History Rhymes

Doug Nolan

President Trump and President Xi are meeting in Osaka as I write. We’ll know much more in the morning. Pre-meeting reports had the two sides agreeing to a “truce.” Heading into the meeting, President Trump said progress was made in Friday trade talk preparations, as he seeks to “even it up” on trade. I’ll assume both sides would prefer to convey a constructive meeting and a positive framework for restarting trade negotiations.

Having attained a head of steam, a positive outcome could provide additional juice to the equities rally. Sovereign bond markets, enjoying even stronger momentum, may have to think twice. Is the market’s 100% probability for a July rate cut justifiable in the event of market exuberance in response to improved prospects for a successful completion of trade negotiations?

There was definitely some push back to market expectations for an imminent start to a rate cut cycle. At least a few Fed officials are not oblivious to the risk of bowing to rate cut pressures:

June 25 – New York Times (Jeanna Smialek): “Jerome H. Powell, chairman of the Federal Reserve, said… that the central bank is weighing whether an interest-rate cut will be needed as trade risks stir economic uncertainty and inflation lags. But he made clear that the institution considers itself independent from the White House and President Trump, who continues to push publicly for a rate cut. Mr. Powell said the case for a rate cut has strengthened somewhat given that economic ‘crosscurrents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.’ But he stopped short of saying a cut was guaranteed, noting that the Fed would continue to watch economic events unfold and would avoid reacting to short-term issues.”

June 24 – Bloomberg (Christopher Condon and Rich Miller): “Federal Reserve Bank of Dallas President Robert Kaplan… sounded a note of caution about cutting interest rates. ‘I am concerned that adding monetary stimulus, at this juncture, would contribute to a build-up of excesses and imbalances in the economy which may ultimately prove to be difficult and painful to manage,’ Kaplan wrote in an essay released by the Dallas Fed.”

June 28 – Bloomberg (Craig Torres and Michael McKee): “It’s too early to know whether policy makers should cut interest rates and whether such a reduction should be a quarter or half percentage point, Federal Reserve Bank of San Francisco President Mary Daly said…”

It would be one rather atypical backdrop for commencing monetary stimulus. Fox Business: “Dow Celebrates Best June in 81 years, S&P Best in 64 Years.” USAToday: “Stocks Post Best 1st Half Since 1997.” Newsmax: “Wall Street Soars 18%, Global Stocks Surge $18T in 1st Half.”

Bloomberg headline (Gowri Gurumurthy): “Junk Sales Hit 21-Month High as Issuers Lock in Lower Rates.” Junk issuance jumped to $28 billion in June, following May’s $26 billion. Year-to-date issuance of $130 billion is running 18% above comparable 2018.

June 28 – Bloomberg (Drew Singer and Vildana Hajric): “For anyone who was anxious that U.S. investors would be bowled over in 2019 by the biggest crush of new listings in more than a decade, some news. You were wrong. So far. Not only has one deal after another surged after pricing, but the market itself has shown no ill effects with billions of dollars of new equity sloshing around. In June alone, as the S&P 500 surged to records, 10 initial public offerings rose by 50% or more in their debut sessions, the most of any month since at least 2008. The average return of 37% is double gains earlier in the year. ‘We’re partying like it’s 1999,’ said Kim Forrest, chief investment officer at Bokeh Capital Management... ‘We’re bringing new companies to the public that we either use or we want to own.’”

According to Axios (using Baker McKenzie data): A total of 62 initial public offerings raised $25 billion during the second quarter, the strongest pace in five years. “Average IPO returns were 30% as Beyond Meat and the tech sector took flight.”

June 25 - Bloomberg (Vildana Hajric and Carolina Wilson): “As the risk of an economic slowdown lingers, exchange-traded fund investors are seeking shelter in bond funds. They’ve poured about $72 billion into fixed-income ETFs this year through June 24, with the funds on track for their biggest first-half inflows ever… Those bets have also fueled assets in the debt strategies to hit an all-time high of nearly $741 billion.”

It requires some creativity on the Fed’s part to justify additional monetary stimulus based on domestic conditions (I know, “inflation below target.”). Yet this is much more about global fragility than the U.S. economy. A positive outcome in Osaka would be constructive for sentiment from China to the U.S. Why then do global sovereign yields seem to look past the G20 (while equities can’t seem to shake the giddies)? Why would 10-year Treasury yields end the week down another five bps to (a near 30-month low) 2.00% - in the face of some Fed pushback on imminent rate cuts? How about German bund yields down four bps to a record low negative 0.33%. Swiss yields down to negative 0.58%, and Japanese 10-year yields at negative 0.16%? French 10-year yields turn negative (0.005%) for the first time, with Spanish yields down to only 0.40%.

Why do bond markets at home and abroad have about zero fear of a Trump/Xi agreement with positive ramifications for risk market sentiment and economic prospects (with, seemingly, receding central bank dovishness)? Because, I would posit, the collapse of bond yields is chiefly about unfolding global financial fragilities rather than trade disputes and slower growth. More specifically, faltering Chinese Bubbles significantly raise the likelihood of the type of global de-risking/deleveraging dynamic that would wreak havoc on securities and derivatives markets across the globe.

There are key elements of the current environment reminiscent of 2007. Recall that after the initial subprime scare that pushed the S&P500 down to 1,370 in mid-August, the index then rallied back to a record high 1,576 on October 11th. After a weak November, the S&P500 ended 2007 at 1,475 (returning 5.6% for 2007). Meanwhile, the bond market was having none of it. After trading to 5.30% in mid-June, yields sank 127 bps by year-end (on the way to March’s 3.31% low) despite the widely held view the inconsequential subprime issue was to be quickly relegated to the dustbin of history.

These are two distinct Bubbles – the U.S. “mortgage finance Bubble” and the “global government finance Bubble.” Bond yields collapsed in 2007 in response to an unsustainable financial structure. There were Trillions of mispriced mortgage securities and derivative contracts that, because of egregious late-cycle excesses, were acutely vulnerable to any tightening of finance. Moreover, large quantities of mispriced securities were held on leverage.

“Crazy” end-of-cycle lending, risk intermediation, and speculative excesses became increasingly untenable. The more sophisticated market operators started to reduce exposure to the most suspect instruments. Subprime securities began to lose market value, and the marketplace turned increasingly illiquid. Credit conditions for the marginal (subprime) home buyer tightened significantly, which set in motion deflating home prices, pressure on higher-tier mortgage securities (i.e. “alt A”) and a more systemic tightening of mortgage Credit. What started at the “Periphery” gravitated to the “Core,” with Trillions of mispriced securities, speculative leverage, and ill-conceived derivatives coming under heightened pressure.

Even in the face of the subprime dislocation, the view held that “Washington will never allow a housing bust.” Indeed, the implicit government guarantee of GSE securities was more crucial than ever heading right into the crisis. Agency Securities actually increased a record $905 billion in 2007 (to $7.398 TN), perceived money-like Credit instrumental in sustaining “Terminal Phase” excess.

