Twinkie defense

From today's WSJ: Back from bankruptcy and liquidation, Hostess Brands epitomizes the US manufacturing renaissance:




Sales of Hostess snack cakes are expected to reach 2 billion units this year.

Innovative new products are the key:



To enhance the value proposition, creative chemical rejiggering has extended shelf life from 26 to 65 days.

"Ho Ho.

This wouldn't be happening if Gaddafi were still alive.

From The Economist:

Kudos to Goldman Sachs for knowing how to make money on the election

A friend forwarded this chart. Since the market is already pricing in a Clinton victory, shorting NJA (non-Japan Asia, in GS lingo, not "National Jousting Association" as the Acronym Finder says) is recommended. Shorting the Mexican peso is also indicated but with a lower level of potential gain. This trade would apply even if Trump lost the election. This reminds us that, in the world of the trading of financial instruments, there is no good or bad, no right or wrong, only opportunity. Investors should never forget this.

Big Picture: Central Bank balance sheet growth accelerates YTD: Now at $21.4 trillion

A new flood of liquidity is being unleashed. Where will it go? (below is from the Bloomberg article)

Meanwhile, while we were thinking about the election, the trade war had already begun.

From "US Steel Could Rise. . ." in Barron's this weekend. (The Mr. Longhi quoted is president of US Steel.)

"The-Policy-That-Must-Not-Be-Named" is finally unmasked.

It's "Monetization."  Japan has finally abandoned the pretense that central bank's printing of money to fund the government is a temporary measure designed to control the level of interest rates.  Will the markets find this candor "refreshing?"

from A6 in today's Wall Street Journal:

Shakespeare's take on the Fed's failure to raise rates

Thus conscience does make cowards of us all,

And thus the native hue of resolution

Is sicklied o'er with the pale cast of thought,

And enterprise of great pith and moment

With this regard their currents turn awry

And lose the name of action.




(Hamlet, Act III, Scene 1)

Net US international investment position continues down

Our net position is now -$7.3 trillion. Our national business model is broken, with too much consumption and not enough investment. What is worse, foreign flows are being used for even greater consumption. Present flows inward will need to be balanced with future flows outward. It is a formula for national impoverishment. Are we doomed? You be the judge.

The Economist, too, is living in a fantasy land: "The audacity of hope"

President Obama has rightly and repeatedly pointed out that anyone who believes the economy is not doing well is "living in a fantasy land."

The Economist has moved to this fantasy land. The current issue has a report on guaranteed incomes. ("Sighing for paradise to come") In it there is graph with the tongue-in-cheek title of "The audacity of hope." (That is also the title of Obama's 2006 book.) It shows that the median salaries of full-time workers in the US are basically unchanged since 2000 A.D. despite a 15% increase in GDP/capital. (Britain did better than the US in both GDP/capita and earnings.)

On top of that, of course, is the fact that fewer workers have full-time jobs and the numbers of those outside the workforce has grown considerably.



To misquote T.S. Eliot, "I'll show you malaise in a handful of dust." (I guess misquoting Eliot is one of the things people in a fantasy land do.)

"Trump's Great Economic Divide" (headline from the WSJ)

Today's "Ahead of the Tape" column in the WSJ mocks Trump's pessimistic view of the economy by contrasting his pessimism with the positive level of consumer sentiment. The journalist quips that the "gulf between scary headlines and current sentiment is 'yuge.'" Steven Russolillo, the journalist, provides a graph of the Michigan Index of Consumer Sentiment to illustrate his point that consumers are confident.

He should have shaded in the recession period and he would have noted that this is more of a coincident rather than a leading indicator. Here is the same graph with the recessions shaded.

(Also note that the journalist omitted the last data point, which turns down, so that his graph give the impression confidence is going up.)

In fact, one notices that sentiments tends to peak one year before a recession. . . But wait! The index peaked about a year ago! Does this mean we are now entering a recession? That we will know only in retrospect. In the meantime, we all should beware lest we let our politics cloud our economic analysis. (Remember Capt. Renaud's line about politics in Casablanca? "I have no conviction, if that's what you mean. I blow with the wind, and the prevailing wind happens to be from Vichy." He would have made a good economist, I think.)

My personal view is that our current economic setup is doomed, but that has little to do with either democrats or republicans.

"Honey, I shrunk the economy!"

As President Obama has rightly stated, "anyone who thinks the US economy isn't doing well is living in a fantasy land." The World Bank, which has just cut its forecast of world growth this year and has cut its US growth forecast particularly sharply, is clearly a denizen of that imaginary place.

The Bank's location was confirmed by this morning's CFA Institute News Brief:

"World Bank shrinks forecasts for economic growth
The World Bank has downgraded its outlook for growth of the global economy this year from 2.9% to 2.4%, which it characterized as insipid. A 0.5-percentage-point cut in its forecast for the wealthiest countries accounts for about half of the reduction. The development lender lowered its US growth forecast from 2.7% to 1.9%.Bloomberg (07 Jun.) "

Economist blames low capital spending on low interest rates.

In today's WSJ, we learn that economist Jason Thomas of Carlyle Group says that low interest rates are stimulating dividend increases and share buybacks at the expense of capital spending, which is expected to be negative in real terms in 2016. If he is right, then the Fed is preventing the very thing it seeks to achieve.

Here's how the article by Greg IP begins:

"One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment.

"After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buy back stock instead?

"That’s the theory advanced by economist Jason Thomas of private-equity giant Carlyle Group. It is at odds with conventional economics but has some intuitively appealing logic and supportive data.

