Four Collision Courses for the Global Economy

Between US President Donald Trump's zero-sum disputes with China and Iran, UK Prime Minister Boris Johnson's brinkmanship with Parliament and the European Union, and Argentina's likely return to Peronist populism, the fate of the global economy is balancing on a knife edge. Any of these scenarios could lead to a crisis with rapid spillover effects.

Nouriel Roubini

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NEW YORK – In the classic game of “chicken,” two drivers race directly toward each other, and the first to swerve is the “loser.” If neither swerves, both will probably die. In the past, such scenarios have been studied to assess the risks posed by great-power rivalries. In the case of the Cuban missile crisis, for example, Soviet and American leaders were confronted with the choice of losing face or risking a catastrophic collision. The question, always, is whether a compromise can be found that spares both parties their lives and their credibility.

There are now several geo-economic games of chicken playing out. In each case, failure to compromise would lead to a collision, most likely followed by a global recession and financial crisis. The first and most important contest is between the United States and China over trade and technology.

The second is the brewing dispute between the US and Iran. In Europe, there is the escalating brinkmanship between British Prime Minister Boris Johnson and the European Union over Brexit. Finally, there is Argentina, which could end up on a collision course with the International Monetary Fund after the likely victory of the Peronist Alberto Fernández in next month’s presidential election.

In the first case, a full-scale trade, currency, tech, and cold war between the US and China would push the current downturn in manufacturing, trade, and capital spending into services and private consumption, tipping the US and global economies into a severe recession.

Similarly, a military conflict between the US and Iran would drive oil prices above $100 per barrel, triggering stagflation (a recession with rising inflation). That, after all, is what happened in 1973 during the Yom Kippur War, in 1979 following the Iranian Revolution, and in 1990 after Iraq’s invasion of Kuwait.

A blowup over Brexit might not by itself cause a global recession, but it would certainly trigger a European one, which would then spill over to other economies. The conventional wisdom is that a “hard” Brexit would lead to a severe recession in the United Kingdom but not in Europe, because the UK is more reliant on trade with the EU than vice versa. This is naive.

The eurozone is already suffering a sharp slowdown and is in the grip of a manufacturing recession; and the Netherlands, Belgium, Ireland, and Germany – which is nearing a recession – do in fact rely heavily on the UK export market.

With eurozone business confidence already depressed as a result of Sino-American trade tensions, a chaotic Brexit would be the last straw. Just imagine thousands of trucks and cars lining up to fill out new customs paperwork in Dover and Calais. Moreover, a European recession would have knock-on effects, undercutting growth globally and possibly triggering a risk-off episode. It could even lead to new currency wars, if the value of the euro and pound were to fall too sharply against other currencies (not least the US dollar).

A crisis in Argentina could also have global consequences. If Fernández defeats President Mauricio Macri and then scuttles the country’s $57 billion IMF program, Argentina could suffer a repeat of its 2001 currency crisis and default.

That could lead to capital flight from emerging markets more generally, possibly triggering crises in highly indebted Turkey, Venezuela, Pakistan, and Lebanon, and further complicating matters for India, South Africa, China, Brazil, Mexico, and Ecuador.

In all four scenarios, both sides want to save face. US President Donald Trump wants a deal with China, in order to stabilize the economy and markets before his re-election bid in 2020; Chinese President Xi Jinping also wants a deal to halt China’s slowdown. But neither wants to be the “chicken,” because that would undermine their domestic political standing and empower the other side. Still, without a deal by year’s end, a collision will become likely. As the clock ticks down, a bad outcome becomes more likely.

Similarly, Trump thought he could bully Iran by abandoning the Joint Comprehensive Plan of Action and imposing severe sanctions. But the Iranians have responded by escalating their regional provocations, knowing full well that Trump cannot afford a full-scale war and the oil-price spike that would result from it.

Moreover, Iran does not want to enter negotiations that would give Trump a photo opportunity until some sanctions are lifted. With both sides reluctant to blink first – and with both Saudi Arabia and Israel egging on the Trump administration – the risk of an accident is rising.

Having perhaps been inspired by Trump, Johnson naively thought that he could use the threat of a hard Brexit to bully the EU into offering a better exit deal than what his predecessor had secured. But now that Parliament has passed legislation to prevent a hard Brexit, Johnson is playing two games of chicken at once. A compromise with the EU on the Irish “backstop” is still possible before the October 31 deadline, but the probability of de facto hard-Brexit scenario is also increasing.