U.S. Non-Financial Debt expanded $2.478 TN in 2007, accelerating from 2006’s $2.432 TN and 2005’s $2.246 TN. The Credit Bubble was sustained by the combination of market confidence in the implicit federal guarantee of Agency Securities along with prospects for aggressive Federal Reserve stimulus (the Fed cut 50bps in September and another 25 bps in October and December), along with sinking market yields and lower prime mortgage borrowing costs.

This is where it gets interesting. Rapid Credit growth throughout 2007 underpinned stock prices, general consumer confidence and overall economic activity. Nominal GDP expanded at a 5% rate during 2007’s first half, 4.3% in Q3 and 4.1% during Q4.

Meanwhile, bond yields completely detached from equities and traditional fundamental factors. Why were yields collapsing in the face of booming Credit growth and inflating risk markets? Because the preservation of “Terminal Phase” excess was fomenting a late-cycle parabolic rise in systemic risk: inflating quantities of increasingly risky Credit instruments, dysfunctional risk intermediation, destabilizing market speculation, and extreme late-cycle imbalances/maladjustment. Stated somewhat differently: efforts to sustain the boom were exacerbating structural impairment. The bond market discerned an increasingly untenable situation.

History Rhymes. China’s Aggregate Financing (approx. non-government system Credit growth) jumped $1.60 TN during 2019’s first five months, 31% ahead of comparable 2018 Credit growth. So far this year, Aggregate Financing is expanding at better than 12% annualized. This is a rate of growth sufficient to sustain the economic Bubble (Beijing’s 6.5% growth target), apartment prices, corporate profits, stock prices and general market and economic confidence.

But extending the “Terminal Phase” has ensured a historic parabolic surge in systemic risk. Consumer (chiefly mortgage) borrowings have increased 17.2% over the past year (40% in two years!). Thousands of uneconomic businesses continue to pile on debt. Unprecedented over- and mal-investment runs unabated. Millions more apartments are constructed. The bloated Chinese banking system continues to inflate with loans of rapidly deteriorating quality.

Global risk markets have been conditioned for faith both in Beijing’s endless capacity to sustain the boom and global central bankers’ determination to sustain system liquidity and economic expansion. So long as Chinese Credit keeps flowing at double-digit rates, inflating perceived wealth ensures Chinese spending and finance continue to buoy vulnerable emerging market booms and the global economy more generally. Global risk markets remain more than content.

At this stage, however, global bonds have adopted an altogether different focus: China’s financial and economic structures are untenable. Sustaining rapid Credit growth is increasingly fraught with peril. With market players now questioning Beijing’s implicit guarantee for smaller and mid-sized banks and financial institutions, financial conditions are in the process of tightening at the financial system’s “periphery.” And tightened Credit conditions have begun to reverberate in the real economy.

And what about the possible impact of a positive G20 and momentum toward a U.S./China trade deal? Stocks, no surprise, are readily excitable. For global safe haven bonds, however, it’s of little consequence. How can this be? Because even a trade deal would at this point have minimal impact on what has become deep and rapidly worsening structural impairment. Trade deal or not, Chinese exports to the U.S. will decline, right along with capital investment. Even with a deal, the Chinese financial system faces the consequences of years of rapid expansion as economic prospects deteriorate. Sure, 6% growth as far as the eye can see. That implies a further surge in consumer debt and even more dangerous mortgage finance and apartment Bubbles. Unparalleled overcapacity and maladjustment.

Record U.S. stock prices in October 2007 made it easy to dismiss the momentous ramifications associated with subprime borrowers (the “Periphery”) losing access to cheap Credit – to disregard the blow-up of two Bear Stearns structured Credit funds, widening Credit spreads, pockets of market illiquidity, and waning confidence in some sophisticated derivative structures. Acute monetary instability (i.e. equities and $140 crude) was mistaken for resilient bull markets.

I would closely follow unfolding developments in Chinese Credit – funding issues for small and mid-sized banks; ructions in the money markets; trust issues with repo collateral, inter-banking lending, and counterparties; vulnerabilities in local government financing vehicles (LGFV); heightened concerns for speculative leverage; and the overarching issue of the implicit Beijing guarantee of essentially the entire Chinese financial system. The overarching issue is one of prospective losses of monumental dimensions. These losses will have to be shared in the marketplace. As much as global markets bank on Beijing bankrolling China’s entire financial apparatus, the Chinese government will not welcome the prospect of bankrupting itself.

The solution, of course, is for China to simply inflate its way out of debt trouble – just like everyone else. What an incredibly dangerous myth the world fully bought into. Reflation – in the U.S., China, Europe, Japan and globally – has only inflated the size and scope of Bubbles.

China could see $4 TN of new Credit this year – debt of increasingly suspect quality. Such reckless Credit excess is putting the Chinese currency at great risk. It took about 18 months from the initial U.S. subprime blowup to full-fledged financial crisis. While one could certainly argue for earlier (i.e. December), China’s crisis clock began ticking no later than with last month’s takeover of Baoshang Bank.

June 27 – Bloomberg: “Almost five weeks after Chinese officials shocked investors by taking over a regional bank, smaller lenders are still struggling with the consequences. Demand for their debt is tumbling. Debt issuance by small banks this month has tanked to a 16-month low. The cost of borrowing is surging. Lenders paid record high premiums on negotiable certificates of deposits -- a type of short-term debt that they rely heavily on for funding -- relative to bigger peers. While the central bank has injected a net 325 billion yuan ($47bn) into the nation’s financial system last week and lifted the short-term debt quota for big brokerages to ease the crunch affecting smaller banks, the measures have failed to shift investor concerns. The fact that some of Baoshang Bank Co.’s creditors may face losses has driven financial institutions to reassess counterparty risks and become more selective in whom to lend to… ‘Some institutions are mulling making white and black lists for small banks and that will affect credit expansion of those banks,’ said Lv Pin, an analyst with Citic Securities.”

June 24 – Bloomberg: “Liquidity conditions for China’s lenders and its non-banking financial institutions are heading in different directions following the surprise seizure of a bank last month. A measure of cash in the interbank system fell to its lowest close since 2009 on Monday, as the central bank has been providing liquidity to the market to ease concern over credit risks at small and medium-sized banks. That’s just as financial firms like insurers continue to face financing difficulties almost a month after the government takeover of Baoshang Bank Co. The People’s Bank of China injected a net 285 billion yuan ($41.5bn) of funds via open market operations last week, the most since late May. The problem is injections like these have not benefited non-banking firms that rely on corporate debt for funding because bond traders are still worried about counterparty risks. ‘Non-bank financial institutions have been having more difficulty in acquiring capital via negotiable certificates of deposit,’ said Ken Cheung, a senior Asian currency strategist at Mizuho Bank Ltd. ‘Large banks are less heavily affected.’ China’s overnight and seven-day pledged repurchase rates for the overall market rose to as high as 8% and 18.3% on Monday…Those prices indicate what non-bank financial institutions could be paying to get funding. The same rates for lenders were at 0.99% and 2.27%.”