"He calculates that since 2009, just after the Federal Reserve took interest rates to near zero, U.S. companies have boosted stock buybacks by 194% and dividends by 66.5%, but investment by 43%. Big energy companies have been slashing capital expenditures while boosting payouts. Even companies without the headwind of lower commodity prices are holding the line: McDonald’s Corp. and Eli Lilly & Co. are maintaining flat capital expenditures while raising dividends; Verizon Communications Inc. said it plans to trim its capital budget and has raised its dividend."

There's a great quote in the article:

Since 1976, higher-yielding stocks systematically outperform the overall market by 0.76 percentage point when inflation-adjusted interest rates fall 1 percentage point, Mr. Thomas finds. Moreover, the relationship becomes more extreme the lower rates go and the longer they stay low.

“John Bull can stand many things but he cannot stand two per cent,” Walter Bagehot, a 19th century editor of the Economist, once said, describing investors’ need for some minimum level of income.

It make sense to me.

Missing Fed gold found!

Ron Paul, Bernie Sanders and other conspiracy theorists have long suggested that the Fed has refused to audit its vaults since 1963 (?) because the gold simply isn't there. Today we saw the first pictorial evidence that Paul and Sanders are right when, in an unguarded moment, Fed Gov. Lael Brainard rested her chin in her hand.

Lincoln

Prof. Boskin is "living in a fantasy land."

President Obama has rightly remarked that anyone who thinks the economy isn't doing well is "living in a fantasy land."  I agree.  We are living in a fantasy land.

Michael Boskin, the economics professor who changed the inflation calculation for social security so that it would rise less than actual inflation, that during the reign of the male Clinton, writes the following in an op-ed in today's Wall Street Journal:

"Mr. Obama will likely go down as having the worst economic-growth record of any president since the trough of the Great Depression in 1933—over eight decades spanning 13 administrations. Mr. Obama thus far has overseen 1.7% average annual economic growth, and the Blue Chip forecast for the remainder of 2016 is only slightly higher."

Given that capital spending is expected to contract in real terms in 2016, the immediate future does not look much different from the recent past. Nonetheless, I may choose to fantasize about a better outlook. (But I certainly wouldn't put money on it.)

Will the Fed tightening cycle produce a long period of negative returns?

An interesting article in the WSJ this morning ("Pension Funds Pile on Risk" http://www.wsj.com/articles/pension-funds-pile-on-the-risk-just-to-get-a-reasonable-return-1464713013 ) pointed out the extent to which ZIRP has forced pension funds, which typlically have a 7.5% actuarial assumption, to adopt abnormal investment policies. The question one should ask oneself is whether "normalization" will force declines in all types of long duration securities.

Given the allocations in the chart in the article, I would assume that cash, both directly and in the form of deleveraging, could suddenly become the preferred asset class. That would constitute a rude surprise for many people.

Food writer offends 1.2 billion people, for starters

The back page of the TLS of May 13th has an amusing comment on political correction. Calvin Trillin wrote a poem about Chinese food, which he loves, in the New Yorker; it has produced some outrage. Here is the offending passage: "Have they run out of provinces yet?/ If they haven't, we've reason to fret./ Long ago, there was just Cantonese./ (Long ago we were easy to please.}/ But then food from Szechuan came our way,/ Making Cantonese strictly passé./ Sometimes we do miss, I confess,/ Simple days of chow mein but no stress."

It seems that it was the word "stress" that provoked the outrage. A letter of protest from Diana Keren Lee stated that this created an us-them conflict by employing "language that is reminiscent of the Yellow Peril of the nineteenth century, in which people of Asian descent were viewed as dangerous." The TLS's commentary ends with the following: "Have they run out of ways to be offended yet? Will the well of microaggression ever run dry? Even to ask is to offend."

The TLS commentary begins by noting that the writers of an earlier generation, such as Norman Mailer, Jean Genet,John Osborne, Erica Jong etc. considered it their duty to épater la bourgeoisie by defying conventions. Then they were lauded for it; today they would be run out of town. (You may click on the image to read the article.)

Ferguson Effect: Murders up 60% in 2015 in heavily black US cities

An article in this morning's Wall Street Journal ( http://on.wsj.com/1sNu9Ws ) discusses the effect of the end of "proactive policing" produced by federal policies and various pressure groups, such as "Black Lives Matter," on security in urban areas. Last year murders were up 17% in the 56 largest urban areas in the US, 60% in heavily black cities. In Chicago, in the first 4 1/2 months of 2016 murders are up 95% compared to the same period in 2014.

I am somewhat relieved that we let our family membership in the Museum of Fine Arts (Boston) lapse. There is no point in taking unnecessary risks.

Of course, this is consistent with everything else that is happening.

You may click on the image below to read the article:

The US military is starting to look more like America. (budget-wise)

An article on page A11 of this morning’s WSJ mentioned that the Marine Corps reports that 70% of its F/a-18 jets are not flight worthy due to inadequate maintenance.

This reminded me of Robert Gates testimony in Congress just before he retired as Secretary of Defense in 2011; he said that the Pentagon was being “destroyed” (he may have used another similar but different dramatic adjective) by the cost of veterans benefits and asked that they be removed from the defense budget.

The US federal budget overall has evolved into a support system for individuals (social security, Medicare/Medicaid, food stamps, etc.)  In fact, direct payments to individuals, including salaries, are now 70% of the budget.

:

Veterans’ benefits are $160.6 billion/year, or 4% of the total spending, while other military spending is 16%, meaning the VA is now 20% of total military spending.  Disability benefits for veterans were about $20 billion per year in 2000 AD and now are about $60 billion per year.  These rising costs are squeezing the other portions of the defense budget. 

