Faux Statesmanship

Doug Nolan

April 5 – New York Times (Dealbook): “’It doesn’t take a genius’ to know capitalism needs fixing. Capitalism helped Ray Dalio build his investment empire. But in a lengthy LinkedIn post, the Bridgewater Associates founder says that it isn’t working anymore. Mr. Dalio writes that he has seen capitalism ‘evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.’ ‘Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another.’ ‘The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.’ ‘We are now seeing conflicts between populists of the left and populists of the right increasing around the world in much the same way as they did in the 1930s when the income and wealth gaps were comparably large.’ ‘It doesn’t take a genius to know that when a system is producing outcomes that are so inconsistent with its goals, it needs to be reformed.’ Stay tuned: Mr. Dalio says that he’ll offer his solutions in another essay.”

I’m reminded of back in 2007 when Pimco’s Paul McCulley coined the term “shadow banking” – and the world finally began taking notice of the dangerous new financial structure that had over years come to dominate system Credit. Okay, but by then the damage was done. As someone that began posting the “Credit Bubble Bulletin” in 1999 and had chronicled the prevailing role of non-bank Credit in fueling the “mortgage finance Bubble” fiasco (on a weekly basis), I found it all frustrating.

Why wasn’t the discussion started in 2001/02 when mortgage Credit began expanding at double-digit rates, and there were clear signs of Bubble formation? Oh yea, that’s right. There was desperation to reflate the system and fight the “scourge of deflation” after the bursting of the “tech” Bubble. Excess was welcomed early on – and later, when things got really heated up, nobody dared risk bursting the Bubble.

Reading Mr. Dalio’s latest, I have to ask, “What ever happened to ‘beautiful deleveraging’?” And I’m not on the edge of my seat waiting for his “solutions.”

There was a window of opportunity early in the mortgage financial Bubble period for “statesmen” to rise up and call out the recklessness of the Fed spurring mortgage Credit excess and house price inflation in the name of system reflation. Statesmen and women should have excoriated governor Bernanke for suggesting the “government printing press” and “helicopter money” - the type of crazy talk that should disqualify one for a position of responsibility at the Federal Reserve. Fed chairman? You’ve got to be kidding.

There was a window of opportunity to rein the Fed in after QE1. The Federal Reserve should have been held to their 2011 monetary stimulus “exit strategy.” Instead they doubled down – literally – as the Fed’s balance sheet doubled in about three years to $4.5 TN. Mr. Dalio - along with virtually everyone – didn’t seem to have any issues. Indeed, an unprecedented expansion of non-productive debt (certainly including central bank Credit and Treasury borrowings) somehow equated with “beautiful deleveraging.” It was ridiculous analysis in the face of the greatest global Bubble in human history.

Central banks aren’t fully to blame, but it's an awfully good place to start. Three decades of “activist” monetary management has left a horrible legacy. The Institute for International Finance reported this week that global debt ended 2018 at a record $243 TN. This debt mountain simply would not have been possible without “activist” central banking. Despite a lengthening list of risks, global stocks have powered higher in 2019 to near all-time highs. A relentless speculative Bubble has only been possible because of central bank policies.

I’m not all that interested in Dalio’s “solutions.” In my book, he missed what was an exceptional opportunity for statesmanship. Bridgewater’s investors were the priority and have been rewarded handsomely. Pro-central bank “activism” has been the right call for compounding wealth for the past decade (or three). But no amount of ingenuity will resolve the historic predicament the world finds itself in today. Markets are broken, global imbalances the most extreme ever, and structural impairment unprecedented – and worsening, all of them.

Most regrettably, the type of structural reform required will only arise from a severe crisis. The Fed and global central bankers have been reflating Bubbles for more than three decades. Highly speculative global markets at this point completely disregard risk. And with borrowing costs incredibly low, what government (ok, Germany) is going to impose some spending discipline and operate on a fiscally responsible trajectory? At this point, finance is hopelessly unsound – and, importantly, hopelessly destructive on an unprecedented global basis.

I had the great pleasure to spend part of my Friday with the University of Oregon Investment Group. I gave a talk, “Money, Credit, Inflation and the Markets.” Being with bright, intellectually curious and enthusiastic university students gives me hope – and a smile.

From my presentation: “And it just breaks my heart to see young people turn away from Capitalism. I anticipate spending the rest of my life trying to explain that the culprit is unsound finance and deeply flawed monetary management – and not the system of free-market Capitalism. History teaches us that credit is inherently unstable. I would argue that the experiment in New Age unfettered credit – with its serial booms and busts – evolved into a failed experiment in “activist” monetary management – another debacle in “inflationism.”

“The result has been a period of historic bubbles – in the markets and in economies – on a global scale. And protracted Bubbles become powerful mechanisms of wealth redistribution and destruction. Central banks readily creating new “money” and favoring the securities markets are fundamental to the problem. Such policies benefit the wealthy and worsen inequality. We’re witnessing the resulting rise of populism and a mounting crisis of confidence in our institutions. Even with 3.8% unemployment, near-record stock prices and one of the longest economic expansion on record, our country is deeply divided and resentful. I fear for the next downturn.”