In Argentina, both sides are posturing. Fernández wants a clear electoral mandate, and is campaigning on the message that Macri and the IMF are to blame for all the country’s problems. The IMF’s leverage is obvious: if it withholds permanently the next $5.4 billion tranche of funding and ends the bailout, Argentina will suffer another financial collapse.

But Fernández has leverage, too, because a $57 billion debt is a problem for any creditor; the IMF’s ability to help other distressed economies would be constrained by an Argentinean collapse. As in the other cases, a face-saving compromise is better for all, but a collision and financial meltdown cannot be ruled out.

The problem is that while compromise requires both parties to de-escalate, the tactical logic of chicken rewards crazy behavior. If I can make it look like I have removed my steering wheel, the other side will have no choice but to swerve. But if both sides throw out their steering wheels, a collision becomes unavoidable.

The good news is that in the four scenarios above, each side is still talking to the other, or may be open to dialogue under some face-saving conditions. The bad news is that all sides are still very far from any kind of agreement. Worse, there are big egos in the mix, some of whom might prefer to crash than be perceived as a chicken. The future of the global economy thus hinges on four games of daring that could go either way.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

The digital assembly line

Technology firms vie for billions in data-analytics contracts

Two surprising leaders have emerged from the pack

SOMEBODY LESS driven than Tom Siebel would have long since thrown in the towel. In 2006 the entrepreneur, then 53 years old, sold his first firm, Siebel Systems, which made computer programs to track customer relations, to Oracle, a giant of business software. That left him a billionaire—but a restless one.

In 2009, a few months after Mr Siebel had launched a new startup, he was trampled by an elephant while on safari in Tanzania. When, a dozen surgeries later, he could work again, the enterprise almost went bankrupt. Undeterred, he rebooted it.

Mr Siebel’s fortitude has paid off. The firm, now called, raised $100m in venture capital last year, valuing it at $2.1bn. It was an early bet on data analytics, which converts raw data (from a machine’s sensors or a warehouse) into useful predictions (when equipment will fail or what the optimal stocking levels are) with the help of clever algorithms. Many investors see fortunes to be made from this new breed of enterprise software, which is spreading from Big Tech’s computer labs to corporations everywhere.

Worldwide, 35 companies that dabble in data analytics feature on a list of startups valued at $1bn or more, maintained by CB Insights, a research firm. Collectively, these unicorns—some of which brand themselves as purveyors of artificial intelligence (AI)—enjoy a heady valuation of $73bn.

According to PitchBook, another research company, the six biggest alone are worth $45bn (see chart 1). Many venture capitalists who back them are hoping to emulate the successful initial public offerings this year of less exalted business-services startups like CrowdStrike, which provides cybersecurity, or Zoom, a video-conferencing company. And then some.

As is often the case in Silicon Valley, hype springs eternal, fuelled by big numbers from consultancies. IDC reckons that spending on big-data and business-analytics software will reach $67bn this year. But it will, boosters say, at last allow businesses to see the computer age in their productivity statistics, freeing them from the shadow of Robert Solow, a Nobel-prizewinning economist, who in 1987 observed that investment in information technology appeared to do little to make companies more efficient.

Just as electricity enabled the assembly line in the 19th century, since machines no longer had to be grouped around a central steam engine, data-analytics companies promise to usher in the assembly lines of the digital economy, distributing data-crunching capacity where it is needed.

They may also, as George Gilbert, a veteran business-IT analyst, observes, help all kinds of firm create the same network effects behind the rise of the tech giants: the better they serve their customers, the more data they collect, which in turn improves their services, and so on.

Consultants at Gartner recently calculated that in 2021 “AI augmentation” will create $2.9trn of “business value” and save 6.2bn man-hours globally. A survey by McKinsey last year estimated that AI analytics could add around $13trn, or 16%, to annual global GDP by 2030.

Retail and logistics stand to gain most (see chart 2).

Data analytics have a long way to go before they live up to these expectations. Extracting and analysing data from countless sources and connected devices—the “Internet of Things”—is difficult and costly. Although most firms boast of having conjured up AI “platforms”, few of these meet the usual definition of that term, typically reserved for things like Apple’s and Google’s smartphone operating systems, which allow developers to build compatible apps easily.