PS: Another worrisome category is “interest on debt,” which is now 6%.  Were the average cost of federal debt to rise to 4%, this would be 20%.

Feldstein warns Fed's delay in raising rates is "dangerous."

In his essay in today's WSJ, Feldstein says, among other things, the following:

• "For price stability, the Fed since 2012 has interpreted its mandate as a long-term inflation rate of 2%. Although it has achieved full employment, the Fed continues to maintain excessively low interest rates in order to move toward its inflation target. This has created substantial risks that could lead to another financial crisis and economic downturn.
• "The S&P 500 price-earnings ratio is more than 50% above its historic average. Commercial real estate is priced as if low bond yields will last forever. Banks and other lenders are lending to lower quality borrowers and making loans with fewer conditions.
• "When interest rates return to normal there will be substantial losses to investors, lenders and borrowers. The adverse impact on the overall economy could be very serious.
• "With a margin of error that large, it makes no sense to focus monetary policy on trying to hit a precise inflation target. The problem that consumers care about and that should be the subject of Fed policy is avoiding a return to the rapidly rising inflation that took measured inflation from less than 2% in 1965 to 5% in 1970 and to more than 12% in 1980."

So Feldstein says the Fed should be worrying about speculation and inflation. The markets, and probably most Fed governors, are worrying about a lack of speculation and deflation.

Who is right? The monetarist Feldman or the Keynesian consensus? What I worry about is the possibility the central banks have created an unstable situation that they will at some point be unable to control.


Lincoln

Upsurge in China's housing market boosts its economy

There is a remarkable article in this morning's WSJ on A10, "China Housing Warms as Debt Clock Ticks," In the January to through April period, housing sales increase 61.4% yoy, property investment rose 7.2%, construction starts rose 21.4%.

This is after a multi-year contraction in housing/GDP. In 2013 housing contributed 22% to China GDP, which is about the same as in Spain and Ireland in 2007. This dropped to 19.8% in 2014 and to 15.1% in 2015. (Maybe 6% is something to aim at as a longer-term healthier number?)

This recent surge reminds me of what happened in Singapore, where we happened to be living during the Great Recession. The stock market went down and housing prices went up. The Chinese, who think multi-generationally, regard property as an investment and stocks markets as speculation. When they become leery of stocks, they buy property. In normal times Singaporeans speculate on stocks during the week and gamble on mahjong during the weekend. (In the local convenience stores the thick weekly books of stock charts are hot sellers.)

Here is a quote from the article: "'Leaving my money in the bank is meaningless and it will only devalue,' said Wang Hong, a 35-year-old office administrator who is looking to buy a second home in Nanjing." Holding fiat currencies is not considered a safe investment in Asia, where they do not benefit from the US dollar's strict stewardship.

Freudian slip? In decrying high debt levels in China, the Economist points out US and Europe are in worse shape

In a bit of possibly unconscious revelation, the Economist in its "Special Report" on finance in China, provided the graphic image below:

On the right you will note that debt levels have been rising rapidly in China and are now about the same as in the US and the euro area.  Everyone's debt level is too high, but the fact is that high debt levels are manageable in fast-growing economies like China's and a real problem in low growth areas like the US and Europe.  We all have a problem, then, but ours is worse.

I am reminded of this pretty smart passage from the Bible:

Matthew 7:3-5New International Version (NIV)

3 “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? 4 How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye? 5 You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye."

Question to US investors: How safe is it to be invested in the world's most expensive stock market?

It's probably not very safe.

(Click on graph for full story in the Wall Street Journal.)

The ECB and Germany play a confusing blame game

German finance minister Schauble blames the ECB for the rise of populist parties, which he attributes in part to the ECB's easy money policy. He thinks they should tighten up.

In reply, ECB Chairman Draghi mostly blames Germany for Europe's woes and for making the ECB adopt an easy money policy. According to Draghi, Germany's high savings rate compared to its neighbors is somehow forcing the ECB to stimulate because Germans are refusing to go into debt and splurge on consumption items.

Meanwhile, Europe's first quarter economy grew at a 2.4% annual rate (0.6%) with no inflation. This is a great result and the previous quarter was also good. Draghi, however, is unhappy because the inflation rate is too low in relation to the growth rate. (WSJ, A14)

I find this all very Kafkaesque.

1st Q US GDP: Right for the wrong reasons

1st quarter US GDP was reported at +0.5% yesterday, which is weak but still positive. This graphic from the WSJ shows that consumer spending on services, residential investment, and state and local government have accounted for more than all the increase.



Here is are some factoids from the "Contributions to Percent Change" table of the BEA press release:



Without the housing bubble (thanks, Fed), Obamacare, and government spending, 1st Q GDP would have been down .82% This does not seem like a productive economy to me, or am I missing something?

What, after all, is truth?

From today's Wall Street Journal:

Encouraging decline in gun-related deaths in the USA

among suiciders, according to yesterday's Wall Street Journal.

Although the suicide rate among both men and women in the USA is rising rapidly, it is good news that fewer suicides are using guns. (for men from 61.7% in 1999 down to 55.4% in 2014) The big increase in method has been in "suffocation," which I take to mean hanging. (Assuming that the number of serial killer assisted suicides using pillows is not significant)

Should restrictions be placed on the sale of ropes?

The article states: "The report showed a surge in suicides among middle-age men and women, a factor noted in rising death rates among middle-aged people and a decline in white Americans life expectancy in 2014." The writer searches for an explanation but cannot come up with one. (Is Global Warming the cause?)

