Fareed Zakaria GPS – CNN 07-12-15

Salient to Investors:

Fareed Zakaria said:

  • The Economist says Connecticut bankrolls the weaker states in America: 5% of their GDP over the last 20 years has been net income transfers to states like Mississippi and Alabama.
  • Allen Cooperman says the nuclear deal will only take Iran from 2 months away from breakout to 3 months.
  • Bloomberg says the Shanghai index mirrors the Dow Jones near the beginning of the Great Depression.
  • The Shanghai index is still up 90% over the last year, despite the recent collapse.
  • Gavekal Dragonomics says 5% to 10% of China’s households have stocks vs. 50% percent in the US.
  • Economists say China’s intervention in its stock market screams of panic.
  • The Guardian sees a ridiculous government overreaction, and says there have been up to 1.4 million new investors per week, many of which are novices. Ruchir Sharma at Morgan Stanley says 2/3 of new investors in China’s stock market have no high school degree, and even rural farmers have established their own stock exchanges.
  • Italy has the most UNESCO world heritage sites, 51, followed by China with 48, and then Spain, France and Germany. The US is tenth with 23 sites.

Jonathan Powell said:

  • Historical conflicts like Afghanistan have ended only through negotiations and not military victory.
  • Terrorism reflects an underlying political problem that almost always needs to be addressed politically.
  • Governments usually wait too long to negotiate with terrorists because they wrongly believe that one last military push will put them on the defensive – little evidence to show this works.
  • ISIS is successful largely because it has attracted disempowered Sunnis in Iraq and Syria.

Ken Rogoff at Harvard said:

  • The Greek referendum, which Paul Krugman urged them to do, was very irresponsible and was spitting in the Germans’ face. Never default on a debt when somebody is still giving you money.
  • If you cancelled all Greek debt, they is still a need to close a 10% gap of GDP in their deficit. Greece cooked their books and lied about their debt and deficit. The necessary changes have to come from within Greece, which has shown little will in wanting to become a modern European state. Greece needs to write down the debt more.
  • Everybody made very optimistic projections of Greek growth, including the IMF and the Europeans.
  • Things are looking better because what doesn’t kill you makes you stronger. Europe could handle a Greek exit, though the political fallout is very unpredictable.

Rana Faroohar at TIME and CNN said:

  • The German public never believed the Greeks would reform and wants to let them go this time.
  • Greece is not a Lehman-like moment so we will not see major international dominos toppling. But it does threaten the political integrity of Europe, with questions next about Portugal, Spain, Italy, though not right away. China creates a new Greece every 6 weeks.
  • Europe’s core, with Germany at the center, is very strong. Germany is incredibly competitive. France could be more competitive by making relatively easy changes. Europe needs one integrative fiscal policy.
  • The European economy is looking a lot better than the politics. The concern is if other nations stir up more trouble in the periphery should Europe be perceived as being unable to get its own house in order.

Zanny Minton Beddoes at The Economist said:

  • The Greek problem has moved from the realm of economics into politics. Many people in northern Europe, not just the Germans, think a Greece exit is better, while France and Italy are very keen to keep the Greeks in. The German Finance Minister wants the Greeks out.  However Merkel will in the end want to keep them in because she does not want to be the chancellor who presides over the breakup of the euro.
  • The US has a much more fiscally integrated system than Europe. Europe created a single currency without creating the economic integration and the fiscal integration that was necessary for that to survive. Europeans are champions at kicking the can down the road.
  • Greece should have written the debt down in 2010 instead if kicking the can down the road. But Greece is no longer the systemic, immediate problem to Europe that it was a few years ago, so a Greek exit would not wreck the euro overnight, but would become a real problem again.
  • The US is looking stronger. The European economy is not great but not that bad, and in many ways improving. 

Joe Cirincione at Ploughshares Fund said:

  • A nuclear deal with Iran is almost certain, likely tomorrow. Most of the serious, big issues have been settled. The deal lengthens the breakout time to at least a year to make the material for at least for one weapon.
  • There will be inspections of Iranian military facilities. Prohibiting arms in or out won’t be lifted right away. Sanctions will remain on the ballistic missile program and for their terrorism and human rights violations. 