A Friday Business Insider headline: “Hedge-fund billionaire Ray Dalio says the current state of capitalism poses 'an existential threat for the US'”; Barron’s: “Hedge Fund Billionaire Ray Dalio Says Capitalism ‘Must Evolve or Die’”; and Vanity Fair: “Billionaire Hedge-Fund Manager Warns a ‘Revolution’ is Coming.” Observer: “Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences.” And CBS: “Billionaire investor Ray Dalio: Capitalism run amok is ‘economically stupid’”

I’m reminded of an analogy I’ve used in the past. One could make a reasonable argument that our eyeballs are flawed. How could something of such importance be so soft, delicate and vulnerable? Yet this vital organ is not flawed – imperfection is not a legitimate issue. It is the nature of its function that dictates its characteristics and vulnerabilities. It cannot sit within a protective ribcage like the heart, or within the hardened skull as the brain does.

To be able to see the world – looking at distant mountain ranges and then immediately shifting focus to the pages of a wonderful book – requires an exquisitely complex organ functioning right out there exposed to the elements and largely unprotected. Importantly, we recognize and accept our eyes’ sensitivities and vulnerabilities. We would not wander into a metal shop without wearing protective eye coverings. We don sunglasses on bright days – darkened snow goggles for spring skiing. We learn at a very young age not to stare into the sun.

I disagree with the increasingly popular view that Capitalism as flawed. At the same time, I have been long frustrated by those dogmatically preaching the virtues of Capitalism without accepting the reality of inherent delicacy, vulnerabilities and weaknesses. As we are with our eyes, we have to be on guard, take precautions, and definitely avoid doing anything stupid. Who is reckless with their eyes? There’s too much to lose. No one wants to contemplate being blind for the rest of their life.

How could we ever have allowed Capitalism to be so irreparably damaged? There are innate instabilities in Credit and finance that have been disregarded for way too long. Unsound “money” is a primary (and insidious) risk to capitalistic systems. I would further argue that persistent asset inflation and recurring speculative Bubbles pose a major risk to sound finance and, as such, to Capitalism more generally. Moreover, inflationism – “activist” central banking – with its asset market focus, manipulation and nurturing of speculative excess and inequality, is anathema to free-market Capitalism.

When the Fed slid down the slippery slope and implemented QE, the economics profession and investment community failed society. The case against QE shouldn’t have been primarily focused on inflation risk. The overarching danger was a corrosive impairment of markets and finance, with resulting dysfunction for Capitalism more generally. The risk was destabilizing inequality, insecurity and resulting societal stress. There was the peril of a fragmented society, divided nation, political dysfunction and waning trust in our institutions. Somehow, everyone was content to ignore the reality that unsound “money” reverberates throughout the markets, the economy, society, politics and geopolitics.

Over the years, I’ve referred to the “first law of holes.” If you find yourself in a hole, the first requirement is to stop digging. Similarly, I’ve repeatedly noted the long-ago recognized issue with discretionary monetary management: One mistake invariably leads to only bigger mistakes. And I’m fond of reminding readers that “things turn crazy at the end of cycles.” Historic cycle, historic “crazy.” I’ll repeat what I’ve written many times before: From my analytical perspective, things continue to follow the worst-case scenario.

It was yet another mistake for the Fed to go full U-Turn dovish. It was another blunder for the global central bank community to signal they were willing to move quickly and aggressively to bolster international markets. The 2019 speculative run in the markets only exacerbates underlying fragilities – worsens inequality – and sets the stage for an only deeper crisis.

I’ll be curious to see if Ray Dalio’s “solutions” include having the Fed disavow aggressive monetary stimulus, while letting markets begin functioning on their own. The biggest problem with Capitalism these days is that the system is not self-adjusting and correcting. Structurally distorted markets and deeply maladjusted economies are incapable of correction. Global imbalances only worsen every year. Speculative Bubbles inflate on further.

Global central banks are understandably distressed about the potential for market dislocation and crisis. Yet recurring efforts to forestall upheaval increasingly risk financial collapse. There is no real solution until deeply flawed monetary management is recognized and changed. The current course will only exacerbate inequality and foment Dalio’s “revolution.” Any soul-searching and scrutinizing of Capitalism must begin with central banking and monetary mismanagement. Where were the likes of Dalio, Dimon and Buffett when it could have made a difference? Faux Statesmanship.

Central bank independence is as dead as vaudeville

US and Europe queue for a rollercoaster ride as lessons of the past are forgotten

John Dizard 

President Richard Nixon with Milton Friedman to his right and Arthur Burns, chair of the Fed, to his left (AP)

Not to dwell on the past, but there was a time when central banks in advanced countries were supposed to be independent of their governments. That meant they were not expected to bend policy to meet the political requirements of the day or the election cycle.

There were times when the precept was violated. For example, it is generally believed that in 1971 Arthur Burns, then chair of the Federal Reserve, succumbed to pressure from the White House to imprudently loosen monetary policy to ensure a strong economy for Richard Nixon’s re-election. The economy boomed and Nixon won but the consequent inflation and damaged Fed credibility were not overcome until Paul Volcker’s Fed imposed high rates and a deep recession.

The Burns episode was seen for years as a historic mistake and a confirmation of why central bank independence is so critical for economic stability. Now that lesson is forgotten.

In the US and Europe, it would seem, central bank independence is as dead as vaudeville.

In the US, President Donald Trump’s nomination of Stephen Moore to the Federal Reserve is a shot across the Fed’s bow. The political and financial elite may think the White House is collectively stupid but Mr Trump and his advisers have recognised the political threat represented by the partially inverted yield curve. Inverted curves probably mean recession, which would mean no re-election.

That is a risk the White House cannot accept, whatever the blather about Fed independence and policy stability. Whether or not Mr Moore is formally nominated and then confirmed by the Senate, Mr Trump has made clear that he intends to get a cut in short-term policy rates from the Fed.