(Click on the graph to see the full article in the Wall Street Journal.)

Driving Lessons from Greece: The consequences of central bank policy

Central bank policy has evolved from unorthodox to downright strange as politicians have failed to take control of the post-crisis economy. Sooner rather later they will confront a stark choice signposted Greece or Ireland.

Full article: http://www.euromoney.com/Article/3543283/Inside-investment-Driving-lessons-from-Greece.html?printrequest=true&copyrightInfo=true

How investors are playing climate change

From this morning's Boston Globe:

Stairway to heaven: time for another step up?

There's a lady who's sure
All that glitters is gold
And she's buying a stairway to heaven

-- Led Zeppelin

Middle aged white women are killing themselves.

Middle aged white women are killing themselves.

And they are not alone.

There was a fascinating article, “A great divide in American death,” about the decline in life expectancy of rural white women in today’s Washington Post. It can be found at this site:

http://www.washingtonpost.com/sf/national/2016/04/10/a-new-divide-in-american-death/

Here is one of many fascinating graphs (click on graph to see it more clearly):

There is more and more drinking, smoking, drug-taking and depression in rural America, and it’s not working out very well.

Caveat emptor: The Wall Street Journal tosses out some interesting numbers, some of which are wrong.

I was recently embarrassed by quoting some statistics from the Wall Street Journal that were completely wrong. (I'm not saying which ones.) The WSJ people seem to be doing this more often than in the past. Perhaps there are fewer experienced editors and perhaps reporters are more rushed than they used to be.

In today's WSJ, an article ("Budget Cuts Fuel Monetary Policy Clashes," p. A2.) discusses how declining government revenues combined with rising transfer payments are turning the Federal budget into transfer payments only. Here is the graph:

The article states "Consumption and investment by all governments -- local, state and federal combined -- dropped to 17.6% of gross domestic product in the fourth quarter of 2015, matching its lowest level in 66 years, according to the Commerce Department." The fact is that the 17.6% number is for the federal government alone. But it's worse than that. The 17.6% figure is the approximate number for 2014 federal government tax receipts. Federal outlays in that year were 20.4% of GDP. So the graph relates federal tax receipts (not expenditures) to transfer payments. (The point that transfer payments are devouring the federal budget is correct, nonetheless, but the problem is not the level of expenditure as the article suggests.)

Moreover, state and local government spending isn't much less than federal spending, so total government expenditures are in the 35%-40% of GDP range, which is not abnormal.

The White House website has the following table of federal receipts and spending which I presume to be accurate;




The reporter graduated from college in 2001 and has been an economics reporter for three years, first for the Economist and then for the WSJ, so he should be a bit more aware of basic facts. Even more, his editor should.

"All power to the Soviets!" Central bank overreach in Sweden and elsewhere

I remembered Lenin's phrase "All power to the Soviets!" when I read this morning that Stefan Ingves, head of Sweden's central bank, thinks that the bank should have more power over the economy. Specifically, the Financial Supervisory Authority (FSA) is standing in the way of the central bank's direct regulation of the housing market. Ingves proposes that the FSA be merged into the central bank. (i.e. eliminated and its authority given to the CB)

Sweden's economy grew 4.5% last year and is expected to grow 3.5% this year. The central bank lending rate is -0.5%. (I believe that Sweden was the first to go negative.) The bank has also done the requisite quantitative easing. The fly in the ointment is that inflation is only 0.4% whilst the target is 2.0%.

Personally, I don't see why stable prices and a booming economy is not considered a good enough result. The Central bank, which seems quite pleased with itself, says, however, that it needs more power so that things will be even better.

It's human nature: everyone thinks he ought to have more power.

Will Armenia be center stage for the conflict between Russia and Turkey?

Azerbaijan has been gearing up to recapture Nagorno Karabakh from Armenia. It now spends more on defense than the entire Armenian budget. Here are two paragraphs from a recent article:

Azerbaijan's government has consistently bragged about its defense budget, which, starting in 2011, it claimed exceeded Armenia's entire state budget. Azerbaijan's Foreign Ministry spokesman Hikmat Hajiyev told the American newspaper Defense News in a story published this week that that "defense spending had enabled the Azerbaijani armed forces to be supplied with requisite advanced weaponry needed to re-take 
'its Armenian-held territories.'"

“It is our priority and we will continue to increase military spending," said Azerbaijan President Ilham Aliyev in 2014. "Over the past 10 years, our military spending has increased more than 20-fold, and our spending allocated to the armed forces is approximately twice as large as Armenia’s overall state budget."

The drop in oil prices means that this level of spending cannot be sustained, so the time to act is now. Russia has a base in Armenia that is a potential threat to Turkey. President Erdogan of Turkey, who may be one of the most dangerous men in the world with his dreams of the restoration of the Ottoman Empire, said, “We pray our Azerbaijani brothers will prevail in these clashes.” Azerbaijan would not have attacked without Turkey's acquiescence.

Will Armenia be center stage for the conflict between Russia and Turkey?

Deutsche Bank is not a happy camper

Deutsche Bank has been deleveraging. (WSJ, A1) Leverage pre-crisis was 61:1 compared to a European bank average of 39:1 and a US average of 13:1. Now, after selling €11 billion in equity and €5 billion in CoCos and shrinking its book leverage is 21:1, compared to 18:1 for the average European bank and 12:1 for the US. (WSJ numbers) The new CEO John Cryan is making further cuts after the €6.77 billion loss in 2015; his nickname in the bank is “Mr. Grumpy.”

Lower leverage means lower profit (and loss) potential.