An AI platform would automatically translate raw data into an algorithm-friendly format and offer a set of software-design tools that even people with limited coding skills could use. Many companies, including Palantir, the biggest unicorn in the data-analytics herd, sell high-end customised services—equivalent to building an operating system from scratch for every client.

Cloud-computing giants such as Amazon Web Services, Microsoft Azure and Google Cloud offer standardised products for their corporate customers but, as Jim Hare of Gartner explains, these are considerably less sophisticated and lock users into their networks.

The enterprising Mr Siebel

Enter, founded to help utilities manage electric grids, a complex problem that involves collecting and processing data from many sources. After its near-bankruptcy, advances in machine learning, sensors and data connectivity gave it a new lease of life—and allowed it to repackage its products for a range of industries. Crucially for corporate clients, C3’s approach grew out of Mr Siebel’s experience with enterprise software. He wanted to make data analytics hassle-free for corporate clients, without sacrificing sophistication.

3M, an American conglomerate, employs C3 software to pick out potentially contentious invoices to pre-empt complaints. The United States Air Force uses it to work out which parts of an aircraft are likely to fail soon. C3 is helping Baker Hughes to develop analytics tools for the oil-and-gas industry (General Electric, the oil-services firm’s parent company, has struggled to perfect an analytics platform of its own, called Predix).

C3’s chief rival in building a bona fide AI platform is not Big Tech or the very biggest data-analytics unicorns. It is a company called Databricks. It was founded in 2013 by computer wizards who developed Apache Spark, an open-source program which can handle reams of data from sensors and other connected devices in real time. Databricks expanded Spark to handle more data types. It sells its services chiefly to startups (such as, a travel site) and media companies (Viacom). It says it will generate $200m in revenue this year and was valued at $2.8bn when it last raised capital in February.

Though C3’s and Databricks’ niches do not overlap much at the moment, they may do in the future. Their approaches differ, too, reflecting their roots. Databricks, born of abstruse computer science, helps clients deploy open-source tools effectively. Like most enterprise-software firms, C3 sells proprietary applications.

It is unclear which one will prevail; at the moment the two firms are neck-and-neck. In the near term, the market is big enough for both—and more. In the longer run, someone will come up with AI-assisted data analytics that are no more taxing than using a spreadsheet. It could be C3 or Databricks, or smaller rivals like Dataiku from New York or Domino Data Lab in San Francisco, which are also busily erecting AI platforms. The field’s other unicorns are unlikely to give up trying. And incumbent tech titans like Amazon, Google and Microsoft want to dominate all sorts of software, including advanced data analytics.

Mr Siebel would be the first to admit that this scramble is likely to claim victims. But it certainly bodes well for buyers of data-analytics software, which is likely to become as familiar to corporate IT departments in the 2020s as customer-relations programs are today.

The ECB’s Deflation Obsession

It is hard to understand why the European Central Bank is currently so anxious to find new ways to make its policy stance even more expansionary. Its hyper-vigilance about falling prices is misplaced, and its ability to increase the rate of inflation is dubious.

Daniel Gros

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BRUSSELS – Central banks aim for price stability, and today, prices are largely stable across much of the developed world. Yet central bankers declare themselves unsatisfied. Some policymakers, most notably at the European Central Bank, are even preparing further stimulus measures aimed at convincing financial markets of their resolve to fight deflation. But such policies overestimate the risk of falling prices.

For starters, prices are not falling now; they are just increasing more slowly than central bankers would like. In the eurozone, for example, core inflation (which excludes volatile energy and food prices) is running at about 1% per year, and markets expect it to remain at this level, on average, for the next decade.

The ECB regards such low inflation as totally unacceptable. It defines “price stability” not as stable – that is, unchanging – prices, but as year-on-year eurozone inflation of “below, but close to, 2% over the medium term.” Similarly, the United States Federal Reserve and the Bank of Japan have inflation targets of 2%.

Central banks are afraid of stable prices for two reasons. The first is that the real value of debt automatically increases when prices fall. But fears of debt deflation seem overblown: because nominal interest rates are themselves close to zero, the real burden of debt would not increase even if prices remained stable. Moreover, the manageability of debt service depends mainly on whether incomes increase faster than the outstanding debt, not on whether the inflation rate exceeds the interest rate.

