The US, China and the return of a two-bloc world
Technology, not military power, will be the basis for this new global split
Gideon Rachman
During the cold war, there was an “east” bloc and a “west” bloc and nations were defined by whether they were closer to Washington or Moscow.
Now, nearly 30 years after the fall of the Berlin Wall, rising tensions between the US and China are re-creating a geopolitical dividing line. And countries are increasingly expected to make clear whether they stand with Washington or Beijing.
The latest example of this came last week, with the news that Italy is close to becoming the first G7 country to sign a memorandum of understanding endorsing China’s giant infrastructure project, known as the Belt and Road Initiative. Within hours, a White House spokesman had criticised the BRI as “made by China, for China”, and suggested that it would bring no benefits to Italy. The Chinese foreign minister fired back, reminding the Americans that Italy is an independent nation. President Xi Jinping is planning to visit Italy later this month to seal the deal.
The tug of war over Italy underlines that the US-Chinese rivalry is now global. China’s economic and political pull reaches well beyond its Asian hinterland and stretches deep into Latin America and western Europe, areas that were once seen as naturally part of the American sphere of influence.
This Sino-American struggle is also increasingly overt. The Trump administration’s decision to launch a trade war on China ended the era when both sides could insist that trade and investment were neutral territory that could be kept separate from strategic rivalry. At the same time, the sheer ambition of the BRI has stoked fears in Washington that China is entering a new phase in its rise to great power status. If the BRI succeeds it will link the whole of the Eurasian landmass much more closely to China, potentially undermining the importance of transatlantic links.
In Washington, big Chinese investment projects are now routinely scanned for their strategic implications. The fact that Chinese firms are investing heavily in ports around the world is seen through the prism of an emerging naval rivalry with the US. And the international expansion of Huawei, the Chinese telecoms company, has become part of a broader struggle over technological supremacy and espionage. American officials have spent recent months imploring their allies not to allow Huawei to run 5G networks, arguing that this would be an intolerable security risk.
Several key US allies, including Japan and Australia, have already taken the American line on Huawei. But others, such as Britain, are still thinking about it. If the British allow Huawei in, they will be taking a security risk that could damage their precious intelligence-sharing arrangements with the US. But if they block Huawei, British hopes for a post-Brexit trade surge in trade and investment from China will be at risk.
Getting squeezed between Washington and Beijing can be very uncomfortable. After Canada obeyed an American extradition request and arrested Meng Wanzhou, the chief financial officer of Huawei, the Chinese response was fierce. Within days, Canadian citizens were arrested in China, and Canadian executives are now wary of travelling there. Similarly, when South Korea agreed to a US request to deploy an American anti-missile system called Thaad, Chinese tourists were directed away from South Korea and stores owned by Lotte, a South Korean retailer, were shut in mainland China after failing “safety inspections”.
The fact that China is increasingly willing to put direct pressure on US treaty allies is testament to the growing confidence of Beijing. That, in turn, reflects a shift in economic prowess. When countries along China’s Belt and Road consider whether to accept Beijing’s infrastructure packages, there is almost never a counter-offer from the US to consider. Nor is there yet an American firm that can offer an alternative to Huawei’s 5G technology.
In the battle for influence with China, the US’s trump card is often security rather than trade. Countries including Japan, South Korea, Germany and Australia now all do more trade with China than the US. But they all still look to America for military protection.
The US could undermine this security advantage if President Donald Trump goes through with his reported desire to charge allies for American protection. But China is not currently in the business of offering security guarantees. As a result, an emerging two-bloc world is unlikely to be based around rival military alliances as it was in the cold war, when the Warsaw Pact faced off against Nato.
Instead, it is technology that could become the basis of the new global split. China long ago banned Google and Facebook. Now the US is struggling to thwart Huawei. With concern mounting over the control and transfer of data across borders, countries may increasingly come under pressure to choose either the US tech-universe or the Chinese version — and they may find that the two are increasingly walled-off from each other. But a division that started with technology would not stay there. Data and communications are now fundamental to almost all forms of business and military activity.
The two-bloc world of the cold war was replaced by an era of globalisation. Now globalisation itself may be threatened by the re-emergence of a two-bloc world.