Factoid: US economic expectations in 2010

The WSJ today (A2) says that the US Government predicted in 2010 that growth from 2010 to 2015 would be 3.9%/yr and unemployment would drop from 10% to 5.9%. Growth was 2.1%/yr and unemployment dropped to 4.9%. The difference between growth and unemployment is anomalous; perhaps we are mismeasuring one or the other.

Factoid: Surprising increase in US gasoline demand

Today's WSJ reported that US gasoline demand in the 4 weeks ending last Friday averaged 9.4 million BPD, which is a summer peak-like level. (8.8 mn BPD in same period in 2014 and 2015.) Lower prices are having their logical effect. (Total oil demand was 19.4 mn BPD in 2015.)

Separated at birth: Russian gold reserves and Switzerland's 5000 franc bill

I recently read (WSJ, 2/23/16, C2) that demand for the CHF 1000 note, currently Switzerland's largest denomination, has been increasing as Swiss central bank rates have turned negative. This raises the fear that local depositors will soon be charged for storing their money in banks. There are now CHF 45.2 bn (US$45.7 bn) in circulation, a 17% increase in the last twelve months.

Two gnome-like parliamentarians from Zug, near Zurich zeroed in on this and proposed that the SNB also Issue CHF 5000 notes, arguing that "an individual's ability to keep wealth stockpiled in cash, and out of the reach of banks, digital payment systems or the government, is a fundamental right." (WSJ's paraphrase)

Meanwhile back in the Kremlin, Bank of Russia President Elvira Nabuillina, a Tartar and worthy scion of the Golden Horde, whom Euromoney has named Central Banker of the Year in 2015, is buying all the gold she can get her hands on. (Well, almost all) In the fourth quarter, the Bank was reportedly the world's largest single buyer of gold, and in January alone it added another 700,000 ounces ($840 mn). Russia's concern is that by holding dollars in reserve it risks having them effectively cancelled by denial of access to the international transfer system, which is the only way these ones and zeroes in the their computer have any value. It is interesting that the Zug solons also expressed concern for digital payment systems in arguing for the CHF 5000 bill. (By the way, one of the ideas discussed last year by the US authorities was to close the payment system to Russia to force them to default on their external debts, which are mainly corporate, thus strewing chaos; international creditors did not like this idea, however.)

Money is a means of exchange and a store of value. In the dollar world, both of these functions are available at the pleasure, and only at the pleasure of the Fed and the US Treasury. That is why politics worry some and "unconventional policies" worry others.

Drug-induced optimism? Botox sales up. Consumer confidence down. It just doesn't make sense.

We note in the paper this morning that Allergan has reported good profits, thanks partly to higher sales of Botox (+10%) and Restasis (+18%). I guess the increase in Botox sales means the consumer is doing better; she has money to spend, and is ceasing to behave like the Madwoman of Chaillot, becoming more mindful of her appearance. Consequently, since it is hard to express emotion while under the influence of Botox, said consumer can neither cry nor laugh, pushing up Restasis dry-eye treatment sales.

What does this say about mass psychology following the Great Recession? We are clearly past denial, and maybe mostly through anger, but what about the other stages of grief? My bet is that ever more people are between depression and acceptance.

Should this trend continue, there will be fewer angry people to attend Trump and Sanders rallies as the folks start going about their business in a more normal way; GDP growth is likely to pick up.

At the same time, we learn this morning that consumer confidence has unexpectedly declined. Fed take note: More Botox is needed. (How about the Fed printing Botox certificates that are tradable and redeemable? A certain amount of economic activity would directly result; in addition, the Botox treatments would greatly increase confidence. It's time for the Fed to try something different, something that might work.)

Unfortunately, Allergan is already an expensive stock and its shareholders are smiling only slightly, which is probably the best they can do, under the circumstances.

Martin Feldstein among the faeries, reporting from a dreamworld.

Martin Feldstein says, “The US economy is in good shape.”

In this morning’s Wall Street Journal, Harvard professor Feldstein said, “The American economy is in good shape, better than critics think and financial investors fear. Incomes are rising, unemployment is falling, and industrial production is up sharply.” (p. A13)

I am glad to hear this because it echoes President Obama’s State of the Union assertions that “America right now has the strongest, most durable economy in the world,” and anyone saying America is in decline “is peddling fiction.”

The market problem is a market problem, according to Feldstein. Fed policy has pushed equities to artificially high levels; even after the recent decline, stocks are still 35% above normal.

He thinks the data showing that household income has stagnated is deceptive because it measures cash income. “The CBO explains that once corporate and government transfers are added to market incomes, and federal taxes are subtracted, the real income after transfers and federal taxes is up 49% between 1979 and 2010 for households in the lowest income quintile (with average total incomes of $31,000 in 2010). Real income is up 40% between 1979 and 2010 for households in the middle three quintiles (with average total incomes of $60,000) in 2010.”

These adjustments are interesting. Until a few years ago, the BLS when reporting on the number of Americans below the poverty line did not take into account government benefits. Today both numbers are available and you can choose between them depending on what point you wish to make. I noticed a couple of years ago, and wrote about it, that the average teacher in the local public schools with a master’s degree and 5-10 years of experience had about same effective income as a family of four on assistance. If the salary were $65,000, then about $20,000 comes off the top for health insurance (here the teacher pays half) and pension contribution (11% of gross income). Then we must subtract state and federal income taxes and NEA dues. On assistance, this teacher and his family could get subsidized housing, free healthcare, food stamps, and cash payments. In effect, he is no better off working, if we go by the numbers.