June 26 – Bloomberg: “Investors in China’s local government financing vehicle bonds -- the market’s hottest trade earlier this year -- have a new risk to consider. At least that’s what yields are signaling, a month after the big jolt from the government’s Baoshang Bank Co. seizure. LGFV notes pay less than company debt because of the assumption that they carry an implied government guarantee, so they should have done relatively better in a risk-averse environment. Instead, borrowing costs for lower-rated LGFVs are rising while yields on corporate bonds are trending lower. It’s another example of the linkages between players in China’s financial system, not all of which are evident on the surface. As small banks struggle to access liquidity amid the Baoshang Bank fallout, that becomes a potential problem for their big borrowers -- often weaker LGFVs. ‘As the risk appetite in the market has become quite low, lower rated LGFVs will have difficulties in refinancing and they will come under bigger pressure to repay debt,’ said Liu Yu, a fixed-income analyst with Guosheng Securities Co. ‘The risk of lower rated LGFVs is increasing and some may default on their borrowing through non-standard financing channels.’”

June 25 – Financial Times (Don Weinland and Sherry Fei Ju): “A rare public default at a Chinese trust company is drawing attention to cracks in the Rmb7.9tn ($1.13tn) market for the investment products in the country, where similar failures have been dealt with behind the scenes in the past. Anxin Trust, which missed payments on Rmb11.8bn for 25 trust products earlier this year, has been forced to publicly document its default because, unlike most trusts, it is listed on the Shanghai stock exchange. The situation has offered a rare glimpse into the factors leading up to failed trust products, which for Anxin include giving loans to an acquisitive property group that has since been delisted from a Chinese bourse. The trust company’s shares tumbled more than 9% on Tuesday after it said its parent company’s shares had been frozen by a court in Shanghai.”

June 24 – Bloomberg: “One of the most opaque areas of China’s credit markets involves the practice of companies buying their own bonds. That may soon get a lot tougher, contributing to financing difficulties that are already bedeviling the nation’s policy makers. At issue is a sharp increase in scrutiny by financial institutions of the collateral that their counterparties offer up in the repurchase market, a crucial channel for short-term funding. If the debt sold by issuers that indirectly purchased a portion of their own bonds -- which could account for as much as 8% of China’s corporate bonds, according to Citic Securities Co. -- is shunned, that will squeeze liquidity for a swathe of the nation’s businesses.”

June 26 – Financial Times (Don Weinland): “Chinese regulators are hitting the brakes on a record surge in US dollar bond sales by local government financing companies despite unprecedented demand for the debt. Local government financing vehicles, which have been used for years by Chinese cities and provinces to raise funds for local infrastructure projects, sold $12.4bn in US dollar bonds in the first half of the year, according to Dealogic, nearly doubling issuance from the same period last year. The boom in debt deals, however, is expected to come to an abrupt end on Friday, after which Chinese regulators are likely to impose stricter rules on the companies.”

The rich v the rest

A rare peep at the finances of Britain’s 0.01%

The richest of the rich are even richer than thought—which means inequality may be rising faster than imagined, too

THEY ARE objects of both fascination and fury. But beyond the annual Sunday Times “Rich List”, which estimates the fortunes of Britain’s wealthiest, relatively little is known about the finances of the economic elite. Official statistics, which extrapolate from surveys of the general public, are good at guessing the incomes of middling sorts. But they find it harder to get an accurate picture of those with more unusual circumstances. The very richest are particularly elusive. As well as being frustrating for nosy parkers, this makes it harder to estimate inequality, which depends on an accurate understanding of the full extent of their loot.

In a paper published on June 17th, Mike Brewer and Claudia Samano-Robles of Essex University paint an unusually detailed portrait of Britain’s very highest earners. Using data from the tax office up until 2015-16, they focus on the incomes of not just the top 1%—who earned a trifling £129,000 ($164,000) or more in that year—but the top 0.01%. The 5,000 or so individuals in that club each made at least £2.2m.

Who are they? Nearly all live in England, the majority in London. Scotland has about 200 of them, and Wales and Northern Ireland perhaps 50 between them. Only about one in ten is a woman; one in 20 is a millennial (roughly defined as the generation born between 1981 and 1996). Financial services, by far the biggest category, employ more than a third of them. Yet roughly 15% of Britain’s super-high earners do not appear to work at all. In 2015 40% of the income of the top 0.01% was “unearned”, meaning that it came from the returns to financial investments and the like.

The very rich have been getting a lot richer. Since 1995 the share of overall income accruing to the top 0.01% has roughly tripled (see chart). They had a turbulent time during the financial crisis of 2008-09, when many bankers were sacked and the value of financial investments plummeted. Yet they quickly bounced back. By 2015-16 the share of income accruing to the top 0.01% was at its second-highest level in decades. It is likely to have risen still further since then.

The paper is part of a recent trend among economists to improve estimates of the incomes of the rich. That work is much needed, since Britain’s two official measures of overall inequality—one from the Office for National Statistics (ONS) and the other from the Department for Work and Pensions (DWP)—have limited success in guessing the incomes of the well-off. Both suffer from the problem that very rich people are particularly likely to under-report their income. Some evidence finds that the very well-off are less likely to answer surveys, since they believe they are too busy to do so. They may also have earnings from a variety of sources, which can make it hard to keep track of everything that is gushing in. An ONS study published in February suggests that survey data capture only about half the income of someone who has just made it into the richest 0.5%.

Since the rich command a disproportionately large share of overall income, getting them wrong is a disproportionately big problem. Both the ONS and DWP suggest that, somewhat surprisingly, since the early 1990s overall income inequality (as measured by the Gini coefficient) has not changed much. Could these conclusions be skewed by a poor understanding of just how rich the richest are?

In an effort to get to the bottom of this, academic researchers have sought to combine tax data with survey data. (Wonks at the DWP already do this, though their methodology is widely agreed to be flawed.) Calculations in a paper published earlier this year by Stephen Jenkins of the London School of Economics and the late Tony Atkinson, formerly of Oxford University, show a marked increase in overall inequality since the mid-1990s, in contrast to the stability shown by official statistics. Such work is at an early stage. But it suggests that a better understanding of the 0.01% may reveal that the gap between rich and poor has been widening more than many people thought.

Negative interest rates take investors into surreal territory

The markets are vulnerable to potential nasty losses if rates suddenly shoot up

Gillian Tett

This summer, Germany’s housing market has turned into Alice in Wonderland: the yield on five-year bonds issued by mortgage banks slid to minus 0.2 per cent, compared to a level of plus 5 per cent a decade ago.