The president’s advisers may also consider pushing for a re-acceleration in the Fed’s process of unwinding its bond book. After all, if a steeper yield curve means a stronger economy, why not push on both ends?

Most economists, and, for that matter, corporate America, think the US is already pushing the bounds of non-inflationary growth. Labour shortages are endemic, shipments are late, profit margins are under pressure, consumers grow more cautious.

Time to pull back and wind in — unless you need one more year of euphoria to ensure you stay in office.

Then you might be willing to settle for inflationary growth, even if it comes with future instability. True, your trading partners may think you are engaging in a competitive devaluation and irresponsible behaviour, but you probably do not care about their opinion. As Mr Trump says, what have they done for us?

Of course this brings back memories of 1971-72, Nixon’s landslide re-election and the decade-long hangover. We even have a set of bubbling White House scandals. Why not put off the day of reckoning for a year or two, if at all possible?

If we do not get this sort of policy bouleversement out of the White House and the Fed, then we could find out how all those post-crisis reforms in the financial system will work when the pressure is on.

For example, if there were to be a bear market in equity, we are likely to see a considerable amount of BBB corporate debt pushed below investment grade by the rating agencies. Just part of the normal economic cycle.

Except that the concentration of corporate paper teetering on the BBB bubble is historically large. Much of it has been pledged to the banking system for what is called “collateral transformation” in repo transactions. The banks provide high quality liquid assets to use as collateral for derivative transactions, which are run through those central clearing houses that were going to eliminate the risk of “another Lehman”.

In the event of ratings downgrades and greater market volatility, the banks will impose deeper haircuts in return for meeting the consequent higher margin calls.

This is the sort of mechanism that feeds on itself. If you are a White House economic adviser, do you want to be at weekend after weekend of crisis meetings dealing with that problem? Or would you prefer to be at the post-election victory parties?

Well, life in America has always been something of a rollercoaster ride. Unfortunately, there is also considerable pressure in Europe. There is another interesting drama playing out between the European Central Bank and its member countries over who gets to supervise clearing houses. This has been well reported in this newspaper but mostly ignored by European political commentators.

The critical faultline in Europe could well run through the clearing houses. The ECB has long believed that it should be in charge of crisis management should there be an issue with the orderly functioning of clearing and settlement systems. The national regulators (and governments) believe it should be part of their competence.

European markets would be short of good collateral to meet margin calls in a crisis. Control over the ECB’s vast balance sheet might then shift to the national governments. So much for its independence.

Global economy enters ‘synchronised slowdown’

Disappointing economic indicators show similar picture in US, China and Europe

Chris Giles in London

Christine Lagarde, managing director of the IMF, said the IMF would cut its growth forecasts © AFP

The global economy has entered a “synchronised slowdown” which may be difficult to reverse in 2019, according to the latest update of a tracking index compiled by the Brookings Institution think-tank and the Financial Times.

Sentiment indicators and economic data across advanced and emerging economies have been deteriorating since last autumn, suggesting fading momentum in global growth and the need to resort to new forms of economic stimulus.

The worsening outlook has sparked warnings from Christine Lagarde, managing director of the IMF, who said the fund would cut its growth forecasts later this week, and the World Trade Organization which has said the continued threats of trade skirmishes had weakened forecasts.

The findings follow generally disappointing economic indicators over the past six months that have shown a similar picture in the US, China and in Europe.

Professor Eswar Prasad of the Brookings Institution said the slowdown did not yet appear to be heading for a global recession, but all parts of the world economy were losing momentum.

“The nature of the slowdown has ominous portents for these economies over the next few years, especially given present constraints on macroeconomic policies that could stimulate growth,” he said.

The Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) compares indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for individual countries.

The headline readings slipped back significantly at the end of last year and are at their lowest levels for both advanced and emerging economies since 2016, the year of the weakest global economic performance since the financial crisis.

The index fell partly because hard data indicating real economic activity has been weaker, with countries such as Italy falling into recession and Germany narrowly avoiding one and with the US economy losing steam as the effects of Donald Trump’s tax cuts wear off.

Although economic sentiment remains high in advanced economies, it has fallen from its peaks and has plummeted to well below normal levels in emerging economies, led by fears that China’s years of rapid economic growth are coming to an end.

Athough China’s economy has been showing signs of improvement following government efforts to stimulate capital spending and the US Federal Reserve’s reversal of its plans for further interest rate rises this year has had a steadying effect, economic confidence has taken a knock over the past six months.

Growth indicators in Europe have been disappointing, Prof Prasad said. Globally, only India stands out as an exception to the slowing trend, boosted by fiscal and monetary stimulus ahead of national elections starting later this month.

Delays in the anticipated trade rapprochement between the US and China have also raised questions over the prospects for greater momentum in the world economy in the second half of the year.

“Trade tensions and the uncertainty they have spawned are likely to leave a long-lasting scar on the world economy. This uncertainty is undermining business confidence and depressing private investment, which has implications for longer-term productivity growth,” Prof Prasad said, He added that any weakness might be amplified by policymakers’ inability to provide effective stimulus to boost prospects later this year.

“High levels of public debt are likely to limit the ability of major advanced economies to counteract a slowdown with fiscal stimulus,” he said. “Conventional monetary policy remains constrained in many advanced economies where policy rates are close to or below zero, while any further unconventional monetary policy actions present significant risks and uncertain pay-offs.”