Karim Sadjadpour at the Carnegie Endowment for International Peace said:

  • A nuclear deal is likely.  Iran is experiencing a perfect storm economically, with sanctions on top of a collapse in oil prices on top of sustaining the Assad regime in Syria.
  • The Iranian supreme leader has control over the main institutions in Iran, but is not an absolute dictator like Mao was. 2500 years of Persian civilization makes the current isolated Iran an anomaly of history and geography, but 36 years of the Islamic Republic raises concern that a nuclear deal could empower hard-line forces in the short-term. 

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/ or read the full transcript at http://transcripts.cnn.com/TRANSCRIPTS/1507/12/fzgps.01.html

Slow-Growth Forecasts Are Wrong – BloombergView 07-16-14

Salient to Investors:

Gary Shilling writes:

  • The pessimistic economic theories are wrong.
  • Weak growth will NOT last forever despite the Reinhart-Rogoff findings that the economy contracts at a 0.1 percent annual rate when government debt exceeds 90 percent of GDP.
  • In the late 1970s and early 1980s many economists presumed high inflation would last forever, yet we got disinflation by the mid 1980s. The post-war baby boom raised fears of a population explosion, yet was followed by the post-war baby bust.
  • Many experts believed that the aggressive monetary stimulus after the 2000 stock market collapse that appeared to have stabilized the economy meant that central bankers had overcome the business cycle, yet they caused the  2007-2009 recession.
  • Glenn Hubbard at Columbia Business School and Tim Kane at the Hudson Institute believe great powers fall into the trap of denying the internal nature of stagnation, centralizing power and rob the future to overspend on the present.
  • Larry Summers worries about persistently slow growth due to slow labor-force expansion and muted productivity growth.
  • Niall Ferguson at the Hoover Institution believes encroaching government is strangling private initiative, especially in the US, and threatens representative government, the free market, the rule of law and civil society.
  • Robert Gordon at Northwestern University believes that all the big growth-driving technologies have been fully exploited and that the era of 2 percent annual output growth per capita from 1891 to 2007 is over and that 1 percent annual growth and personal incomes growing at 0.5 percent annually is ahead.
  • Jonathan Laing wrote in Barron’s that the growth in the US labor force in coming decades will slow due to low birth rates and less immigration – both global trends – as will productivity advances. Laing believes any productivity increase will come from machines replacing middle-income employees.
  • Increased government regulation does stifle innovation and reduce efficiency and, therefore, growth. By 2018, the percent of Americans received meaningful financial support from the government will rise to 67% versus 28.7% in 1950, 52.4 percent in 1970 and 58.2 percent in 2007. Yet the fact that the 50 percent level was breached 43 years ago attests to the American character of deep-seated self-sufficiency.


Read the full article at http://www.bloombergview.com/articles/2014-07-16/slow-growth-forecasts-are-wrong

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Ivory Tower Types Fall for Bigger Inflation Fix – Bloomberg 08-21-13

Salient to Investors:

Caroline Baum writes:

The bad idea that the Fed could “fix” things faster with more inflation keeps popping up in academic circles: Kenneth Rogoff of Harvard in December 2008, followed by Greg Mankiw of Harvard, Olivier Blanchard at the IMF in 2010.

Noah Smith advocates inflation of 4 percent to 5 percent for the next decade, with the only downside to higher inflation being the “nuisance cost” of changing prices.

Kenneth Rogoff of Harvard says if the Fed or any central bank raises its inflation target, that would lift inflation expectations and reduce short and intermediate-term real rates, and in theory would not affect real long-term rates. Rogoff says 2 years of 6 percent inflation would speed the deleveraging process.

However, almost 5 years of zero-percent interest rates, large-scale asset purchases and forward guidance has not enable the Fed to even hit its 2 percent target from below.  And why would central bankers, who have fought hard to earn credibility with financial markets, forgo that trust for short-term gains?

In the real world, bond investors would look at 6 percent inflation and project 8 percent or 10 percent, so nominal bond yields would rise and long-term rates are what matter for capital investment.

Marvin Goodfriend at Carnegie Mellon said it is a slippery slope to do something for short-term purposes today, then do it again for short-run purposes. But Goodfriend says the idea of raising the inflation target has no traction among central bankers.