That means investors are essentially paying for the privilege of lending money into Europe’s largest property sector. Economic logic — or gravity — has been turned on its head.

If that were not bizarre enough, consider this: in Denmark, some financial institutions are offering borrowers “negative” mortgages that pay interest; treasurers of major German companies are muttering about their bonds trading with negative yields; and yields on 10-year government bonds in France and Sweden have fallen into negative territory too, joining Germany and Japan.

Overall, the global pile of negative yielding debt has swelled above $12.5tn, breaking the record set in 2016. Even in America, the yield on 10-year Treasuries recently fell below 2 per cent. That might not look dramatic since it is still positive in nominal terms. But when adjusted for core inflation (about 2 per cent) it equates to a near-negative real rate. This is remarkable given that the US just notched up an economic growth rate of 3.1 per cent in the first quarter.

Some investors might feel tempted to shrug their shoulders. When negative rates first appeared two decades ago in Japanese yen money markets, they triggered so much shock that local bank computing systems went haywire. But they are now cropping up so frequently that investors have become almost inured to the surreal. There has been extraordinarily little public debate about the record levels of negative yielding debt. Neither politicians — nor many voters — appear to really care.

However, it would be a profound mistake for investors to ignore what is now under way or simply presume that they have seen it before.

One obvious reason to pay attention is that sinking bond yields, and an inverted yield curve — where short-term bonds have higher yields than long-term ones — have previously been good recession predictors.

Another is that there appears to be a subtle shift in investor psychology. The issue revolves around the explanations for negative rates. When these first appeared, investors and economists tended to assume that the pattern reflected idiosyncratic events, such as the 1997 Asian financial crisis, the 2008 financial crisis and eurozone debt dramas — and “emergency” (supposedly temporary) central bank easing.

Today it is hard to blame negative rates on a specific “event”, with the possible exception of those who believe that Donald Trump’s threatened trade war will now deliver a devastating breakdown in global trade.

Instead, the investors, economists and policymakers are increasingly pointing to long-term structural explanations for the shift to negative rates. They cite demographics, specifically that the ageing of developed world populations may be suppressing demand, and speculate that technological innovation may be dragging prices down. Some also argue for secular stagnation, which is when low demand and a reluctance to invest creates a self-reinforcing downward loop.

It is hard to prove — or disprove — just how much these structural factors are to blame. Opinions at the US Federal Reserve and the European Central Bank are mixed. No wonder: another factor driving interest rates lower is the ultra accommodative stance of the central banks. The ECB and Bank of Japan have bought so many government bonds in an effort to stimulate growth that there is almost a shortage of safe assets for ordinary investors.

The bottom line is this: the more that the economic consensus quietly starts to attribute negative rates to structural issues, rather than idiosyncratic shocks or the economic cycle, the more likely they are to assume that this pattern is here to stay. They feel a diminishing sense of urgency about the need to hedge against future rate rises.

That might not matter in the short term. Rates seem likely to stay very low for the foreseeable future given rock-bottom inflation in many places and dovish central banks. However, it leaves investors and public sector institutions exposed to nasty potential losses if rates suddenly rise due to unforeseen economic or political shocks.

That might seem hard to visualise now. But a decade ago it was even harder to imagine negative rates in Germany’s mortgage bond market. Now more than ever, politicians and investors need to talk about this growing risk — and retain their sense of imagination in this Alice in Wonderland world.

Government contracts become Amazon’s new target market

Companies complain that the tech giant may take their business as it has in retail

Rana Foroohar

Should Amazon be the US government’s Everything Store? It’s a question being raised as a small but seismic tweak has made its way into the legislation governing how the federal government buys its annual $50bn-worth of commercial goods — from machinery, to potato chips, to toilet paper.

Thanks to what has become informally known as the “Amazon Amendment” to the 2018 National Defense Authorization Act, government officials must come up with an ecommerce solution for all purchasing — and wholesalers are complaining it will allow Amazon to eat their lunch, just as it has in retail.

Amazon started courting government business a few years ago, and in 2017 signed a lucrative deal with 1,500 local public agencies, which was criticised by non-profit advocacy groups like the Institute for Local Self-Reliance, alleging that the deal would leave the public sector paying more, rather than less, for goods. Last year, Amazon almost nabbed a $10bn Pentagon cloud computing contract before the deal was squashed, in part due to complaints from competitors that Amazon had hijacked the bidding process. It is now a run off between Microsoft and Amazon.

The National Association of Wholesaler-Distributors, a group that represents the biggest companies in a sector worth $5.6tn in sales a year, is waging a public relations war to try and ensure that its members don’t lose government contracts to Amazon. In particular the trade group is upset that the General Services Administration, the part of the government tasked with figuring out which ecommerce model to use, is piloting only an “e-marketplace” version that they, and a number of others, including ILSR, believe will favour a single player. Other ecommerce options, such as a government-managed portal for multiple suppliers, were discarded.

“By designating one, and only one, channel to reach the government customer, core antitrust and broad competitive precepts are assailed,” wrote NAW president Dirk Van Dongen in a February letter to lawmakers. His members’ businesses could be under threat, too. The GSA has said nothing about capping the fees Amazon could charge sellers. Wholesalers and the ILSR worry that sellers could be hit with as much as a 15 per cent fee on the value of goods sold. Amazon would not confirm or deny that number, saying that “fees vary”.

As importantly, these companies could be vulnerable to having their data mined. That would put them at risk of being undercut by Amazon’s own private label lines. The ecommerce group has in the past been accused, by some retailers, of monitoring third party sales on its platform, and then using that information to dominate competitors. Amazon, for its part, says that it invests heavily to help third-party sellers, and that they, as a whole, outperform the company’s own retail division.

So if the wholesalers don’t like the Amazon model, why don’t they simply get together and create their own platform? After all, there’s nothing in the legislation that precludes another e-marketplace from capturing government business. This has not happened, says Stacy Mitchell, the co-director of ILSR, because “many of the specific requirements that the GSA outlines strongly favour Amazon and make it highly unlikely that another platform provider could compete.”

Even if they could, it may be too late. “Amazon is incredibly good at what it does,” admits Mr Van Dongen. What’s more, traditional companies would have to embrace the competition and collaboration mix inherent in the e-marketplace as practised by Amazon. Coming together to share technology and data would be a major culture shift as has been the case in other industries.

Mr Van Dongen says his members don’t mind competition, and are all for more government efficiency via ecommerce. But they believe this is a fight, as he puts it, about “how the game is played”. Amazon, say rivals, has used its outsize Washington influence — it lobbies on more issues than any other company — to stack the deck. Amazon hired Barack Obama’s chief procurement officer, Anne Rung, who has since had email exchanges with an official in the Trump administration about how the GSA process should roll out. Amazon says Ms Rung has been compliant with White House ethics rules.

“Amazon is trying to make fundamental changes to federal procurement standards,” says ILSR researcher Zack Freed. “Right now, there are standards around transparency and pricing in government procurement.” An Amazon model, he believes, “would preclude that”.