THE U.S., CHINA AND THE RETURN OF A TWO-BLOC WORLD / THE FINANCIAL TIMES OP EDITORIAL
THE ALLURE, AND BURDEN, OF PRIVATE EQUITY / THE NEW YORK TIMES
Wealth Matters
The Allure, and Burden, of Private Equity
By Paul Sullivan
Private equity offers the promise of exclusive deals, outsize returns and enviable cocktail parties.
But as seductive as these investments are, they can trap investors with onerous restrictions like high capital requirements and longtime commitments.
Simply put, private equity is an investment in an asset that is not traded on a public stock market. It’s a catchall term that also includes debt, real estate and various esoteric forms of financing — all of which have different expectations and risks.
The high returns offered by these private equity funds, and the minimal regulatory oversight, draw investors with deep pockets, like pension funds and wealthy individuals, who can meet the minimum investment requirement. The downsides are that the fees are high and the money is typically locked in for at least four to seven years.
That has not stopped the industry from growing. Private market fund-raising rose nearly 4 percent globally in 2017 to $748 billion, according to a review by McKinsey & Company. That year, the private equity firm Apollo Global Management raised a record $24.6 billion for its ninth fund.
But investors must understand the risks. Private equity investments are less liquid than public market securities, for starters, which makes them harder to cash out in a market downturn. And investors may be required to put in money later, an agreement known as a capital call.
“You always have to think about the margin for safety,” regardless of the type of investment, said Tony Roth, chief investment officer at Wilmington Trust. “What happens if it doesn’t turn out the way you’re thinking?”
This is the fourth in a five-part series looking at highly desirable assets that can deliver great returns but can also become burdens when owners need to offload them quickly. Previous columns have looked at art, cars and collectibles.
Private equity is different from the other types in this series because it is a financial investment, not a tangible asset. You can’t hang it on your wall, park it in your garage or serve it with dinner. But it has a cachet from the past successes of other investors, and the high barrier to entry creates an air of intrigue.
The first step to making a private investment is understanding the pitch. After all, there are some 7,000 private investment managers across the globe.
Determining the skill of the manager is important, so do your homework. Andrea Auerbach, global head of private investments at Cambridge Associates, a consultant and an adviser, said picking an average manager could affect your bottom line.
The difference in returns between public equity managers who are in the middle of the pack and top performers was less than three percentage points, she said. But when it came to private equity, the difference in returns between mediocre and top managers was 21 points.
A second step is spreading money across funds raised in different years, not just with different strategies. For instance, funds raised in the years before the recession made most of their investments when the market was at a peak, so they consequently performed worse than those that raised money in the years right after the downturn, when asset values were lower.
A bigger problem for investors in 2008, though, was that private equity firms demanded money from investors in a capital call. The timing was bad because some investors had put their money in the stock market and had to sell their shares at steep discounts to avoid defaulting.
“Most investors oversimplified it, which increased their risk,” said Adam I. Taback, deputy chief investment officer for Wells Fargo Private Bank. “You have to figure in the growth of every other asset. What’s happened to the other 90 percent of your portfolio while you’re doing all this private equity planning?”
Patience is a necessity in private investments.
The marketing material for these funds suggest the investment will last about seven years, but in reality, with clauses in the documents about mandatory extensions, some of these funds can drag on for twice as long.
“Let’s say you make a commitment to a manager and they turn out to be not who you think they are,” Ms. Auerbach said. “You can try to sell your slightly used private equity stake on the secondary market, or you can do your homework and make sure you can stay with the manager for 12 to 15 years.”
“Everything,” she added, “takes longer than people think.”
In the current economic cycle, advisers are urging their clients to do more due diligence and be cautious. “With at least a five- to seven-year outlook, it’s almost certain there is going to be a recession during that time frame,” Mr. Roth said.
Investors should factor in periods of volatility. “When you know you’re going to have a recession, you need a much larger margin of safety than earlier in the cycle,” he said.
To this end, Mr. Roth said, Wilmington Trust has formed partnerships with various private equity firms on behalf of its clients to make niche investments. One involved investing in distressed loans in Europe.
In another recent deal, Wilmington Trust joined forces with a private equity firm that invested only in digital and personal security companies. Its $700 million fund, entering its second year, has already returned capital from successful deals.
Uneven allocation can be a problem. As a private investment matures, managers are both asking for capital and returning money from earlier investments.
“If you have $10 and want to go into small-cap equity, you write your check and you have your $10 of exposure,” said Katherine Rosa, global head of alternative investments at J. P. Morgan Private Bank. “With private equity, you commit capital and that’s drawn down over three-, four-, five-year periods and the distributions come back to you when the manager decides to sell that position.