Read the full article at http://www.bloomberg.com/news/2013-08-21/ivory-tower-types-fall-for-bigger-inflation-fix.html

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Rogoff Saying This Time Different Calls for Reflation Bloomberg 08-12-13

Salient to Investors:

Kenneth Rogoff at Harvard said:

  • Janet Yellen and Lawrence Summers qualify to replace Bernanke because of their dovishness about placing too much weight on stable inflation when unemployment is far above its longer-run level.
  • Aggressive monetary stimulus is needed, even at the cost of moderate price increases, because with weak global inflation, higher prices may even help the US economy by lowering real interest rates and reducing debt burdens.
  • In more normal times, you want the Fed to be an anchor against high inflation and assure investors that inflation will stay low and stable to keep interest rates down.
  • Many central banks need to convince the public of their tolerance for inflation, not their intolerance.
  • There is little stomach at the Fed for more than 2.5 perrcent inflation.

Joseph Stiglitz at Columbia University said policy makers for the next 3 or 4 years will be focused on reviving the economy, and the likelihood that inflation is going to be a problem is very small.

Ethan Harris at Bank of America said the Fed won’t risk allowing medium-term inflation to deviate above 2.5 percent, even under Summers or Yellen. Harris said once you accept higher inflation, it becomes a slippery slope and eventually you get inflation that hurts the economy – viz 10+ percent inflation in the 1970s and 1980s .

Read the full article at  http://www.bloomberg.com/news/2013-08-12/rogoff-saying-this-time-different-calls-for-reflation-economy.html

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Reinhart-Rogoff Rebuttal Says UMass Critics Politicized Debt – Bloomberg 04-26-13

Salient to Investors:

Carmen Reinhart and Kenneth Rogoff at Harvard acknowledged on April 17 that they had inadvertently left some data out of their calculations in “Growth in a Time of Debt”, but the error did not change their basic findings that countries with public debt in excess of 90 percent of GDP suffered measurably slower economic growth.

A study by Bradford DeLong at University of California and Lawrence Summers concluded that stimulus could generate so much growth that it would pay for itself.

Paul Krugman has continued to be one of the most vocal critics of fiscal cuts.

Read the full article at http://www.bloomberg.com/news/2013-04-26/reinhart-rogoff-dispute-umass-criticism-of-debt-study-findings.html

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Why everyone is wrong about austerity – MarketWatch 04-26-13

Salient to Investors:

Brett Arends writes:

It is not clear if high debt levels lead to slower growth, or result from slower growth, or that the two have only a loose connection, but we cannot borrow and print money indefinitely with no consequences whatsoever.

Rogoff and Reinhart got their math wrong but their data still shows some correlation between debt levels and lower growth rates. The UMass–Amherst economists who revealed Reinhart and Rogoff’s errors found that economies with government debt over 90% grew by just 2.2% a year on average, versus just over 3 percent for economies with debt between 30% and 90% of GDP, and over 4 percent for economies below 30% of GDP.

However their study was mostly based on data for advanced economies from 1946 to 2009, and you cannot deduce universal rules for the future from a 63-year snapshot of history. Historians like Harvard’s Niall Ferguson, a leading champion of the Reinhart-Rogoff view, should have been more skeptical.

New Zealand right after World War II had high debts, yet grew very quickly in the late 1940s because everyone needed food and wool.

Anti-austerians, who cite the biggest, broadest, longest period of growth and prosperity in US after WWII, despite debt at 120% of GDP in 1945, ignore the fact that taxpayers effectively repudiated a large chunk of it with a falling dollar and surge in inflation.

In the 1970s, huge government debts were partially repudiated every year through inflation – Treasuries became known as “certificates of confiscation.”

ICI reports the public holds $3.4 trillion in bond funds so will pay a vicious price if inflation surges again.

US household, corporate and state and local governments owe a total of $40+ trillion, nearly 3 times GDP, au contraire to just after WWII when corporate and household balance sheets were in excellent shape due to the high savings rates during the war years, and the war-time inflation which wiped out the debt of the Depression. In addition, today we also have off-balance-sheet liabilities for Social Security and Medicare.

Read the full article at http://www.marketwatch.com/story/why-everyone-is-wrong-about-austerity-2013-04-26

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The 1 Percent’s Solution – The New York Times 04-25-13

Salient to Investors:

Paul Krugman writes:

Keynesian economics is close to a TKO over austerian economics, whose predictions about the real world failed completely and supporting academic research has turned out to be riddled with flaws.