But would it save taxpayers money? Maybe not. One 2017 study done by the Naval Postgraduate School, comparing existing GSA purchasing systems to Amazon, found that the GSA programme offered the lowest prices 80 per cent of the time. Still, purchasers preferred the ease of using Amazon.

But that may be part of the problem. The idea that buying stuff for the government should be as easy as buying it for yourself — no matter what the costs in transparency — is Amazon’s framing. But the public sector is not a household. If businesses and citizens feel that the purchasing process has become captured, it will be a net loss to the government — and society as a whole.

The U.S. vs. Iran

Tense Rhetoric Pushes Middle East Closer to Accidental War

By Christiane Hoffmann, Susanne Koelbl, Roland Nelles, Christoph Reuter, Raniah Salloum and Christoph Scheuermann

U.S. President Donald Trump speaks at a NATO summit, flanked by Secretary of State Mike Pompeo and National Security Adviser John Bolton

With U.S. President Donald Trump and Iranian leader Hassan Rouhani trading taunts and threats, tensions between the two countries are reaching an all-time high. The slightest misstep could trigger yet another full-blown, armed conflict in the Middle East.

Three days after United States President Donald Trump called off a military attack against Iran at the last minute, his national security advisor, John Bolton, stepped up to a lectern in Jerusalem and fulminated against his archenemy.

Iran was still trying to acquire a nuclear weapon, he said, and arming the U.S.' enemies. No one should "mistake U.S. prudence and discretion for weakness," Bolton said, adding that his country's military was "rebuilt, new and ready to go." It sounded as if he wanted to declare war with Iran right then and there.

Bolton is a central figure in the conflict between the U.S. and Iran. For years, he's pushed for a military strike against the Middle Eastern nation. "We are watching and we will come after you," Bolton said in September. When Iranian forces shot down a U.S. drone from the sky last week, it was Bolton -- along with Secretary of State Mike Pompeo and CIA Director Gina Haspel -- who urged the president to retaliate.

Is this how wars begin?

The U.S. and Iran have been at odds for four decades, though the danger of their hostility escalating into armed confrontation has never been greater. For weeks, the U.S. has been bolstering its presence in the Persian Gulf. Trump has boxed Tehran into a corner with his campaign of "maximum pressure" and Iran has been reacting increasingly aggressively. A volatile mix of threats, provocations and ultimatums is brewing in the region.

This week, Trump threatened the "obliteration" of parts of Iran. He was lashing out after Iranian President Hassan Rouhani called the White House "mentally disabled."

At the heart of this mutual animosity are decades of offenses, economic interests and vying for dominance in the region. On the one side is the American superpower, with the largest armed forces and the strongest economy in the world. It is prepared to use its economic clout as a weapon to enforce global sanctions against Iran. Washington has its allies in the region, including a nuclear-armed Israel and the Kingdom of Saudi Arabia.

On the other side is the Islamic Republic of Iran, the leading regional power in the Middle East, with its army of allied militias and armed groups reaching all the way from Lebanon to Pakistan. It is a massive non-governmental force of tens of thousands of men who listen to Tehran's orders. On top of this, Iran can count on the goodwill of Russia.

Somewhere on the periphery of all this -- passive, and therefore lacking all influence -- are Germany and Europe. Wars begin when there are no more channels of communication and everyone misjudges their opponent's motives and intentions.

No Way to Save Face

On Monday, Trump signed a directive that imposed sanctions against Iran's supreme leader, Ayatollah Ali Khamenei. It's hard to imagine Khamenei would support talks with his adversary in Washington under these conditions. And if the White House also imposed a travel ban against Iran's moderate foreign minister, Javad Zarif, it would alienate one of the last remaining high-ranking Iranian interlocutors willing to travel to the U.S.

German Foreign Minister Heiko Maas' trip to Tehran two weeks ago was a flop. The Germans didn't have anything to offer the Iranians. If anything, Maas' visit convinced Tehran that the Europeans cannot be counted on.

Wars also happen when there doesn't appear to be a face-saving way out for either side. The Iranians will not come to the negotiating table on their knees. With its sanctions against oil exports, the U.S. is shortening the lifespan of the regime in Tehran -- which will do anything it can to survive.

Iran has apparently pivoted from a strategy of patience to one of pinpricks. It means to show the U.S. that its "maximum pressure" comes at a price. Attacks have been carried out against American facilities in Iraq, though no one has taken credit for them. Houthi militias in Yemen have intensified their attacks against the U.S. ally Saudi Arabia. An oil tanker burned near the Strait of Hormuz, and though it's not entirely clear who attacked it and five other ships, the government in Tehran has long made it known that it considers the world's most important trading route for oil to be part of its strategic capital. If Iran can't export oil, then other countries shouldn't be allowed to do so either.

A Danger of Being Misunderstood

Wars sometimes happen by mistake. What if an American soldier were to be killed in Iraq by pro-Iranian militias?

In Washington, many of the details of the conflict with Iran bear the signature of John Bolton. He's been urging the president to take a harder stance against Tehran for months and has even been advocating military action. It wasn't Trump, but Bolton who announced in May that he was sending a combat unit led by the aircraft carrier Abraham Lincoln as well as a bomber squadron toward Iran's territorial waters in the Persian Gulf.

Trump doesn't want a military conflict. On the contrary, he means to draw U.S. forces out of the costly wars in the Middle East. But he's using the might of the American military to threaten Tehran, like he did with North Korea. It became clear last week that this double strategy isn't working so well.

For months, advisers to the president have vowed to retaliate if Iran attacked American soldiers or U.S. allies in the Middle East. In May, John Bolton warned, "Any attack on United States interests or on those of our allies will be met with unrelenting force." It didn't sound like he was talking about sanctions against the Iranian economy, but about war.

Then last week, Iran's Revolutionary Guard shot down a U.S. drone. Tehran said the drone had crossed into Iranian airspace. The Pentagon maintains the aircraft was over international waters.

At the White House, the Department of Defense presented the president with plans for retaliatory strikes. According to the New York Times, Trump at first approved the plans but then changed his mind 10 minutes before the operation was set to begin. The president wants to bring the regime in Tehran to the negotiating table. He wants to show strength. But he has underestimated the Iranians' persistence. Now all Trump can do is escalate or give in.

Many Republicans in the Senate and Congress consider the prospect of war with Iran risky and unnecessary, though there is an influential group of Congresspeople that supports Bolton's hard line. "The only thing Iran and every other thuggish regime understands is Strength and Pain," Sen. Lindsey Graham wrote on Twitter. The senator from South Carolina, an ally of Trump's, suggested the president should sink Iran's navy and bomb its refineries should Tehran endanger shipping in the Persian Gulf again.