China’s cyclical recovery is picking up steam

Growth rebounds as the threat of trade war recedes and domestic stimulus takes effect

Gavyn Davies

The slowdown in the US and eurozone economies continues to surprise the Federal Reserve and the European Central Bank, explaining their recent sharp turn towards dovishness. ECB president Mario Draghi coined another of his memorable phrases last week, saying that “pervasive uncertainty” meant downside risks, even relative to the central bank’s latest downgraded growth forecasts, were still predominant.

Policymakers in the advanced economies have uniformly attributed the downturn to “external” economic shocks, which is code for concerns about the loss of economic momentum in China.

Towards the end of last year, these concerns seemed wholly justified. China’s GDP grew by only 6.4 per cent on the official figures in the 2018 calendar year, the lowest growth rate in three decades. According to a recent study published by Brookings, the true rate of growth, on more accurate data, may have been 2 percentage points below that.

Furthermore, Chinese activity growth in the Fulcrum nowcasts nosedived to just 4 per cent in December. This triggered much of the slowdown in global growth, especially in the trade and manufacturing sectors.

So what has gone wrong with the Chinese growth engine in the last year? Two factors have been important: a shift in monetary policy towards deleveraging and a further knock to confidence from trade war fears.

Monetary policy shifted its focus towards deleveraging, especially in the shadow banking sector, which has been the main source of financing for infrastructure investment since the global financial crash in 2008.

In the 2018 calendar year, overall credit growth (known as total social financing) grew in line with nominal GDP, broadly as the authorities intended. But the effects on fixed-asset investment in state-owned enterprises were more severe than they meant them to be and, by the year end, investment growth had dropped to almost zero.

Small businesses have for years relied on lending from the shadow banking sector to finance expansion, so they were also badly affected by the authorities’ decision to squeeze that sector. The intention was to redirect lending by state-owned banks away from the SOEs and towards small private businesses, which represent the most dynamic source of new growth in the economy.

This shift has not taken place, in part because banks have been reluctant to lend to private companies against a background of rising debt defaults and declining business confidence. In addition, the demand for credit has been weak. The People’s Bank of China has made repeated attempts to encourage more bank lending to the private sector, so far with limited success.

Against this troubled domestic backdrop, the further hit to confidence arising from fears of a trade war with the US has clearly not helped. The imposition of new US tariffs on Chinese exports was a relatively limited event last year, reducing Chinese GDP by only about 0.3 per cent, according to several independent estimates.

But the increased intensity of tariff threats from the Trump administration late last year risked doubling this direct hit to GDP from trade, and adding an additional downside shock to domestic investment and consumption. The economy seems to have anticipated these shocks ahead of implementation, weakening domestic demand further.

Overall, the nowcast shows that activity growth fell by about 3 percentage points during 2018. At a very rough guess, about half of this may have come from the effects of the toughening in deleveraging policy throughout the year, with the rest stemming from fears of a greatly exacerbated trade conflict towards year end.

The question for 2019 is whether the easing under way in fiscal and monetary policy will be enough to promote an economic recovery, given the backdrop for trade policy emerging from the present round of Donald Trump/Xi Jinping talks. These have not reached a firm conclusion, but both presidents have strong domestic political reasons to avoid a major escalation of the conflict. Markets have already priced in a successful outcome and it seems reasonable to assume that the damage to economic confidence more generally will abate in coming quarters.

On the domestic policy front, premier Li Keqiang delivered the government work report at the National People’s Congress on March 5. Sometimes compared to the State of the Nation address by the American president, this report included a description of policy intentions for 2019, and economic objectives for the coming year.

Overall, the tone was consistent with Mr Li’s policy stance of several years. Although supportive of growth-sustaining measures, he is strongly opposed to a return to old-style demand management that would involve a blunderbuss increase in leverage, especially in the shadow banking system. In fact, he has already expressed concern that releveraging may have gone too far, given the very strong monetary and social financing data for January.

Instead, support for demand will be more nuanced, and probably more focused on fiscal policy, notably tax cuts, than previous stimulus packages. Although the official target for the budget deficit is only 2.8 per cent of GDP, compared with 2.6 per cent last year, there will be off-budget increases in local government bond financing and other measures that will boost demand. Overall, the fiscal thrust this year will probably be in the region of 0.5-1.0 per cent of GDP.

On the monetary policy side, the official target is to keep overall leverage in the economy unchanged this year, with total social financing growing in line with nominal GDP (ie 9.5 per cent). However, many independent economists think that this target will be exceeded by perhaps 2 per cent, allowing overall leverage to resume its upward trajectory, albeit at a slower rate than seen in earlier stimulus packages. That also seems to be the message from the latest monetary data.

Encouragingly, the latest nowcasts show that the economy has rebounded from the severe weakening recorded towards the end of 2018, and activity is back in line with Mr Li’s new target of 6.0-6.5 per cent growth in GDP in 2019. Assuming that there is no return to escalating trade wars, the worst may be over for the Chinese economy.

Spain Gets a Crash Course in a Former Colony’s Art

By Maya Jaggi

“The Marriages of Martín de Loyola to Beatriz Ñusta and Juan de Borja to Lorenza Ñusta de Loyola,” is the first painting from colonial Latin America to be displayed at the Prado Museum in Madrid.CreditCreditFundación Pedro y Angélica de Osma Gildemeister/Lima, Museo Pedro de Osma

MADRID — A painting from Peru on loan to the Prado Museum here captures an extraordinary moment in Spain’s colonization of the Americas. The anonymous 18th-century canvas portrays the wedding of an Inca princess and a conquistador, witnessed by Inca royals in gold regalia, and black-cloaked Spanish clerics.