This is especially important for highly indebted governments (and households). But on that score, the picture is currently even more positive: nominal GDP growth in the eurozone remains around 3%, well above the interest rates on almost all member governments’ longer-term debt (the average refinancing cost across the eurozone is now close to zero).

As a result, eurozone governments are in a very comfortable position. Provided they run a primary budget balance of revenue and non-interest expenditure, their debt burden will slowly decline, relative to GDP. Households are also favorably placed: their incomes are growing by about 3%, while mortgage rates are heading toward zero. They can therefore just wait for their debt-service capacity to improve over time.

Central banks’ second reason for avoiding stable prices is that it might be difficult for prices to fall in absolute terms. In any economy, the relative prices of goods and services need to adjust in response to supply and demand shocks. So, for average prices to remain unchanged overall, some prices would still have to increase, and others would have to fall.

True, producers rarely face significant barriers to lowering the prices of most goods and services sold to consumers or other businesses. But firms generally find it much harder to reduce nominal wages to compensate for lower prices. It is better, therefore, for average wages to increase, so that those wages that need to fall do so in relative rather than absolute or nominal terms.

Yet the downward stickiness of wages is unlikely to become a concern anytime soon. Nominal wages are currently increasing by around 2.5% per year in the eurozone (and by over 3% in the US). These rates are among the highest this decade, which has been a period of strong employment growth overall.

Some may argue that average eurozone wage growth of 2.5% is not enough, and that the ECB’s expansionary monetary policy stance is thus justified. But the question remains: Should the ECB be preparing additional stimulus measures when the risk of harmful deflation is actually falling?

Moreover, downward wage stickiness can disappear, as the experience of Japan shows. In 2018, for example, Japanese wages increased by about 2%, the highest rate in over 20 years. But over the past 12 months, they have suddenly started to fall, even though labor-market conditions have not deteriorated. On the contrary: employment continues to increase and unemployment is still falling.

This is not the first time that wages have fallen in Japan, and previous episodes caused no noticeable problems. Some economists, in fact, have argued that downward wage flexibility does not seem to be a primary contributing factor to Japan’s prolonged deflation.

Central bankers today are thus facing a luxury problem: prices are increasing a bit more gently than they would like. Although inflation is below target, unemployment keeps falling to record lows, and debtors are happy. The need for occasional reductions in nominal wages seems remote in Europe and the US, and does not seem to cause trouble in Japan.

Given all this, it is hard to understand why the ECB in particular should be so anxious to find new ways to make its stance even more expansionary. Yes, economic activity has weakened over recent quarters, and survey-based indicators suggest that the global economy is poised for a slowdown. But as former US Secretary of the Treasury Lawrence H. Summers and Anna Stansbury have convincingly argued, by itself, further monetary-policy easing will do little to stimulate demand and drive inflation.

The ECB should tone down its rhetoric about the imminent risk of deflation and keep its course steady. Its hyper-vigilance about falling prices is misplaced, and its ability to increase the rate of inflation is dubious.

Daniel Gros is Director of the Centre for European Policy Studies.

The escalating trade war will deepen global gloom

Central banks adopt damage limitation mode with looser policy ahead

The editorial board

Employees work on electric bicycles at the production plant of e-bike manufacturer Riese & Mueller in Muehltal near Darmstadt, Germany, August 30, 2019. Picture taken August 30, 2019. REUTERS/Ralph Orlowski
Falling US demand for Chinese goods will reverberate through global supply chains, potentially spilling into the wider economy © Reuters

September has started badly for the global economy. The step up in tariffs on US imports from China at the beginning of the month and the deepening of manufacturing weakness in the US heightened concerns over the health of the world’s two largest economies. Service sectors globally remain resilient in the face of the manufacturing malaise, with the gap remaining at an unprecedented high in August. But with no imminent end to the trade war it is only a matter of time before the trade-related weakness in investment spills over into consumption.

Global economic momentum is set to get worse before it gets better. The persistent strength of the US dollar in this low-growth, low-confidence environment adds to the sense of unease given the potential for US action to reverse the appreciation.

The manufacturing surveys released over the past week confirmed entrenched weakness. The JPMorgan global index saw its fourth month of contraction — the longest decline since 2012. It is also the most severe. More than half of the 30 countries tracked have manufacturing sectors in decline. Europe is hurting the most, with industry-intensive Germany in freefall. The export-dependent economies in Asia have also seen sharp declines.