The former U.S. Secretary of Defense Leon Panetta told DER SPIEGEL in an interview that he considered the current situation very dangerous. "If you struck targets in Iran, missile sites or military installations or other targets," he said, "Iran would literally respond, either by shooting missiles at our military bases in the Gulf or having missiles fired towards Israel."

Unrealistic Expectations

Wars happen when one side believes it can easily win.

Bolton's allies in Congress believe Iran could quickly be defeated. For what it's worth, neoconservative hardliners said the same thing about Iraq in the run-up to the Iraq War. Sen. Tom Cotton recently said that a military conflict with Iran wouldn't have to last long. Only two strikes would be necessary, he said: the first and the last.

Bolton's problem is that the president requires Congressional approval if American soldiers are to be involved in an armed conflict. At the moment, it doesn't appear likely that Trump would receive a majority of support for such a deployment. The Democrats are against him. Bolton's allies in the White House are therefore trying to come up with a workaround. To the surprise of many observers, Secretary of State Mike Pompeo claimed in April that there were links between Iran and al-Qaida. If such an assertion could be proven, military operations against Iran could fall under the jurisdiction of the U.S.' ongoing fight against terror.

Like Trump, Iran has no interest in going to war with the U.S. The regime knows it could never win such a conflict. But the U.S.' abandonment of the nuclear deal strengthened the forces within Iran who oppose any sort of rapprochement with Washington: conservative hardliners and their armed forces -- the Revolutionary Guard.

An Elite Fighting Force

Supreme Leader Khamenei and his followers created a two-track system of power in 1979. On the one hand, there is the state with its limited democracy, the parliament, a president and the regular armed forces. On the other, there is the so-called Sepah-e Pasdaran, known internationally as the Islamic Revolutionary Guard Corps. It was first created as a protective force against the "enemies of the revolution."

Over the past 40 years, the Revolutionary Guard has developed into a force with its own economic empire. It dominates large swaths of the Iranian economy, controlling airports, oil rigs and companies. The 125,000 troops within its ranks answer only to the "revolutionary leader." Since the death of Ayatollah Khomeini, the founder of modern Iran, in 1989, Ali Khamenei has held this position.

The Revolutionary Guard, however, has benefitted from Western sanctions for many years. It was they who filled many of the gaps left behind by Western corporations under hardline Iranian President Mahmoud Ahmadinejad. They also created a network of smugglers, middlemen and dubious suppliers who transported banned goods into the country.

Soon after the revolution, the Islamic Republic exported its militia model to the surrounding neighborhood. In Lebanon, the Revolutionary Guard began establishing Hezbollah -- the Shiite group with its own militia -- in 1982. To this day, Hezbollah has successfully fended off any attempt to subordinate its estimated 20,000 fighters to the Lebanese government or to submit to any form of state authority.

Shiite militias emerged in Iraq, too, after the U.S. invasion in 2003. In 2014, several of these militias banded together to form the Hashd al-Shaabi, or Popular Mobilization Forces. They are financed, but not controlled, by the Iraqi state. The three most powerful of these militias are under the direct command of the Revolutionary Guard.

A Powerful Commander

In Syria, Hezbollah came to the aid of the embattled army of the dictator Bashar Assad in 2012. They were followed by tens of thousands of fighters recruited in Iraq, Afghanistan and Pakistan. Without the help of this Shiite fighting force, Assad wouldn't have stood a chance. Even the intervention of the Russian air force in 2015 would have been too little, too late.

The chain of command for all of these groups can be traced to the Iranians, or more precisely, to Qasem Soleimani, the commander of the Quds Force, an arm of the Revolutionary Guard responsible for foreign operations. Soleimani has acquired a kind of pop star status through the wars in Syria and Iraq, where he has allowed himself to be photographed on the front lines with a Palestinian scarf around his shoulders and his gray beard neatly trimmed.

Yet even Soleimani's most loyal adherents in Lebanon and Iraq have no interest in a large-scale war with the U.S. No one wants to see the region bombed. In Iraq, even the most radical commanders warn of a war that would destroy the country.

America's wars in Iran's neighboring states began with a clear goal: regime change. The U.S. and its allies overthrew the Taliban in Afghanistan and Saddam Hussein in Iraq, but the country's archenemy, the Islamic regime in Iran, is still in power today.

The attempt to destabilize the Iranian government through sanctions hasn't worked so far. There is massive dissatisfaction over the country's economic plight, and Iranians are desperate and angry -- not only because of the American sanctions, but also due to the corruption and maladministration by their own rulers.

Protests and unrest are frequent, and people often take to the streets to protest in Tehran or in other cities. But the protests haven't yet grown into any kind of movement that could become dangerous for the regime. It is lacking direction, a leadership figure and a political program.

Iranians Are Used To Uncertain Times

"The economy is very strongly affected by sanctions," says Bijan Khajehpour, managing director of the Vienna-based management consultancy Eunepa, "but that doesn't threaten the regime's stability." He said Iranians don't want to risk the country slipping into a civil war as happened in Iraq and Syria.

The Iranians are used to uncertain times. The U.S. has imposed sanctions on the country for almost four decades. These days, though, the mood in the Iranian capital seems nervous and depressed. Tehran residents are constantly following the news, on their mobile phones and on the television screens on the walls of their cafés.

Iran's economy has been in a state of free fall since the U.S. pulled out of the nuclear agreement. The dollar exchange rate has more than doubled within a year, and President Rouhani's government has failed to stop the rampant rise in basic food prices. The International Monetary Fund forecasts that inflation could reach 40 percent or more this year and that gross domestic product will shrink by around 6 percent. A few weeks ago, Iranian economic experts lamented the fact that around half of the Iranian population is now living below the poverty line.

"The value of our savings is decreasing by the day. Everything is unpredictable. This stress is driving everyone crazy," says Azadeh, 42, a psychologist and university lecturer from northern Iran. "The young people have no faith in the future," she says by phone, "they wonder why they should study, because their earnings will never be enough to live on. They're constantly thinking about leaving the country. Anywhere, regardless where."

Ahmad, 50, is an employee with a company in Tehran that sells machine parts. Although business has further deteriorated as a result of the new sanctions, Ahmad believes that the pressure from the Trump administration has done more to stabilize the regime. "The U.S.' withdrawal from the nuclear agreement led many Iranians to back our religious leadership again," he says. "Now everyone has come to understand that America can't be relied on."

Is this how wars start? Any day now, Iran is expected to exceed the amount of lowly enriched uranium permitted under the nuclear agreement and thus officially breach the treaty. Soon after, the ultimatum that Iran has given to the remaining signatories of the nuclear deal expires. Even after that, it isn't expected that Tehran will terminate the agreement, but it is likely that it will adhere to it less and less.

A Closer Alliance with Russia

According to Iranian observers, Tehran is assuming that UN sanctions won't get reintroduced despite these actions, under the assumption that the Russia and China would veto that step at the Security Council. That would be a triumph for Tehran, too, given that there hasn't been a single pro-Iranian vote in the council in the past 40 years.