Behind the apparent harmony lies a tale of defeat and devastation. Yet the union the painting depicts also signals the birth of a mixed culture, whose art is only now receiving its due.

“This is the first time we’re showing a painting from colonial America,” Miguel Falomir, the Prado’s director, said in a telephone interview. The Prado owns “between 15 and 20” paintings made in Spain’s former colonies, he said, but they are kept by the ethnographic Museum of the Americas. They have never been shown alongside European old masters.

For centuries, “we’ve considered this art as second-class,” Mr. Falomir said. “That, thank God, has changed.” 
“The Marriages of Martín de Loyola to Beatriz Ñusta and Juan de Borja to Lorenza Ñusta de Loyola,” an oil painting of the Cusco school of art, was made during the Viceroyalty of Peru. Starting in 1542, the viceroys ruled large stretches of South America in the name of the Spanish king for almost three centuries, until Peru declared independence in 1821.

It was a time of feudal exploitation and forced religious conversion, but also of cultural flourishing. Local artists learned to paint in styles popular in Europe, introducing Peruvian landscapes, maize, guinea pigs and parrots into biblical scenes, and blending Renaissance, baroque and Incan symbols.

The main wedding, in the foreground of the painting, is between the niece of the last Inca rebel, Tupac Amaru, and the Spanish captain who defeated him. Their marriage in 1572 followed her uncle’s execution in Cusco, the Spanish-occupied Inca capital. The second wedding, tucked in a corner, shows the couple’s daughter marrying in Spain almost 40 years later, suggesting a distortion of time and space.

The painting, which combines European and Amerindian perspectives, is on loan to the Prado from the Pedro de Osma Museum in Lima, Peru, through April 28. Its display in Spain’s national museum during the institution’s 200th anniversary year suggests an important shift in the way Latin American colonial art is seen in Spain.

And it has coincided with a call by President Andrés Manuel López Obrador of Mexico for an apology from the King of Spain and the Pope, for atrocities against indigenous peoples during the Spanish conquest of Latin America. The headline-grabbing move, rejected by the Spanish government, shows that imperial history remains bitterly divisive, on both sides of the Atlantic.

But art could help re-examine the conquest’s 500-year legacy with newfound respect, instead of rancor or political posturing.

Pedro Pablo Alayza, the director of the Pedro de Osma Museum in Lima, said by phone that “art is of course a way to understand what happened in the colonial period.”

“Colonial history is traumatic,” he said. “But we can’t go ahead into the future if we don’t think again about our past.”

The Prado is one of 12 major museums and galleries in Spain that opened shows of Peruvian art in February, in parallel with ARCOmadrid, the annual art fair, where Peru was guest country. These exhibitions provide what Fietta Jarque, their coordinator, called a “crash course in Peruvian art.”

Amauta, a shortlived but influential journal founded in the 1920s, fostered a spirit of openness and exchange between Latin America’s indigenous and Hispanic cultures.CreditJose Sabogal/Museo de Arte de Lima, Peru, via Reina Sofia, Madrid

Spanish audiences will rediscover a chapter that is missing from their own history, she added.

“In Spanish schools they barely learn about three centuries of common culture,” said Ms. Jarque, a Peruvian critic and curator who lives in Spain. She said a “sense of guilt for the conquest” was partly to blame.
The traces and techniques of pre-Columbian art were not wiped out by Spanish rule and remain “raw material” for Peruvian artists, according to Sharon Lerner, the contemporary art curator at the Lima Museum of Art.

For instance, the gigantic pre-Incan land drawings and ceramic designs explored in “Nasca,” an exhibit at the Telefónica Foundation through May 19, helped inspire the modernist artists on show through May 27 in “The Avant-Garde Networks of Amauta,” at the Reina Sofia museum.

That exhibition shows how the Latin American artists and intellectuals of Amauta, a short-lived but influential journal founded in Peru in the 1920s, opened up to Amerindian culture.

But Sandra Gamarra, an artist from Peru, said in a telephone interview that people’s minds were still shaped by past thinking.

“The colonial system is still alive in Peru,” she said. “The idea of race, of different levels of humanity, is in our culture. We learn to see through categories, and through art.”

Ms. Gamarra’s sepia-like family portraits, which were on show at the ARCOmadrid art fair, are painted in iron oxide and modeled on colonial-era paintings depicting the offspring of interracial unions. In those so-called caste paintings, people were classified: criollo (American-born to European parents), mestizo (Spanish and Amerindian), mulato (Spanish and African), and so on, showing Spanish colonial society as acutely race-conscious, yet rife with miscegenation.

“Cosmovisión Aimeni” by Santiago Yahuarcani, is on show in the “Amazonías” exhibition at the Matadero Madrid.Creditvia Matadero Madrid

A legacy of stratification lives on in Peru. Mr. Alayza, of the Pedro de Osma Museum, said that “diversity is both a source of the country’s richness and its problems with racism.”

But, he added, “to understand each other is the main goal.”

Partly to this end, the Peruvian Culture Ministry has tentatively begun supporting contemporary art. The Madrid shows are driven by independent curators, but the government of Peru is supporting the exhibitions as part of a cultural program in the lead-up to the 200th anniversary of the country’s independence, in 2021.

Shows like “Amazonías,” an exhibition at Matadero Madrid through May 5, which places video installations next to hallucinogenic paintings evoking the spirit world, reflect how attitudes in Peru are changing.