The less trade-dependent US manufacturing sector is now also in contraction. The official US index from the Institute for Supply Management contracted for the first time in three years in August. Forward-looking components on new orders contributed significantly to the decline. This bodes badly for any imminent pick-up. Another measure of factory output for the US remained expansionary but dropped to the lowest level in almost a decade.

The new tariffs effective from Monday will only make things worse. US president Donald Trump’s decision to increase existing tariffs on Chinese goods to 30 per cent — on top of the announcement of new 15 per cent tariffs on previously exempt, mostly consumer, goods — are not yet captured in the data. Once the new tariffs are fully implemented in December, average tariffs will stand at around 24 per cent versus just over 12 per cent at the start of the year — and just 3 per cent before Mr Trump imposed the first round of tariffs in early 2018.

This is an increase of more than four-fifths in the dollar amount of tariffs US businesses need to pay for Chinese imports since July. The jump will be increasingly felt by US consumers over the final four months of this year. Tariffs were already cited as a factor in the drop in US consumer confidence in August, the largest drop since 2012. The US Federal Reserve’s latest Beige Book — surveying activity across the central bank’s 12 districts — also cites increasing concern over tariffs.

Falling US demand for Chinese goods will continue to reverberate through global supply chains and may well spill over into the wider economy. Now is not the time for caution, and central banks globally are rightly shifting to damage limitation. The Fed is expected to cut rates again this month. The European Central Bank is also expected to ease policy next week marking the first loosening since 2016.

Lower borrowing costs can provide support to demand but cannot fully offset the supply shock from the trade war. Governments must also step in with fiscal support. This idea is finally gaining traction in Europe, particularly with Germany on the brink of recession. Christine Lagarde, the ECB president-elect, this week added her voice to the call for EU governments to launch fiscal stimulus. Given the increase in tariffs due in coming months, such support can hardly come too quickly.

A Dollar for Argentina

Argentines prefer to hold greenbacks. Why not bury the peso?

By The Editorial Board

Argentina is back in the soup, as it so often is. The prospect that Peronists might retake power has Argentines fleeing the peso for dollars, and on Monday the center-right government of PresidentMauricio Macriimposed capital controls. Here’s a better idea: Replace the peso with the U.S. dollar as Argentina’s legal tender.

The actual election is in October but the August primary victory of left-wing populists—presidential candidateAlberto Fernándezand his running mate, former presidentCristina Kirchner —has triggered a monetary panic. The demand for dollars has soared, the peso has fallen some 20% against the dollar, and central bank reserves are declining.

President Macri has done nothing to shore up confidence. After the primary vote foreshadowed a likely defeat in his bid for a second term, he announced a gasoline price freeze, a minimum-wage hike and new subsidies for special interests. This Peronism-lite did nothing to restore government credibility.

Last week Argentina failed to roll over its maturing dollar-denominated debt, and candidate Fernández, who is promoting the impression of chaos, said the country is in “virtual default.”

The capital controls will limit access to dollars for businesses and individuals. Exporters will be required to bring their hard-currency earnings back to Argentina.

Argentina needs access to capital markets but its history of stiffing creditors makes it high risk.

EconomistSteve Hankerecently wrote in Forbes that Argentina had “major peso collapses” in 1876, 1890, 1914, 1930, 1952, 1958, 1967, 1975, 1985, 1989, 2001 and 2018. Each time Argentines have had their savings, earnings and purchasing power diminished.

Now the government is telling investors that if they put their money in Argentina, they can’t be certain they can take it out. This is sure to be a drag on growth. The economy is expected to contract this year and next.

Dollarizers face resistance from the Peronist party, which relies on the inflation tax to fund its populism when revenues run low. Yet demand for dollars suggests that Mr. Macri would have popular backing for adopting the greenback as the national currency. Lawyers in Argentina differ about the legality of dollarization under the Argentine constitution, but our sources believe Mr. Macri could dollarize with the backing of a majority in Congress.

Panama has used the dollar as legal tender since 1904, and El Salvador and Ecuador dollarized in 2000. Ecuador did it to resolve a banking crisis and El Salvador did it to bring down interest rates. El Salvador and Panama now have the lowest domestic borrowing rates in Latin America and the longest maturities. Ecuador has price stability not seen in at least a half century.