So why does he want to work? There are a number of reasons. He probably does not want to move his family to subsidized housing where he hears reports of frequent drug busts, shootings, assaults, and other crimes. He also likes being in a work environment where he is active, has interesting and dynamic colleagues, as well as other psychological rewards.

This is the point that Feldstein seems to miss. People don’t feel good about themselves if they are forced to depend on government programs. A good job is not an even trade for monetarily equivalent benefits. If you tell people in the latter group, or those who fear going there, that the economy is in good shape, they won’t believe you.

Dollar dreadnaught dings dong

Yesterday’s WSJ, which I just got around to reading today, has an interesting article on the effects of the strong dollar on coffee production around the world, “Strong Dollar Skews Coffee Trade.” It leads with a touching story of Vietnamese farmer Y Kua Mlo storing his coffee crop in his bedroom rather than putting the crop on the market because the price in dong, the national currency of Vietnam which is the world’s second largest coffee producer, is depressed because the dong is tied to the dollar. The world’s largest coffee producer Brazil’s currency has, however, dropped, making its coffee cheaper. Meanwhile, production in Brazil is soaring because the real ($R) price is up. “Coffee prices have been painfully low, and none of us want to sell the beans now,” Mr. Mlo moaned. (The market price is 34,000 dong ($1.52/kilogram) but he is holding out for 40,000.) Mrs. Mlo says he should have switched to peppers, so there is probably a lot of tension in the coffee bean-stuffed bedroom.

Vietnam, like the other countries whose currencies are tied to the greenback (China, Hong Kong, Saudi Arabia, Panama, etc. – the list grows ever shorter) are in increasing difficulties, as is the United States itself. I would expect that the market will bring the dollar down soon, particularly as the 10-year bond yield differential is diminishing. (Assuming of course the Fed does not tighten further.)

El-Erian fears doom, but hopes for the good enough

Mohammed El-Erian has just published a book, The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. He says the world economy is on a road heading for a "T junction," to use a British phrase. We must soon choose between the two roads. One leads to total destruction (depression, social disorder) and the other to some sort of survival. He assigns a 50% likelihood to each outcome. To achieve the latter somewhat better outcome, far-sighted, enlightened and public-spirited actions are required from our leaders. (It is unclear how he gets a 50% likelihood that this will happen. It's rather like Samuel Johnson's definition of a second marriage, "the triumph of hope over experience.")

As for the central banks, we have reached the point where a continuation of extraordinary measures (ZIRP, QE) is counterproductive, and even destructive. He goes so far as to say that apart from the emergency measures during the crisis, the central bank monetary manipulation experiment has not worked.

Yesterday my wife listened to El-Erian's hour-long interview on Tom Ashbrook's show "On Point" in the morning. She insisted I hear the replay in the evening, but I resisted as I was reading a book. I did, however, subsequently download and listen to the podcast. It is well worth hearing. It is anything but the party line.

The link: http://onpoint.wbur.org/2016/02/16/economic-market-crash-prediction


Yours truly,
Lincoln

Central bankers among the wolves

Last week Janet Yellen talked to Congress and on Monday Mario Draghi spoke to the European parliament. I happened to watch some of each on TV.

Janet Yellen probably regards her recent testimony to Congress as a low point, at least so far. Like Rodney Dangerfield, she got no respect. (“I come from a stupid family. During the Civil War my great uncle fought for the West!” – NB: I think that was said by Dangerfield, not Yellen.) Gone are the halcyon days of the representatives’ and senators’ groveling and obsequious boot-licking of Greenspan and Bernanke. The image that came to my mind was the movie scene where the caveman, or, in this case, cave-chair finds herself alone at night surrounded by a pack of hungry wolves held at bay only by the sputtering flames of a dying torch. The wolves respect the flames but not the chair, and they know the flames are dying. I was half expecting a band of loyal governors to rush into to hearing room at the last minute to rescue her, but they didn’t.

Mario Draghi looked more impressive, speaking with assuredness, surrounded by well-groomed advisors in Italian suits, until the Q&A, when the camera turned and revealed that the large parliamentary room was almost empty. Draghi gave his usual “we’ll do what it takes” and even boasted that half of the Eurozone’s growth has been from ECB actions. (The other half was, according to him, from low oil prices, leaving out government, policy, individual initiative, invention, and hard work, all of which are of no account, at least in Mario’s mind.) I couldn’t help thinking that he keeps saying he’ll do “whatever,” but in reality he does rather less than his words suggest. No doubt there are some puppet strings leading to the restraining hand of Wolfgang Schäuble, just offstage.

For several years at least, people have been reassured by the assumption that the central banks have matters under control. Now that doubt has crept in, who or what will be the new repository of hope? So far, the political leaders are AWOL and have been a long time. Nature abhors a vacuum. This has the makings of a crisis.

What China yuans, China gets; my humble and beneficent exchange rate forecast

Mr. Kyle Bass of Hayman Capital Management has, according to the Wall Street Journal, a multibillion-dollar bet against the Chinese yuan (money), the renminbi. In an eleven-page letter to investors that was cited in the Journal, Bass reported that his fund had sold off the bulk of its other investments to concentrate on shorting Asian currencies. What caught my attention, and the attention of many other investors, was the following quote from Mr. Bass: “The view that China has years of reserves to burn through is misinformed. China’s back is completely up against the wall today. . .” Bass justified his view with the fact that China’s liquid reserves were “only” $2.2 trillion at the end of January compared to its total reserves of $3.23 trillion.

