out.”

... but celebrate often

Cake might only be for special occasions, but celebrations are for every day. Science says so.

“Celebration is one of the emotions that propel people further on the path of positive habits,” said Dr. McGonigal. Celebrating tells your brain a behavior is beneficial, and that it should look for more opportunities to engage in it.

The celebrations don’t have to be grand. If you finally study for your licensing exam, tell your co-worker. If you survive a tough workout, take a sweaty selfie. Dr. McGonigal said celebrations can actually change your memory of a particular experience, making it more positive than it was. “And that makes you more likely to choose to do it again in the future,” she added. Taking it a step further, you can send yourself a thank-you letter or FutureMe email expressing gratitude for your new habit.

That gratitude and that authentic pride, along with hope, social connection and compassion, are the most effective emotions for promoting long-lasting behavior change, according to Dr. McGonigal. The least effective are shame, guilt and fear.

So even if you stumble when forming your new habit — which research says you probably will — be kind to yourself. Although big, long-term change isn’t easy, it is possible. “Habits are not a finish line to be crossed,” said Mr. Clear. “They’re a lifestyle to be lived.”

China’s Malign Secrecy

In principle, China’s massive savings, infrastructure know-how, and willingness to lend could be great for developing economies. Alas, as many countries have learned the hard way, Chinese development finance often delivers a corruption-filled sugar high to the economy, followed by a nasty financial (and sometimes political) hangover.

Ricardo Hausmann

businessmen shake hands night

CAMBRIDGE – Secrets may be among the most valuable assets that governments have: the Trojan Horse, the Enigma code, the Manhattan Project, and surprise attacks such as Pearl Harbor, the Six-Day War, and the Yom Kippur War are just a few of the best-known examples. But in some cases, governments’ desire for secrecy is hard to square with the national interest – and may even be among the most dangerous threats to it. The threat is even greater when the secrecy is prompted by the less-than-lofty interests of a foreign government intent on getting its way.

A case in point is Chinese international development finance. China has become a new and important player in this area. In principle, China’s massive savings, infrastructure know-how, and willingness to lend could be great for developing countries. Alas, Pakistan, Sri Lanka, South Africa, Ecuador, and Venezuela have learned the hard way, Chinese development finance often delivers a corruption-filled sugar high to the economy, followed by a nasty financial (and sometimes political) hangover.

As countries confront rising project costs and try to make sense of what happened and how to get out of the mess, they find that the financial terms of their obligations have been contractually shrouded in secrecy. Moreover, the contracts impose constraints on the ability of borrowers, such as state-owned enterprises, to make the terms known to the government, let alone the public.

This is unfortunate, to say the least, because controlling the accumulation of debt is one of the most important things that a government can do to prevent crises. It is also one of the most challenging. Many countries have made headway in shoring up their fiscal policies by adopting public-finance laws and budgeting practices to keep deficits under control. You would think this would be enough to keep a lid on debt accumulation. After all, basic accounting implies that debt tomorrow is just debt today plus the deficit you run between today and tomorrow. So, if you can control the deficit, you can control the growth of debt.

If only it were so easy. As Ugo Panizza of the Graduate Institute of International and Development Studies in Geneva and his co-authors have shown, developing countries seem to violate accounting identities, because there is practically no correlation between deficits and the evolution of debt. The reason is that many expenditures become public obligations without ever going through the budget process. How does this happen?

An important way to distinguish between government and non-government debt is to determine whether the debt obligation is to be paid from future taxes or from the future cash flow generated by the project that is being funded with the loan. But this distinction is often quite muddled, owing to guarantees, either explicit or implicit, that force the government to rescue the project ex post facto and repay the creditor fully or in part.

One recent practice used by both China and Russia is to lend against future exports, as in the case of oil in both Ecuador and Venezuela. These arrangements come in two flavors: outrageous and beyond belief.

The outrageous version is based on the idea that this debt is not really debt, but just a pre-purchase of oil. This claim is ridiculous, because debt is any obligation you take on today that you commit to repay with your future revenue. Moreover, it is not just any old debt; it is debt collateralized by the future stream of exports, which makes it super-senior debt – more senior than debt from entities with so-called preferred creditor status such as the World Bank and the International Monetary Fund. Not counting it as debt is clearly outrageous.

But it gets worse. The Chinese have used oil exports to collateralize debt for projects that have nothing to do with oil, such as the Coca Codo Sinclair dam in Ecuador or Venezuela’s Fondo de Desarrollo Nacional, which has provided no clue about what happened to a Chinese loan of more than $60 billion. In these cases, the project loan is repaid not from the future revenues of the project, but from the future oil revenues that the country was counting on to pay for all of its obligations, financial or otherwise. As a result, oil revenues are used to pay for projects that neither enhanced oil production nor went through the budget process, thus disrupting the financial stability of both the oil company and the government.

In this context, China’s practice of keeping financing terms secret from the society that is ultimately responsible, and often from that society’s government, is beyond the pale. Even the terms of renegotiation are secret, lest other borrowers use the outcomes as precedent.

I cannot think of a good argument reconciling secrecy in the context of public financial obligations with the public interest. It is something that societies should not tolerate. The fact that the terms of these massive obligations have not leaked to the public reflects how weak civil society and the press are in these countries.

Others can help. Credit rating agencies should demand to see the financing contracts. If the agencies are rebuffed, the opacity of such practices should be reflected in their ratings. The IMF and other multilateral creditors should condition loans on compliance with standards of transparency that would prevent this secrecy. The Paris Club of major sovereign creditors should make the disclosure of the terms of Chinese or Russian loans a condition for debt restructuring.

Secrecy has a place in government, but not in international public-sector finance. It is a practice that needs to end before it does even more harm than it has already caused.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.