One objection to dollarization is that Argentina would lose the profits a central bank earns by printing its own currency, known as seigniorage. But this is a political excuse disguised as economics. What is lost in seigniorage will be more than offset by ending peso crises.

Setting the right exchange rate also matters. Several Argentine economists propose converting short-term government paper to longer-term bonds to reduce the number of pesos that need to be exchanged for dollars in the short run. But the best rate is probably the black-market rate where the peso now trades.

Dollarization eliminates the moral hazard that central-bank rescues encourage in the banking system; international capital markets become the lender of last resort. Another benefit is that it would be nearly impossible to reverse, unlike Argentina’s one-to-one convertibility law with the dollar of the 1990s, which politicians violated when they were back in hock in the early 2000s. Argentines also ought to have the right to keep their dollars abroad if they choose. This would alleviate the worry that the government might “corral” bank accounts as it did in 2001.

A Macri decision to dollarize would break this ugly cycle by giving Argentines a store of value and a medium of exchange they can rely on. It might not save his Presidency, but it would ensure a legacy for Mr. Macri as the leader who dared to defend Argentine savings from a marauding future government.

Treasury Bonds Are Now Riskier Than Stocks

By Andrew Bary 

Adam Neumann, founder of WeWork Photograph by Kelly Sullivan/Getty Images for the WeWork Creator Awards

The backdrop for stocks improved marginally in the past week, and major indexes responded as the S&P 500 index rose almost 2%, to 2978, finishing on Friday at its highest level since late July.

The U.S. and China agreed to new trade talks in October in a sign of cooling trade tensions. August employment data reported on Friday offered more evidence of a resilient U.S. economy, with payrolls growing by 130,000 in the month and the jobless rate holding at 3.7%.

Investors are taking comfort from the expectation that the Federal Reserve will remain accommodative and cut short-term interest rates later this month by a quarter-percentage point from the current range of 2% to 2.25%.

“The market is making several assumptions,” says Blackstone Groupstrategist Byron Wien. “There will be some sort of a trade deal with China in the next six to nine months. Interest rates and inflation will remain low, and the stock market is attractive, with stocks yielding more than bonds.”

The S&P 500 dividend yield is nearly 2%, while the 10-year Treasury yields 1.55%, marking a rare time when stocks yield more than government bonds. The S&P is valued at 18 times projected 2019 profits for an earnings yield—the inverse of the price/earnings ratio—of 5.5%. That stacks up well versus the entire bond market: Treasuries, municipals, mortgage securities, and corporate bonds.

The risk in Treasuries is now greater than in stocks, and the upside potential in government bonds looks more limited. The 30-year Treasury, now yielding about 2%, near its recent record low yield, would fall 20% in price if yields rise to 3%.

The floundering prospects for an initial public offering of the We Co., parent of WeWork, shouldn’t come as a surprise. The company is exhibit A for the ills of the unicorn market—private businesses with $1 billion-plus valuations—at a time when public-market investors are souring on several of them. Uber Technologies(ticker: UBER) is down nearly 30% from its IPO price after hitting a new low this past week.

We has big operating losses ($1.4 billion on $1.5 billion in revenue in the first half of 2019), opaque financials, and grandiose ambitions. “Our mission is to elevate the world’s consciousness,” according to the prospectus.

It has a dangerous business model, with long-term leases with landlords and short-term rental agreements, and an extreme private-market valuation of $47 billion. There have been recent reports that We may be seeking to cut that valuation to as low as $20 billion in an IPO—or put off the deal entirely.

An attractive and undervalued alternative to We is a pair of leading real estate investment trusts focused on the Manhattan office market: SL Green Realty(SLG) and Vornado Realty Trust(VNO).

Despite all the fuss about Google and Facebook(FB) snapping up space in the city, Manhattan is viewed as the nation’s weakest major office market. As a result, SL Green and Vornado have badly lagged behind peers and the roaring REIT market this year. SL Green, at $81, is up 2% in 2019, and Vornado, at $63, has risen just 1%, against a 25% gain in the broad Vanguard Real Estateexchange-traded fund (VNQ).

Both SL Green and Vornado yield about 4%. The combined market value of the two REITs is $19 billion, less than the reported low-end We valuation of $20 billion.