“So at any time,” she added, “the most you’ll be out of pocket is between $6.50 and $7.50 out of that $10.”
That dynamic has tripped up some investors who pledged money to private equity funds that was allocated to another investment, hoping their returns would cover the call for more capital.
For investors new to private equity, buying a stakes on the secondary market may be a good entry point, Ms. Auerbach said, because the buyer will have a sense of the fund’s performance and get returns more quickly.
But the question remains: How much do you put into private equity to reap the benefits but avoid the downside? Unfortunately, there is no hard rule like the 60/40 split between stocks and bonds that serves as a baseline for investing in the public markets.
Ms. Auerbach wrote a paper analyzing the private investment strategies of top-performing institutional investors and what individuals could learn from them. She found that most big institutions had at least 15 percent of their portfolio in private investments, with some going more than 40 percent.
She said large, multigenerational families might be able to do the same, given their wealth and ability to remain comfortable with the illiquidity.
Of course, that percentage depends not just on the asset base but also on a family’s spending. Ms. Rosa said clients needed to think about whether they could get returns on their other investments that were high enough to cover their lifestyle while they waited for their private equity investments to mature.
That makes sense, but all those numbers need to be forecast out years, and by that time, the economy may have stalled.
TICK, TICK, TALK, 2019 RECESSION COMING / SEEKING ALPHA
Tick, Tick, Talk, 2019 Recession Coming
by: David Haggith
- The Fed's plan is going to fail; it was always obvious it was going to fail; and it is now, in fact, failing in exactly the manner I've said it would.
- I think a big, fat recession in 2019 could be the best thing that ever happened, even though it would be the worst thing that ever happened.
The 2018 stock market crash is now a fait accompli, having taken a polar bear plunge that put ice in the veins of the Fed and electrified their collective spine with such a deep chill they ran like a fat walrus from the bear market to halt their long-nurtured plans of economic tightening.
With that event fulfilled, I'm now predicting a 2019 recession as the major economic news for this year (both US and global).
Several leading stock market indexes around the globe endured bear market declines in 2018. In the U.S. in December, the small cap Russell 2000 Index (RUT) bottomed out 27.2% below its prior high. The widely-followed U.S. large cap barometer, the S&P 500 Index (SPX), just missed entering bear market territory, halting its decline 19.8% below its high.
And, technically, we're still in the bear market, as we've recovered to the point where the market broke all to pieces in January 2018 but not to the point from which the bear market began.
In the US, most analysts agree that bear markets and domestic recessions have generally been fairly closely related, though the exact leads and lags between the two may differ considerably across cycles. Furthermore, there have been several bear markets, notably in 1987 and 1978, that have not been accompanied by recessions, and vice versa.
What will spark the next bear market? An economic recession, or the anticipation of one by investors, is a classic trigger, but not always. Another trigger has been a sharp slowdown in corporate profit growth, as we are seeing now…. Stock market pundits are widely divided about the nature of the next bear. For example, Stephen Suttmeier, the chief equity technical strategist at Bank of America Merrill Lynch, has said he sees a "garden-variety bear market" that will last only six months, and not go much beyond a 20% dip, per CNBC. At the other end of the spectrum, hedge fund manager and market analyst John Hussman has been calling for a cataclysmic 60% rout.
Moreover, any results they do get will have diminished returns at best. At worst, new Fed stimulus will now have an opposite effect if people are smart enough to realize it all means we are right back where we started and that Fed money-printing must now go on ad nauseam. So, the Fed has done its damage (which it really did by the recovery path it chose), and the bond market knows it. For stocks, as I laid out in that first Premium Post, this will be a year of turmoil whether stocks are generally up or down.
The U.S. private sector added 129,000 jobs in March, the weakest reading in 18 months and below consensus expectations of 165,000, according to an Econoday economists survey. The report is watched for clues to official labor data due Friday.
Following last month's weak ADP print which front-ran the dismal "must be an outlier due to weather, shutdown, or anything else" payrolls data, expectations were for a slightly weaker ADP employment headline in March. However … ADP disappointed, adding just 129k jobs in March (well below the expected +175k…. This is the weakest growth in employment since Sept 2017.
The BLS reported that the US added 196K payrolls in March, higher than the 177K.