Felix Lossio, an official with the Peruvian Culture Ministry, said that only a few years ago, “Amazonian artists whose mother tongue is not Spanish sharing space with urban artists from Lima would have been unthinkable.”

“We wouldn’t have recognized this as contemporary art, but exotic craft,” he said.

Like the painting of the Inca princess and the conquistador, which the Prado now appreciates for its artistic value, the complex aesthetics of Peru’s indigenous art are gaining admirers.

Despite the cataclysm of conquest, that world, and its art, never entirely vanished.

The Experts Keep Getting the Economy Wrong

Again and again, forecasters have been too optimistic — which is a sign of the economy’s funk.

By David Leonhardt

Traders at the New York Stock Exchange on Friday. The week ended on a down note after a disappointing jobs report.CreditCreditBrendan Mcdermid/Reuters
President Trump likes to brag about the supposedly booming economy. So do other Republican politicians. Some journalists have gotten into the habit too, exaggerating the strength of the economic expansion, because it makes for a good story.

Here’s the truth: There is no boom. The economy has been mired in an extended funk since the financial crisis ended in 2010. G.D.P. growth still has not reached 3 percent in any year, and 3 percent isn’t a very high bar.
Last week, while attending an economics conference in Washington, I discovered one particularly clear sign of the economy’s struggles — namely, that it keeps performing worse than the experts have predicted. I put together this chart to show the trend:

Again and again, Federal Reserve officials have overestimated how quickly the economy would grow. They keep having to revise their forecasts downward, only to discover that they didn’t go far enough down. Economists on Wall Street and other parts of the private sector have made the same mistake.

Over time, the differences between the experts’ predictions and the economy’s performance have added up. The American economy would be about 6 percent larger today — producing $1.3 trillion more in goods and services this year — if the forecasts had come true. And for most families, real-life experience has been more disappointing than the G.D.P. numbers, because much of the bounty of the economy’s growth has flowed to the affluent.

So what is ailing the American economy?
Several years ago, Lawrence Summers — the economist and former Treasury secretary — began using the phrase “secular stagnation” to describe the problem. The term was originally coined during the Great Depression, and it describes an economy that can’t quite get healthy.
When Summers first made his case in 2013, some other economists criticized it as too pessimistic. But the repeated growth shortfalls of recent years suggest he was onto something. At last week’s conference, hosted by the Brookings Institution, Olivier Blanchard — the former chief economist of the International Monetary Fund — said he was now more persuaded by the secular-stagnation story than he first had been. It is, Blanchard said, “more likely than not.”
There are two main culprits. The first is a savings glut. Americans are saving more and spending less partly because the rich now take home so much of the economy’s income — and the rich don’t spend as large a share of their income as the poor and middle class. The aging of society plays a role too, because people are saving for retirement.
The second big cause is an investment slump. Despite all the savings available to be invested, companies are holding back. Some have grown so large and monopoly-like that they don’t need to invest in new projects to make profits. Think about your internet provider: It may have terrible customer service, but you don’t have a lot of alternatives. The company doesn’t need to invest in new technology or employees to keep you as a customer.
Beside a lack of competition, the investment slump stems from what Summers calls the de-massification of the economy. Developers aren’t building as many malls and stores, because goods now go straight from warehouses to homes. Offices don’t need as much storage space. Cellphones have replaced not just desktop computers but also cameras, stereos, books and more. Many young people have decided they’re happy living in small apartments, without cars.
For all of these economic problems, there are promising solutions. But the United States is not giving those solutions a try.
The 2017 Trump tax law is a useful case study. It is a dreadful piece of economic policy — essentially a giant effort to aggravate income inequality. Tax cuts that benefit the wealthy most are huge and permanent. Tax cuts focused on everyone else are smaller and temporary.
But the law still pumped money into the economy last year, thanks largely to those temporary tax cuts for the middle class and poor. And guess what? G.D.P. growth finally met some forecasters’ expectations, as you can see from the first chart above. The economy expanded 2.9 percent in 2018.
Unfortunately, the boost seems to have been temporary. In the first quarter of this year, growth has slowed markedly, probably to about 0.5 percent. It will most likely grow faster over the rest of 2019, but not 3 percent. Once again, economists have started downgrading their expectations.
A better policy response would start with a tax cut focused on the majority of Americans, not the wealthy. And there are many other ways to take on secular stagnation. When I spoke to Summers last week, he rattled off a list:
Infrastructure projects, to jump-start investment. The retirement of coal-fired power plants, which would also lead to new investment. Stronger safety-net programs, including Social Security, to reduce the savings glut. More aggressive antitrust policies, to combat monopolies.
And a Federal Reserve that, at long last, stopped making the same mistake — of overestimating both growth and inflation.
After a decade of negative economic surprises, maybe we shouldn’t be surprised anymore. Maybe we should try some new solutions.

Alarm Bells Are Ringing

by: Bill Ehrman
- We need widespread structural financial and regulatory reforms, as well as trade deals, to meaningfully re-accelerate global growth.

- We have not altered our view, one we had since January, that global growth would bottom out by mid-year and begin to accelerate as we move into and through 2020.

- What is occurring in the key economic areas that warrant our view.