The use of the words “only $2.2 trillion” is interesting in light of the facts that the total reserves including gold of the UK are only $107 billion, of the US only $434 billion (almost all illiquid gold), of Germany only $193 billion, and so on. (This is from the latest World Bank data at http://data.worldbank.org/indicator/FI.RES.TOTL.CD .) China’s liquid reserves of “only” $2.2 trillion are huge in comparison. Of course, Bass can be excused for a bit of hyperbole since it reflects his investment position and thus may be of near term benefit to his investors.

Bass will probably make a lot of money on his short because his investment strategy is not at odds with the policy of the People’s Bank of China (PBOC). Between the Asia crisis of the 1990s, when the renminbi was devalued, and 2005, China tied the renminbi to the US dollar, much to its benefit. Then, until 2005, it followed a policy of gradually increasing the value of its currency relative to the dollar. This policy has had bad consequences for China because the US dollar has been strengthening, dragging the renminbi up with it to a very overvalued position. The negative consequences were aggravated by the large devaluations of the currencies of China’s main trading partners other than the US, which has left China with an even greater overvaluation than the US.

So in December 2015 China announced it would no longer track only the dollar but rather a trade-weighted basket. China can be expected to adjust gradually its currency valuation again this basket to bring the renminbi back in line with other currencies.

The BIS has created trade-weighted indices of many currencies based on each country’s individual trade relationships. The graph of the US dollar, the renminbi, the euro (based on Germany’s trade), and the yen shows that the renminbi has risen considerably against all them since 2010. (About twice as much against its basket as the US dollar against its.) (This is not to say whether or not the renminbi is overvalued in some absolute sense, but only relative to where it was five years ago.)

Were it to regress to the mean, the renminbi would depreciate about 30% on a trade-weighted basis. So here is a crude forecast: Both the US dollar and the renminbi will likely depreciate on a trade-weighted basis, China by 30% and the US by 15%, so China will depreciate 15% in dollar terms. The renminbi/dollar is now 6.53 yuan/dollar; in this scenario our guess is that that rate will be about 7.50 at some point. This is a big move, but I am guessing that this is in the ballpark of what the PBOC is targeting. They will, of course, proceed by baby-steps, like the mincing gait of the women with bound feet in the old imperial court. But proceed they will. In the words of Lao Tzu, “The journey of a thousand miles begins with a single step.”

Going postal, and liking it

In recent years I have noticed that the service provided by the US Postal Service has improved a lot. Most letters I send to people in Massachusetts seem to get there in the next day or two, and letters to the rest of the country take two or three days. This is a far cry from thirty years ago when a letter to New York City from Boston could take a week or ten days, or three days, or five days (one never knew), while a letter to Washington usually took three days, but not always. The post office performance had been unpredictable, but now it has become fast, cheap and reliable.

I remembered this when I saw an article in the Wall Street Journal this morning on page B4, “Postal Service is Profitable.” It said the postal service in Q4 2015 earned $307 million and had its first quarterly profit since 2011. It also delivered 660 million holiday packages more than either UPS or Fedex and more than it had forecast. In fact, the post office is gaining market share from these rivals.

This interested me enough to glace at the post office FY 2015 report to Congress. In FY 2015, USPS revenues were up 1.6% to $68.9 billion, employees numbered 491,863, flat from the previous year, mail deliveries were down 1% to 154.2 billion pieces, and packages were up substantially to 4.53 million from 3.96 million. (+14%)

The USPS reported a net loss of $5.1 billion in FY 2015, about the same as in the two previous years, so the 4th quarter profit is particularly notable. It should be remembered that the USPS has been subject to unique charges by Congress. Unlike ordinary corporations, the service is required to amortize over a ten-year period the PSRHBF Prefunding Expense, which is the present value of the future health benefits of future retirees; this amount exceeds $5 billion/year. The service must also credit toward the pension of any military veteran it hires his full number of years of military service as if they were years at the post office; this transfers liabilities from the Department of Defense to the Postal Service and represents a subsidy to the defense budget.

So the post office is not in bad shape and it’s getting better. It has stopped shrinking and is growing slowly. One may conclude that a government-owned corporation can be efficient when subject to competition. This is one of those rare instances in which the thesis propounded by John Kenneth Galbraith in The New Industrial State has been realized, at least partly.

But what of UPS and Fedex? I remember reading years ago that Fedex had made few inroads into the domestic Swiss market because the post office there was fast, reliable and lower cost. I wonder if this sort of competition will develop in the US to an even greater extent than was evident during the holidays. I wonder if a similar threat exists in other markets, like Canada and the UK?

Marketwatch headline on Japan reveals the true situation

It makes we wonder what, with Rodan on the rampage, will Godzilla (BOJ) do?

Rosenberg's case for inflation rather than deflation

Decades ago, when economist David Rosenberg was with Merrill Lynch, from time to time he used to come by the offices of the firm in Boston where I worked. He came to talk about interest rates and the markets in general.  He was always respected by the cognoscenti for his knowledge, intelligence, and common sense, so we always looked forward to learning what he had to say.

Because of this, when he was on Bloomberg Surveillance on Thursday, I paid attention, and all the more so as I realized he was making the case that we will be surprised when we realize that inflation is much higher than assumed. "Don't worry about deflation," he argued.

The key points that stuck in my mind were that service sector inflation is already at 3% and that bank lending is now growing rapidly.  Here is a clip from his much longer interview.

(Here is the full hour from Bloomberg Surveillance, which deals with many things.  The inflation discussion begins around 1:22 .)

Is it the thought that counts? Brussels offers the UK nothing in a pretty package

If a country is not part of the euro zone, there really is no reason for it to be part of the EU, given the the worldwide free trade regime that now exists under the WTO.  A country surrenders sovereignty in exchange for . . . nothing.