Those little upticks at the end of each graph may seem insignificant, but they are actually highly significant because the first uptick in unemployment downtrends from a low bottom always immediately precedes a recession:

On average, since 1969, the unemployment rate trough occurred nine months before the NBER-determined recession trough, while the yield curve inversion occurred 10 months before…. The minimum lead times were one month for the unemployment trough and five months for the yield curve inversion.
Markit's March services purchasing managers index [PMI] came in at 55.3 above consensus expectations of 54.8, according to FactSet. A reading of at least 50 indicates improving conditions.
Pretty good except …
US Manufacturing PMI dropped to weakest since June 2017
The Institute for Supply Management's services sector gauge fell to 56.1% in March, down from 59.7% in February.
In a world where Caterpillar is considered a global industrial bellwether and a key indicator of economic inflection points … today's downgrade of Caterpillar (NYSE:CAT) by Deutsche Bank is a harbinger that the recent risk on euphoria may be coming to an end….. Dilllard says that "synchronized global growth has collapsed, the China Land Cycle is rolling over (and will continue to weaken despite the single positive data point this week), Europe is slowing more than expected and the US is oversaturated with construction equipment…. Together this synchronized slowdown will not only usher in a negative earnings revision cycle, but also make 2019 the cyclical peak.
Then again …
The Financial Times reported that the U.S. and China were nearing the final stages of trade talks (paywall) and had two issues left to resolve - the current tariffs on Chinese imports and details on an enforcement mechanism to keep China compliant with the deal.
US stocks jumped euphorically this week upon China's PMI (manufacturing index) getting a mild bump; but, in fact, a rise to 50.5 is not considered expansionary for China's economy, but merely flat; and that tiny bump came after a huge one-off bump in credit by the People's Bank of China, now mostly used up.
Auto sales in the U.S. wrapped up an ugly first quarter with dismal results for the month of March as the buying frenzy from last year's tax cuts wore off and the economy continues to decelerate…. General Motors saw deliveries drop 7% for the quarter, with all four brands falling…. Fiat Chrysler sales fell 7.3%…. Ford sales were down 5% in March….
And that is including online sales!
Housing downturns have preceded every U.S. recession since World War II. For example, one measure of the momentum of residential investment turned negative before each of these episodes…. Recent movements in several housing indicators - mortgage rates, existing home sales, real house prices and the momentum of residential investment - resemble those seen in the late stages of past economic expansions. Could these storm clouds gathering over the housing market be signaling a broader economic downturn in 2019 or 2020….? Each of these indicators is in a range that, in previous cycles, preceded a recession by a year or two.
Listing prices are declining in what were some of the hottest housing markets in the country…. For instance, the median asking price in San Jose, California, was $1,100,050 in March - the highest of 500 metro areas, but down 11.6% from a year ago. Median asking prices in Denver and Boulder, Colorado, experienced similar declines. The median asking price declined the most year over year in Lynchburg, Virginia, plunging 37% to $145,000. Overall, 114 of the 500 markets Realtor.com surveyed saw a drop in the median listing price. On the other side, smaller markets in the middle of the county experienced the largest increases in asking prices.
The Real Estate Board of Greater Vancouver (REBGV) reported today … the lowest sales total for [March] since 1986 - down 31% from a year earlier and 46% below the 10-year March sales average.
Australia's housing boom/bubble could unravel badly. Last week, Grant Williams highlighted a video by economist John Adams, Digital Finance Analytics founder Martin North, and Irish financial adviser Eddie Hobbs, who say Australia's economy looks increasingly like Ireland's just before the 2007 housing collapse.

Global recession fears are exaggerated and … a recovery is most likely in store for both China and the Eurozone in the next several months.
While the financial media continue to fret over the global slowdown, a salient piece of good news having positive economic implications was largely ignored…. The good news is that at the end of the first quarter last week, the S&P 500 Index registered its best start to a year since 1998…. In years when the SPX was up strongly and didn't suffer a significant decline in the first three months, it nearly always finished higher at the end of the year.
Why we NEED a 2019 recession
THE CHALLENGE OF MONETARY INDEPENDENCE / PROJECT SYNDICATE
The Challenge of Monetary Independence
By shadowing the US Federal Reserve so closely, Latin American countries are foregoing the policy flexibility that their floating exchange-rate regimes are intended to allow. They also risk relying too heavily on possible US interest-rate cuts to boost their economies, and not enough on deeper, long-term reforms.