Iran is no longer hoping for the Europeans' support and is instead forging an even closer alliance with Russia. As in Syria, Moscow appears to be trying to exploit the errors and weaknesses of the West to expand its influence. Moscow is ignoring U.S. sanctions and stepping up trade with Iran and has recently signed a number of investment contracts, notably in Iranian infrastructure.

Tehran also received political support from Moscow this week. On Tuesday, the Kremlin publicly backed the Iranian version of the incident in which the American drone was shot down, with Russian security adviser Nikolai Patrushev saying there is evidence the U.S. violated Iranian airspace. He made the statement in Jerusalem, at a meeting with his U.S. counterpart, John Bolton.

Marin Katusa: This Gold Bull Market Is For Real

In his latest report, commodities analyst Marin Katusa lays out the case for a sea change in gold’s relationship to the overall market. Here’s hoping he’s right:

Gold Just Had Its Biggest One Day Influx EVER
On Friday June 21st, the largest gold focused Exchange Traded Fund (GLD) saw over $1.5 billion flood into the ETF. 
The inflow that day was over 10% higher than the 2nd largest ever inflow. That happened on July 11, 2008. 
Last week, we witnessed the single largest inflow day ever in the ETF’s history, which was created just before the 2008 financial crisis. 
And this will have massive implications for gold investors. 
So pay attention… 
Below is a chart which shows the weekly inflows and outflows of the GLD ETF since 2013. 
GLD inflows gold bull market
It’s no wonder that Gold is at a 5 year high and recently broke a 5 year resistance line… 
Gold five year high gold bull market
Gold Rush – Follow the Fund$ Flow 
A metric we follow very carefully is this: 
• Which sectors are “passive” funds directing their capital into? 
It’s been many years since the passive funds have paid attention to gold. 
More importantly, the passive funds have just started their influx of capital into the gold sector. 
And if you understand how the algorithms work (which us math nerds do), the algo’s and passive funds chase gains and liquidity. 
The gold sector is tiny compared to other sectors like the financial sector or bio tech sector. Thus… 
It doesn’t take a lot of new capital to send the share prices soaring. Let me explain… 
Below is a chart which shows the weighting of gold stocks in the S&P 500. 
gold S&P gold bull market
The reduction from 0.30% to 0.07% sent the gold market into the worst bear market in history. 
That is what the opportunity is in the gold sector. 
As you’ll see in the chart, the weighting has recently spiked back above 0.10%. 
The 30 year weighting average is 0.234% 
If the gold weighting doubles from here… 
Which would still be less than the 30 year average… 
The gold sector will be one of the hottest markets in the world. 
And we will see multiple ten baggers in short order. 
The great thing about the niche sectors is it takes a long time for the passive, generalist fund manager to rotate their capital into gold stocks. A savvy investor can get in front of the herd and make a killing. 
How You Can Make Money in This Cycle 
History shows that resource stocks move in cycles. Especially gold stocks. 
There’s a reason why gold bugs go nuts… 
There’s no rush quite like a gold rush. 
And throughout the last fifty years there have been many major (and some minor) gold rushes where the gold stocks went absolutely ballistic.

Saudi Energy Conundrum Deepens With Gas Deal

Saudi Aramco’s partnership with Sempra is smart, but also an admission that the country’s most valuable commodity is becoming far less so

By Lauren Silva Laughlin

An oil tank at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia. Photo: ahmed jadallah/Reuters

Saudi Arabia has finally found a deal that makes sense. After forays into companies such as Uber, state-controlled oil giant Saudi Aramco has lined up a deal to buy liquefied natural gas from U.S. utility Sempra Energy . SRE +0.47%▲

It gives the kingdom access to a business it knows and a commodity that has recently attracted its focus. But the investment also underscores the challenges it faces as petroleum’s supremacy recedes.

Aramco has agreed to make an investment in Sempra Energy’s infrastructure project in Port Arthur, Texas, which is fast becoming a hub for U.S. natural gas exports. As part of the deal, it will have the opportunity to purchase 5 million tons per annum of LNG and a 25% equity interest in the project.

For its part, Sempra needed a partner. Last summer Australian investor Woodside Petroleumdecided not to commit equity to the project. Woodside Chief Executive Officer Peter Coleman said, according to Reuters at the time, that it would struggle to produce adequate returns.

Small wonder why. The U.S. is becoming a major natural gas exporter as production of the commodity has grown along with oil out of West Texas basins. Infrastructure projects are expensive, but the price of LNG in key export markets has fallen almost 70% since late 2015. As of February it fetched around $5 per thousand cubic feet, according to the U.S. Energy Information Administration, making it a much less lucrative equation for U.S. producers.

Enter the Saudis, who for the past few years have been trying to sort out a future in which oil is a less-valuable commodity. A shock to prices in 2014 through early 2016 sent Brent crude plummeting 75%. Crown Prince Mohammed bin Salman set out to revamp the country’s economy and in 2016 launched Vision 2030.

The ambitious plan is meant to transform Saudi Arabia from an oil-dependent country to one that focuses on logistics and tourism, as well as solving the world’s problems from water to power. Getting there will consume an awful lot of electricity.

In 2015, Saudi Arabia held the world’s sixth largest gas reserves. That is a lot. But producing that gas is tricky, and the country has gaps in its power needs, particularly during the summer months. To fill them, it burns oil. It might as well be torching dollar bills. Jadwa Investment, a Riyadh-based Sharia-compliant investment bank, noted that Saudi Arabia could save $71 for every barrel of crude oil substituted by a barrel of equivalent of gas in electricity generation in 2030.

In its bond prospectus this year, Aramco noted this as a risk. Gas demand is expected to grow 3.7% annually between 2017 and 2030 and demand could exceed the company’s ability to produce more. That might require imports—a spur for the partnership announced last week.

But Saudi Arabia’s move is also a nod to global trends in hydrocarbons. Electricity demand could rise 90% through 2040 under some scenarios laid out by the International Energy Agency. Oil use for cars, meanwhile, could peak in the mid-2020s.

Saudi Arabia needs more income if it is to pay for its cities of the future, or even today’s bills. Although it has some of the lowest oil production costs, the International Monetary Fund says the country needs oil to be around $80 to $85 a barrel in order for it to balance its Budget.

The investment in gas, then, is a way to secure a commodity it will itself demand as well as a hedge against a murky future for its main source of income. The trouble is that it is late to the game. Oil majors and national oil companies are hastening the switch to gas from other fuels and depressing returns. According to the U.S. Energy Information Administration, if investments in natural gas technology and resources pick up, prices will hover around their current level through 2050.