The two main studies supporting austerity – Alesina/Ardagna and Reinhart/Rogoff – were criticised almost as soon as they came out and did not hold up under scrutiny. The IMF reworked Alesina/Ardagna with better data and reversed their findings, and Reinhart/Rogoff suffered the famous Excel error.

The dominance of austerians in influential circles is due in part to the widespread desire to see economics as a morality play, a tale of excess and its consequences, despite the fact that the people suffering now are not at all the same people who sinned during the bubble years. In part due to upper-class preferences.

Page, Bartels and Seawright found that the policy preferences of ordinary Americans differ significantly from the very wealthy. Joe Public is somewhat worried about budget deficits and wants entitlement spending to rise, but the wealthy regard deficits as the most important problem and want to cut entitlement spending.

Read the full article at http://www.nytimes.com/2013/04/26/opinion/krugman-the-one-percents-solution.html?nl=todaysheadlines&emc=edit_th_20130426

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Euro Crisis Seen Reaping Social Toll With Record Jobless – Bloomberg 01-28-13

Salient to Investors:

The median economist estimated unemployment in the euro region rose for a fifth month to 11.9 percent, the highest jobless rate since records began in 1995, while German unemployment held steady at 6.9 percent. The median economist expects the euro-area economy to decline 0.4 percent in Q4 2012,  annual inflation to remain at 2.2 percent, but confidence to rise to the highest level since June, while US unemployment will remain unchanged in January.

The IMF expects a second year of contraction in the euro region.

Mario Draghi said the jury is still out on whether investor optimism can be reflected in economic momentum.

Marco Valli at UniCredit Global Research said the worst may be over for financial markets, but the Europe is still in recession, and unemployment will remain very poor at least for another year or longer. Valli sees all the preconditions for economic improvement down the road.

Martin Van Vliet at ING said companies are still laying off, especially in southern Europe, so unemployment will trend higher in the next two months. Ing said financial conditions are improving and markets becoming more optimistic, but has yet to feed through to the real economy.

Luc Coene at the ECB said there is only so much a central bank can do, so the next move won’t be from the ECB. Coene expects a shallow recovery starting this year, and said the latest indicators in Germany indicate a stronger underlying base of activity than was assumed.

Kenneth Rogoff at Harvard said France needs an economic overhaul to revive growth and help underpin the political union required to stabilize the euro region. Rogoff said European governments’ responses to the debt crisis aren’t enough, and they need political integration with taxation powers.

Mark Carney at the Bank of Canada said policy in developed countries isn’t maxed out and central bankers can be flexible in meeting inflation goals.

Patrick de Maeseneire at Adecco said the euro-area economy will be tough in half1, especially in France and southern Europe, while Germany is slowing, automotive slowing. de Maeseneire sees a wider recovery in 2014.

Read the full article at http://www.bloomberg.com/news/2013-01-28/euro-crisis-seen-reaping-social-toll-with-record-jobless.html

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Ken Rogoff – Charlie Rose 12-18-12

Salient to Investors:

Ken Rogoff at Harvard says:

  • The global economy is growing more slowly than everybody wants – The improving US is one of the bright spots with only 2% growth. China is slowing, India slowing dramatically. 
  • US trend growth rate is 2.5%. Need 4%-5% growth for a sustained period to solve unemployment problem. Housing will continue to strengthen and employment stabilise but we won’t see galloping growth.
  • The US cannot live on stimulus forever but withdrawing it too rapidly makes no sense. The Fed focus on final output, unemployment and inflation is wise but needs to force its message.
  • The US is in a static situation in a changing world which is not healthy. The US government is paralyzed so cannot be creative – we need tax reform, spending on education, to rein in entitlements.
  • Of course the problem is debt – we have record public, private, international debt. US debt levels is at a level where its been historically problematic – very large debt creates inter-generational and distributional tensions. The debt needs to be gradually reined in, not dramatically cut with draconian austerity.
  • Debt is not the only problem and Keynesian spending is not the solution – we need more fundamental reform. Fiscal stimulus is currently 7% of GDP and we need to slowly reduce it. The US needs to spend more on sensible infrastructure, and encourage private funding of infrastructure and other things over which it has had a monopoly.
  • Debt levels at 90% or more of income is historically associated with lower sustained growth, and can restrain growth for decades. US debt at twice current levels would be dangerous. Europe is in more danger of repeating a Japan.
  • Over time, government is service intensive so is always going to be more expensive. The US is on the healthy side of government spending levels unlike France where government spending is half of GDP. Krugman may be right we don’t have too much debt but eventually we will have.
  • In the fair chance we don’t get an agreement on the fiscal it won’t be the end of the world because the hue and cry will bring a settlement within a few weeks. The fiscal cliff is a skirmish in a war. Another debt ceiling fiasco would be ugly.
  • Tax reform is needed but a dream at the moment. Things like the tax treatment of carried interest is egregious.
  • The US is tracking the average of post war crisis. It typically takes another 5 to 6 years to reach normal employment, but will be longer at the current pace. It takes 5 to 6 years for housing to stabilize.
  • Another crisis is not around the corner, unlike Europe or Japan. See no danger of a housing bubble.
  • Credit problems is one leading indicator of crises that got cast aside,  housing bubbles another – central banks need to refocus on them.
  • Tax increases on the wealthy is the just the first move to raising taxes on everyone. Tax hikes hurt growth proportionate more in most cases. The Bush tax cuts were the first step towards the financial crisis.
  • Entitlements, especially medicare, have to be cut because they look crazy 10 years out.
  • Spending less on defense is unlikely in a world where emerging markets are spending more on defense and the issues getting bigger . Government spending on goods and services isn’t that big so not much to cut – we have to cut entitlements , especially medicare. We need more spending on R&D , education, infrastructure.
  • The big problem is the incredible political paralysis, like can seen in gun control. Simpson-Boles was a bold and sensible plan that got thrown out by both sides – we would be in a lot better place today had we adopted it. Clearly there is a lot of political opposition to it.
  • Europe is still a mess. It needs fundamental change not just liquidity injections.
  • China has stabilized but has many bubble signs.

Watch the full video at http://www.charlierose.com/view/interview/12700

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All Bonds Rally First Time Since 2008 With Portugal Up – Bloomberg 11-05-12

Salient to Investors:

Investors can’t get enough government securities even though rising debt loads are blamed for curbing global growth. For the first time since 2008, all 26 markets tracked by Bloomberg and the EFFAS are poised to generate positive returns on an annual basis. Governments are getting a handle on borrowing and central banks are taking new steps to cap bond yields, and inflation slows.

Howard Simons at Bianco Research said the longer-term bull market in government bonds is intact all over the world.

Government bonds have returned 31 percent since mid-2007, with reinvested interest versus the MSCI All-Country World Index of stocks which has lost 4.2 percent with dividends, and versus the S&P GSCI Total Return Index of 24 raw materials which has lost 21 percent.

Michael Quach at Smith & Williamson Investment Mgmt said we still have a massive deflationary force and very low interest-rate policies in most developed nations.

Joachim Fels at Morgan Stanley sees global consumer prices rising 3.4 percent in 2012, 3.2 percent in 2012 versus 4.4 percent in 2011.

Jamie Stuttard at Fidelity Investments said gains in government securities reflect central banks support of government debt rather than a referendum on government actions.

Steven Miller at BlackRock said monetary authorities will do whatever it takes to stop any sharp rise in bond yields. Miller said if central banks keep buying a lot of government debt, that will curtail any tendency for yields to rise.

Gary Shilling at A. Gary Shilling & Co. said investors are better off with US Treasuries as there is no raging economic growth to justify what we’re seeing in equities markets – all this stimulus is really an opiate.

Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff wrote in April that developed economies with high public debt potentially face massive losses of output lasting more than a decade, even if their interest rates remain low. They found that countries with debts exceeding 90 percent of the economy historically have experienced subpar growth for more than 20 years, but weren’t advocating rapid reductions in government debt at times of extremely weak growth and high unemployment.

Japan’s debt of $11.5 trillion is more than double GDP, US debt is 68 percent of GDP, Greece, Iceland, Italy, Singapore, Portugal and Ireland all have debt exceeding their GDPs.

Jeffrey Caughron at Baker Group said demand will persist for sovereign debt and there’s room for healthy countries and those enacting responsible policies to continue to issue any debt.

Read the full article at http://www.bloomberg.com/news/2012-11-05/all-bonds-rally-first-time-since-2008-with-portugal-up.html