Investors are worried about several factors: new supply in the Hudson Yards on the far West Side, the high cost of renovating old Manhattan towers, and a retrenchment in the financial-services industry. These are legitimate concerns, but they seem amply reflected in the depressed stock prices. 

Sandler O’Neill+Partners analyst Alexander Goldfarb is partial to SL Green. “Management has been doing everything that you would want them to—selling assets and buying back stock at a 30% discount to net asset value and generating growth in the portfolio,” he says.

Unlike WeWork, both SL Green and Vornado are asset rich and valued at a discount to private-market transactions in Manhattan.

The larger Vornado has the better balance sheet and could sit on $3 billion in cash following the sales of condos at a building on “Billionaires’ Row” near Central Park and from a joint venture involving its street-level retail space in Manhattan. Vornado is headed by founder Steve Roth, 77, who has brought a private-company, long-term orientation to Vornado for four decades.

There is uncertainty about the company’s direction in the post-Roth era. It is possible that Vornado could be sold—private real estate funds are bursting with money.

More than 20 years ago, Wien, then the chief domestic strategist at Morgan Stanley, wrote that Europe was in danger of becoming a “vast open-air museum.”

His warning has proved prescient. European economies have stagnated, interest rates have plunged to zero—or lower—and stock markets have badly lagged behind the S&P 500 in the past five and 10 years.

“What I meant was that Europe would remain a great place to visit, eat, and absorb the culture, but not necessarily a great place to invest,” Wien said this past week.

The issue now is whether European stocks are appealing. The Vanguard FTSE Europe ETF (VGK) has returned just 1.7% annually in the past five years, nine percentage points behind the S&P 500.

European stocks have been hampered by the lack of a dynamic tech sector and a large weighting in banks (which have badly trailed their U.S. peers), energy (one of the global markets’ worst sectors), and economically sensitive stocks like autos.

Part of the bull case for European stocks is that yield-starved European investors will gravitate to equities, given that government bond yields are low or negative, with the German 10-year Bund at -0.6%.

European dividends exceed bond yields as stock markets lag.

The stock-bond yield gap in Europe is about four percentage points, against less than a half-percentage point in the U.S. European stocks trade for 14 times projected 2019 earnings, a discount to the S&P 500 at 18 times. And European companies greatly favor dividends over stock buybacks. The result is dividend yields averaging close to 4%. For income-seeking U.S. investors, Europe beckons.

Among European stocks, Royal Dutch Shell(RDSB) and BP(BP) yield over 6%. Top bank HSBC Holdings( HSBC) yields 5.4% and UBS(UBS), 6%; Daimler (DDAIF) and BMW (BMW.Germany) yield over 5%. The Vanguard FTSE Europe yields 3.4%.

Value stocks started to stir last week, besting their growth counterparts and cheering embattled value investors after a long, brutal period of underperformance stretching back a decade.

“I take comfort in the duration of the underperformance and that so few people are true value investors anymore,” says Steve Galbraith, a former Morgan Stanley strategist and Wien colleague who now heads Kindred Capital Advisors in Norwalk, Conn. “This reminds me of 2000, but the difference is there aren’t as many value advocates.”

Many value investors have left the business, seen their asset bases wither, or stretched the definition of value by buying stocks like Netflix(NFLX) or

After the 2000 market peak, the S&P 500 tumbled more than 40% in the ensuing 2½ years. But some value managers showed positive returns because of the deep undervaluation of value stocks.

“Our portfolio is littered with single-digit P/E stocks and some have mid- to high-single digit yields,” Galbraith says. He ticks off LyondellBasell Industries (LYB), Goodyear Tire & Rubber(GT), CBS(CBS), and Delta Air Lines(DAL). Both Goodyear and Lyondell yield more than 5%.

Investors can also play a revival in depressed value strategies through Franklin Resources(BEN). Its shares, at about $27, trade for 11 times projected earnings in its current fiscal year ending this month and yield nearly 4%. Franklin’s net cash and investments total more than half of its current market value of $13.5 billion—probably the highest percentage for any company in the S&P 500.

Pzena Investment Management(PZN), founded and headed by Rich Pzena, is a small-cap play on a value-investing revival. Its shares, at about $8, trade for about 12 times annualized earnings in the first half of 2019. (There are no published estimates for the company.) Pzena’s trailing dividend yield, including an annual special payout, is 7%. Despite value investing’s woes, Pzena has experienced net inflows in the past year.