Aggressive monetary ease may stem the global economic slowdown while boosting the value of financial assets, but we really need widespread structural financial and regulatory reforms, as well as trade deals, to meaningfully re-accelerate global growth. We were not surprised to see the OECD last week cut its growth forecasts for 2019 and 2020 to 3.3% and 3.4%, respectively, with the majority of the cuts coming in the Eurozone. Inflation forecasts were lowered too.
We have not altered our view, one we had since January, that global growth would bottom out by mid-year and begin to accelerate as we move into and through 2020. The primary reasons for our optimism are:
  • All monetary bodies have now shifted to more accommodative stances which we had been anticipating.
  • Governments are increasing spending while decreasing taxes allowing budget deficits to widen.
  • Trade deals will be finalized and/or added tariffs will be put on hold.

Let's take a look at what is occurring in the key economic areas that warrant our view:
  • The United States has become the pivotal country impacting our view. There is no doubt any longer that the Fed will, at a minimum, pause hiking rates for all of this year and will most likely end unwinding its balance sheet within a month or two. We are not sure if the Fed will cut rates to halt dollar strength but it would be a smart move if done. The Fed's primary objective has shifted to protecting the expansion rather than containing inflation. There were several economic numbers reported last week that need mention. The surge in the trade deficit in December to $59.8 billion and for the year to $621 billion had a lot to do with our domestic economic strength, weakness overseas and fear of added tariffs in January, 2019. No surprise that the trade war actually increased the deficit last year. The employment numbers reported on Friday were a shock to all, including us. Without going into great detail, we are convinced that the numbers were off-base. We are focusing instead on the ADP number which were reported Wednesday showing jobs rose by 183,000 in February, weekly unemployment claims remain near record lows and there are over 7.3 million job openings. We consider the December job report an outlier to reality and to be totally dismissed. It is clear that first quarter GNP will be the lowest point for the U.S economy in 2019. Interest sensitive sectors like housing are already showing improvement with the recent drop in mortgage rates. There is no doubt in our minds that consumer spending will remain strong (just look at Costco (NASDAQ:COST), Target (NYSE:TGT) and Walmart (NYSE:WMT) numbers) as well as capital spending on technology which will boost future productivity. And finally, there are the heightened prospects of trade deals being concluded with China, Japan and hopefully the Eurozone this year. 2020 could surprise on the upside. Don't forget that Trump will do everything in his power to boost the economy and stimulate the financial markets prior to the Presidential election in 2020. And the Democrats are running a huge risk moving too far to the left in our opinion. The U.S. stock market remains undervalued today as we expect S&P earnings to increase by at least 5% in 2019 with the 10-year treasury holding beneath 3.0%.

  • China's National Conference last week was very revealing although not surprising to us. China lowered its economic growth target for the year to a range between 6% and 6.5% as expected. Premier Li Keqiang offered plans to stimulate the domestic economy through a combination of tax cuts and large spending projects. Trade was a major topic of discussion as it was clear that trade conflicts had severely hurt China's economy. Ironically it was reported last week that China exports had fallen by nearly 20% in February from a year ago with exports dropping 26% to the U.S. We are taking these numbers with a grain of salt too as exports were unusually high in November and December anticipating added tariffs in January. Weak imports were affected for the same reasons and do not reflect weakening domestic demand in China. We are confident here, too, that China's economy will improve as we move through the year benefitting from the massive flood of added liquidity and tax cuts including a sharp reduction in the VAT. And what if there is a trade deal with the U.S as we are anticipating? It is important to note that the Chinese government is trying to contain speculation in its financial markets by permitting a sale recommendation Friday on one of its most prominent insurance companies.

  • Japan's economy rebounded 1.9% in the fourth quarter after declining 2.4% in the third quarter. Private consumption rose by only 0.4% as wage growth remains weak and net exports actually penalized growth by 0.3%. Japan's Cabinet office just reported its latest composite of business conditions fell for the third straight month to its lowest level since June 2013. Japan desperately needs global trade conflicts to end. The BOJ cannot do more than it is already and it is equally difficult for the government to increase its deficit from these lofty levels. Japan's economy will muddle along until global trade improves. We do expect Japan to reach a trade deal with the U.S before the end of the summer which will improve the prospects of growth accelerating later in the year especially if China and the U.S reach a deal too.

  • We remain negative as to the prospects of the Eurozone despite the shift in policy at the ECB last week. The ECB promised to maintain interest rates at current levels through year end and will offer banks a new round of loans not seen since 2016. We do not believe that the Eurozone can grow by even 1.1% in 2019 until the area can get its act together. Brexit, political problems in Italy and Spain, and most importantly its trade conflict with the U.S are all putting a lid on Europe's prospects. Germany must ease up on its neighbors permitting higher spending and lower taxes even if it means rising deficits. It is no surprise that the region is in great need of structural reforms to better compete globally. Notwithstanding, we believe that all European governments recognize the downside risks including rising deflationary pressures and will work together to promote growth including a trade deal with the U.S.
Aggressive monetary ease has taken the risk of a near term recession off the board but it will not lead to accelerated economic growth until trade deals are reached. Businesses are keeping their hands in their pockets until they have some certainty over trade policy. We are confident that trade deals will lead to more capital spending and hiring. China, Europe and Japan are being hurt far more than the U.S by trade issues and therefore have much more to gain once deals are reached.
We have been writing since last October that the risks to the downside were unfathomable and that it was about time for the powers to be to the right things. Trump has disrupted the status quo in so many ways. While we disagree with many things about him including his ways, we do agree with many of his objectives. Who can argue against no tariffs, no subsidies, no stolen IP and a level playing field? Who can argue that the U.S bears all the research cost of drugs?
Change is difficult and hiccups occur along the way but the end game may be worth the disruption.
Alarm bells are ringing around the world increases the odds that trade deals will be reached this year which will lead to an acceleration in global growth into and through 2020. It is important to note that no one believes this so we are not paying for it either. We believe that the U.S markets are undervalued today even without trade deals. We are less sanguine on other markets unless trade deals are reached.
Our portfolios are more diversified than we can remember without one overriding theme. Each investment is led by great management with winning long-term strategies and the resources to see it happen. While we continue to hear about too much leverage in the system, it really is not corporate America whose balance sheets have never been better. We are concerned however by the buildup in government debt everywhere.
We own many drug companies who are benefitting from new product flow, rising margins and cash flow; industrials and capital goods companies with volume growth 1.5-2 times GNP, rising margins and huge free cash flow generation; technology including semis at a fair price to growth generating huge free cash flow; cable companies with content like Comcast (NASDAQ:CMCSA) and Disney (NYSE:DIS); housing related companies lie HD which will benefit from insufficient supply and low mortgage rates; low cost industrial commodity companies generating huge free cash flow; and many, many special situations where internal development will close the gap between current price and intrinsic value. We own no bonds as we expect the yield curve to steepen later in the year and we are flat the dollar even though we anticipated its near-term strength.
Review all the facts; pause, reflect and consider mindset shifts; look at your asset allocation with risk controls all the time; do independent research and… Invest Accordingly!