Andrés Velasco
LONDON – The United States Federal Reserve has done it again. In 2018, the prospect of higher US interest rates sent emerging markets into a tailspin. But so far this year, indications of a more relaxed Fed stance have boosted emerging-market currencies and stock markets, despite concerns about a possible US-China trade war, economic slowdowns in most major economies, and rampant populism.
Around Latin America, currencies and central banks are enjoying a much-needed breather. Markets had been anticipating tighter monetary policy in a number of countries, including Chile, Peru, and Mexico. Now, the talk is of a wait-and-see approach before withdrawing monetary stimulus.
Even in Argentina, still battling the twin evils of high inflation and low investor confidence, the more benign external scenario allowed for a sharp, if short-lived, reduction in peso interest rates.
By shadowing the Fed so closely, Latin America’s central banks are foregoing the policy flexibility – or so-called monetary independence – that their countries’ floating exchange-rate regimes are intended to allow. What’s more, policymakers risk relying too heavily on possible US interest-rate cuts to boost the region’s economies, and not enough on tougher structural reforms and export-promotion measures.
In theory, a country with a floating currency can use local interest rates to smooth domestic inflation and output, while letting the exchange rate rise or fall as needed to achieve external balance. This is why most emerging markets have moved to floating exchange rates, and why the fixed-but-adjustable pegs once so common in Latin America are now mostly a thing of the past.
The change is broadly considered to have been a success. But practice is turning out to be quite different from what theory would predict.
When the US raised rates last year, Latin America was expected to follow. Now the Fed seems to be pausing, and so are the region’s central banks. What is going on? What happened to monetary independence? Weren’t local conditions supposed to determine local interest rates?
Not really. Although currency movements that absorb shocks are a good thing, central bankers seem to believe that too much of a good thing can become bad. To borrow the memorable title of a paper by Guillermo Calvo and Carmen Reinhart nearly two decades ago, they suffer from “fear of floating.”
So when US rates rise, putting downward pressure on local currencies, emerging-market central banks tend to follow the Fed’s lead. This is partly to limit inflationary pressures, because local-currency depreciation makes imported goods more expensive. Emerging-market central bankers also want to protect the balance sheets of local banks and companies, which tend to borrow in dollars and will face greater difficulty repaying if the local currency falls.
Now that the Fed has signaled a loosening of its stance, Latin American policymakers will probably follow the US lead again. For starters, most countries in the region are more worried about slow growth than inflation these days, and do not want their currencies to appreciate sharply. Possible Fed easing therefore gives policymakers the chance to inject some additional monetary vitamins into Latin American economies with little or no risk of higher inflation.
Argentina’s recent experience highlights another reason to cut interest rates as soon as the Fed does. Starting in the second quarter of 2018, local rates had increased sharply to contain rising inflation and prop up the plummeting peso. But the record rates (as high as 60%) were causing central-bank debt to snowball, a phenomenon economists call “unpleasant monetarist arithmetic.” So, as soon as the Fed began sounding dovish, Argentina’s central bank cut rates, hoping to prevent the debt snowball from getting even bigger.
The view that most countries’ monetary policies are really made in Washington, DC, has been around for a while. Hélène Rey of the London Business School has argued that local financial and credit conditions reflect what the Fed does, almost regardless of the exchange-rate regime. This idea of a “global financial cycle” is plausible, but remains controversial.
The good news is that most Latin American economies are better prepared nowadays to deal with US interest-rate changes. In the past, the region’s central banks had little choice but to follow Fed rate rises, because they needed to attract enough foreign funds to finance large current-account deficits. But nowadays, Latin America’s main economies run much smaller external deficits – usually 1-2% of GDP – and are therefore far less dependent on foreign finance.
The bad news is that these smaller Latin American deficits reflect relatively low investment rather than high levels of saving. Growth around the region has been lackluster since the commodity boom ended five years ago and seems likely to remain so for the foreseeable future.
Complacently relying on looser US monetary policy to manufacture the region’s next growth spurt will not help. The Fed’s magic punch may be tasty, but it is no substitute for the deeper, long-term economic reforms that Latin America urgently needs.
Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.
ALLIANCES SHIFT AS THE SYRIAN WAR WINDS DOWN / GEOPOLITICAL FUTURES
Alliances Shift as the Syrian War Winds Down
The countries that aligned to help protect Assad may be reconsidering their allegiances.
By George Friedman
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Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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