Saudi Arabia’s investment, then, is rich with irony. Pivoting its economy away from fossil fuels requires building cities in the desert, which in turn requires vast resources of a fossil fuel it needs. It isn’t the best reason to buy into a commodity. But if we really are headed for a world of cheap and plentiful gas then there are worse outcomes for a power-hungry country with an eye on the future.

lunes, julio 01, 2019



Beyond Unemployment

In modern economies, people may have jobs, but they still harbor major concerns in a wide range of areas, including security, health and work-life balance, income and distribution, training, mobility, and opportunity. By focusing solely on the unemployment rate, policymakers are ignoring the many dimensions of employment that affect welfare.

Michael Spence


MILAN – For much of the post-World War II period, economic policy has focused on unemployment. The massive job losses of the Great Depression – reversed only when World War II, and the massive debt accumulated to finance it, kick-started economic growth – had a lasting impact on at least two generations. But employment is just one facet of welfare, and in today’s world, it is not enough.

The growth patterns between WWII and about 1980 were largely benign. There were recessions, but unemployment remained low. Labor’s share of income rose gradually, with middle-income groups, in particular, achieving greater prosperity and upward mobility. In the United States and elsewhere, the central bank’s mandate was straightforward: maintain full employment and keep inflation under control.

This unemployment-focused mindset endures today. It is reflected, for example, in discussions on artificial intelligence and automation, which increasingly focus on fears of technological unemployment. The US economy is considered to be relatively healthy, because unemployment is at historical lows, growth is moderate, and inflation is subdued.

But the benign growth patterns of a few decades ago no longer exist. To be sure, there are economies whose principal problems do lie in growth and employment. In Italy, for example, GDP growth has been negligible for two decades, and unemployment remains high, at over 10%, with youth unemployment standing at nearly 30%. Similarly, in early-stage developing economies, the main overriding goal of policy is employment growth, in order to provide opportunities to young people entering the labor market and to the poor and underemployed in traditional sectors.

Jobs, however, are just the first step. In modern economies, employment challenges are multidimensional, with employed people harboring major concerns in a wide range of areas, including security, health and work-life balance, income and distribution, training, mobility, and opportunity. Policymakers should thus be looking beyond simple measures of unemployment to consider the many dimensions of employment that affect welfare.

Consider job security. In periods of rapid structural change, jobs are created, destroyed, and transformed, and the skills demanded of the labor force change. Even with supportive policies and programs, this generates insecurity; matters become much worse when the government leaves the stage.

Even when workers have not lost their jobs, their welfare may be undermined by the fear that they will. After all, at a time of increasingly extreme levels of wealth inequality, relatively few have the capacity to self-insure against employment and income shocks or to invest heavily in retraining. According to a recent survey by the US Federal Reserve, four in ten American adults wouldn’t be able to cover an unexpected $400 expense with cash.

In this context, the design and coverage of social security systems and social services become even more important. Yet, far from bolstering social safety nets, some governments and companies are trying to save money by outsourcing functions relating to benefits like health care, pensions, and unemployment insurance.

Another dimension of the employment challenge is income. A pattern of increasing job and income polarization has been documented in most, if not all, developed economies, driven partly by the growing gap between (rising) productivity and (stagnant) compensation for many low- and middle-income jobs.

With many lower-skill jobs having moved abroad or been automated, the supply of labor for non-automatable work in non-tradable economic sectors has expanded. The lower marginal product of lower-skill labor, together with the decline in effective collective-bargaining mechanisms, has helped to fuel income inequality. While countermeasures, such as redistributive tax policies, have mitigated the trend somewhat in some countries, they have not reversed it.

A third dimension of the employment challenge is fairness. Most people understand that market-based economies do not produce entirely equal outcomes, owing to differences in capabilities and preferences. But broad acceptance of inequality requires that it be moderate and merit-based. Extreme inequality based on privileged, non-merit-based access to opportunities and compensation – something that can be seen in many countries today – is socially corrosive.

This is closely linked to a fourth issue: prospects for upward mobility. To some extent, inequality of opportunity may be overstated nowadays, at least in the US. It is widely assumed that once a person manages to join a particular network – say, by attending an Ivy League university – their access to job opportunities and thus their prospects of social and economic advancement are substantially improved.

There is undoubtedly some truth to this. Markets do have network structures, which may not appear in most models but matter in almost every sphere. Some of these structures – such as mechanisms for transmitting reliable information – are benign. Others – such as those rationed according to social class or, today, wealth – are more problematic.

For example, as the recent college admissions scandal involving eight prestigious US universities shows, wealthy parents have been able to buy their children’s way into the educational elite. But while a degree from a top university can open doors, whether by signaling extraordinary ability or conferring membership in influential alumni networks, that is far from the only way to gain access to valuable opportunities.

In the US, in particular, there are a large number of quality institutions of higher education, both public and private, with distinguished graduates in a wide range of areas, from business to the arts to education. The pathways to opportunity are thus not nearly as narrow as many seem to believe.

This is not to say that declining upward mobility, both relative to the past and compared with other Western countries, is not a problem. On the contrary, there has been useful research into the causes of this trend, and this research should inform policy.

And that is precisely the point: there are no simple solutions. One figure – the share of people with jobs – can no longer be considered sufficient to measure the health of an economy, let alone the wellbeing of its labor force. That will require a nuanced approach that addresses the many dimensions of employment that affect human welfare.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.

The 3 Most Bearish Charts

by: Michael A. Gayed, CFA
- The tariff war is likely to cost US households $800 if it continues to escalate.

- Earnings don't look that impressive.

- Global PMI has declined for 12 straight months.


“There are risks and costs to action. But they are far less than the long range risks of comfortable inaction.”  
- John F. Kennedy
As much as I’ve been negative on equities in my most recent writings, let me be very clear that I have no dog in this fight. I’m tactical in my thinking and analysis. My objective is to play the cards I’m dealt since I don’t get to choose them.
Having said that, there are several interesting data points which are worth considering for those that are of the same mindset as I am about near-term risks and divergences that could cause a Spring Crash in the S&P 500 (SPY). A few observations I made on Twitter likely will tickle your inner bear, while anger bulls. Don’t get emotional, don’t get set in your thinking.
Simply take these for what they’re worth and consider them in the context of what you hear in the news, and how you manage your portfolio.
Yields matter. Interest rates are the heart, soul, and life of the free enterprise system. And while everyone seemingly got hyped about the "end to the secular bull market in bonds," if history is any guide, 2-year yields may be warning of a recession looming. This is consistent with the message coming out of Lumber and the potential follow-through in home construction stocks. Pro tip: when housing goes bad, so too tends to be risk sentiment.
Not just a US phenomenon of course. Global PMI frankly looks scary in the face of equity markets that appear on many metrics to be disconnected from reality following the December lows of last year.
Will bears ultimately be right in the near term? Or are these all false positives for risk? I have no clue frankly. All I know is that probabilities don’t favor bulls, and that gray-haired bears might be getting their dancing shoes on soon enough. Bonds, which continue to be villified, might actually end up being the hero for your portfolio if these charts are indeed a warning that something wicked comes this way.