The Revolt Against Big Food

Today’s food problem is not absolute scarcity. It is that food is so unequally distributed and irrationally consumed that the world’s most deprived people die or suffer from cognitive impairment because of undernutrition, while others face death or disease because of obesity.

Jayati Ghosh

NEW DELHI – Confounding the grim prediction made by the British economist Thomas Malthus in 1798, the world currently produces more than enough food for a population that has increased almost tenfold since then. Today’s food problem is not absolute scarcity. It is that food is so unequally distributed and irrationally consumed that there is widespread malnutrition at both ends of the spectrum: the world’s most deprived people die or suffer from cognitive impairment because of undernutrition, while others face death or disease because of obesity.

Modern patterns of food production and distribution are largely to blame. Production – even by smallholders – increasingly relies on cultivation techniques developed by large corporations. And food consumption around the world is becoming less healthy and sustainable, owing to aggressive marketing and the year-round supply of previously seasonal or faraway crops.

The problem is clear, yet little is being done to address it. A deep-seated complacency at the heart of the world’s business-driven food system is fast turning into hubris. The dominance of multinational agribusiness companies – “Big Food” – rivals that of big tech firms in the digital economy, and policymakers seem happy to encourage the widespread belief that only industrial agriculture can feed the world and meet increasing demand.

This dogma has led to pervasive monocropping and excessive use of chemicals in food production. These practices damage the environment, reduce soil quality, make crops more vulnerable to natural hazards and pests, pose greater risks to farmers’ livelihoods, and produce increasingly unsafe food. Industrial farming also fuels unhealthy and dangerous consumption patterns, sometimes even leading to obesity and undernutrition within the same family.

The challenge is to make food production more sustainable, and to adopt safer and healthier diets. It may seem futile even to attempt this, because consumers around the world are so accustomed to the cheaper foods produced by global agribusinesses. But there are good arguments for a revolt against Big Food.

As Timothy Wise of the Small Planet Institute and Tufts University argues in his new book, “the myth that ‘we’ feed ‘the world’ is the ultimate first-world conceit.” The industrial farms and multinational agribusinesses based in the Global North do not account for most of the world’s food production, 70% of which comes from millions of small farmers, especially in the developing world.

What’s more, many of these farmers already have the tools to achieve “green” agricultural goals, according to Wise, if only they were allowed to use them. The world does not need a new technological revolution in agriculture to produce food in a sustainable and profitable way.

Perhaps the most important myth Wise busts is that small farmers are less knowledgeable and efficient than large-scale producers or cultivators operating under contracts with agribusiness companies. The political and market power of large corporations has made this axiomatic among policymakers, but there are plenty of examples of small farmers succeeding with their own methods.

In Malawi, for example, smaller producers have taken the initiative after other well-intentioned agricultural policies resulted in unanticipated negative outcomes. Over a decade ago, the country sought to increase maize production by giving smallholders coupons to buy seeds and chemical fertilizers. Yields rose dramatically at first, prompting reports of a “Malawi Miracle” (multinational seed and fertilizer companies benefited, too). But this success encouraged maize monocropping, which made the soil more acidic and less fertile over time. Farmers had to buy more seeds and fertilizer just to maintain yields, and there is now little evidence that rural hunger in Malawi has decreased.

Now, however, groups of small farmers have started growing a locally improved variety of more nutritious corn. They no longer require seed purchased from multinational companies or heavy use of chemical fertilizer, and they are mixing the new corn with other crops.

Small farmers are proving their worth elsewhere, too. In the Indian state of Kerala, local communities are leading a resurgence in rice farming, and women’s collectives have become successful organic farmers under the state’s Kudumbashree federation of women’s self-help groups. Small farmers in Mexico are playing a crucial role in preserving much-needed biodiversity – a fact that the country’s new government recognizes. And China has given small farmers training and facilities, and has grouped them into cooperatives as part of a large-scale project to promote sustainable agriculture.

The answer to the modern global food problem seems simple: loosen the grip of big corporations over production, distribution, and consumption, and give small farmers the room to produce sustainably. But this is easier said than done. Giant agribusiness interests may be powerful enough to prevent such a revolution from even taking root.

Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University in New Delhi, Executive Secretary of International Development Economics Associates, and a member of the Independent Commission for the Reform of International Corporate Taxation.