Here are the symbolic concessions that Brussels is offering London.  When God received a halfhearted offering from Cain, He was not pleased.  How will Cameron react?

Unfortunately, there's no such thing as a free electrocution.

From the New York Times Dealbook:

"HOW FREE ELECTRICITY HELPED DIG $9 BILLION HOLE IN PUERTO RICO

"Puerto Rico's power authority, also known as Prepa, has been giving free power to all 78 of Puerto Rico's municipalities, to many of its government-owned enterprises and even some for-profit business, but not to its citizens, Mary Williams Walsh writes in DealBook. It has done this for decades, even as it has sunk deeper into debt and borrowed billions just to stay afloat.

"Now, the island's government is running out of cash and a movement is underway to limit the free electricity, which is estimated to cost Prepa hundreds of millions of dollars. "

The fog of emerging market debt

Inside investment: The fog of debt By: Lincoln Rathnam Published on: February 2016

Fears of a 1980s-style debt crisis in emerging markets are overblown. But to clear the miasma of statistics, investors would do as well to understand the sentiment of their peers as well as the credit fundamentals of their investments.

I had already been thinking about changing my newspaper print subscription from the Financial Times to the Wall Street Journal when I walked into the restaurant at the Boston Marriott in late January to attend a breakfast meeting. The FT is a fine paper, but it has not been delivered at all this year due to the collapse of distribution after the Boston Globe, its distribution partner, tried to save money by squeezing the paper carriers, a plan that backfired. 

I picked up a complimentary WSJ at the maître d’hôtel’s desk. An erstwhile emerging markets bond fund manager, I shuddered like the old fire horse hearing the station bell in the distance when I espied the headline 'Debt haunts emerging markets’. 

The article began: 'Underlying this month’s market turmoil runs a deeper worry that mounting debt burdens in developing nations, particularly in Asia and Latin America, threaten to become a drag on global growth.’ Intrigued and concerned, I consulted two reports. The first was: 'Capital flows to emerging markets,’ published by the Institute of International Finance in January. The second was the IMF’s paper from last October: 'Corporate leverage in emerging markets – a concern?’ 

The IMF reports that corporate debt, mostly local currency bank loans, in emerging market countries quadrupled between 2004 and 2014, from $4 trillion to $18 trillion; further, the biggest debt growth has been in construction, followed by oil and gas, both cyclical sectors. 

Easy money 

It is interesting to note that EM corporate debt had remained fairly flat in the five years preceding zero interest-rate policy (Zirp) and quantitative easing. Now we know who got the easy money. Corporate debt is now 88% of GDP for emerging countries in aggregate; it had been under 50% previously. China alone now stands at 130%, compared with the US at 70%. Latin America had a similar quadrupling of debt in the 10 years before August 1982, when Mexico suspended debt payments, so the present situation may be viewed as disturbing. 

Much as the miasma that cloaks the streets of Beijing in darkness lifted when factories were closed for the Olympics, looking deeper into the data provides clarification. While EM corporate debt-to-GDP ratios have been steadily rising, public debt has remained unchanged (38% of GDP pre-crisis to 39% today.) And while overall corporate debt has risen sharply since the crisis, there has been little change outside of China since commodity prices stopped rising in 2010. (A few countries now have lower corporate debt ratios than in 2007, including Russia, Poland, South Africa and Hungary.) 

There has been a negative net flow of funds from emerging market countries for two years, with net flows of minus $111 billion in 2014 and minus $735 billion in 2015. Two points should be borne in mind. First, the annual flows turned negative, not from an increase in outflows, which have remained fairly constant for several years, but mainly from a precipitous drop in inflows. 

Second, in 2015, almost all outflows were from China, and outflows accelerated in the fourth quarter, peaking in December when the People’s Bank of China announced that it would no longer link the yuan wholly to the dollar but to a trade-weighted basket of which 26.4% is dollars. 

The IIF opines that the December flows were primarily by Chinese companies repaying or hedging dollar indebtedness in light of the future devaluations of the yuan indicated by the new basket. China has spent a considerable amount of reserves to devalue gradually; one may surmise that this is to allow local companies time to hedge their dollar exposure, which implies further revaluation once the requisite time has elapsed. 

Considerable risk 

Below the disturbing global statistics are two points. Firstly, the surge in EM corporate debt has overwhelmingly resulted from borrowing by Chinese state-owned enterprises in local currency. Secondly, outside of China, the debt increase has been in companies in construction and resources, and mainly in Latin America. It seems a relatively safe bet that the Chinese state will look after the well-being of the SOEs, for reasons of national pride if nothing else. The rest of the problem is then theoretically manageable, despite the likelihood of defaults in the commodity/energy sector. But this does not mean that defaults will not become more widespread. There is considerable risk in the flow numbers. 

There is an investing disorder that I shall call the 'Nat Rothschild syndrome,’ in honour of the yclept gentleman’s ill-fated investment in Bumi of Indonesia. The syndrome is 'the erroneous belief that the emerging market counterparty is the source of repayment of money invested’. This is almost never true. One must, however, admire the fight Rothschild put up once he realised he had been conned.

When flows become negative, borrowers are under intense pressure not to repay, partly for fear of becoming the laughing stock of their national peers. (One can imagine the awkward silence when a local 'repayer’ walks into the bar of the Rio Yacht Club.) The ultimate counterparty for a foreign lender to an EM company is not the borrower, but another foreigner who will lend that company additional money to repay the first foreign lender or buy the stake directly. 

Here, then, is the key to EM credit monitoring: when a foreign bond holder perceives a reluctance among his fellows in London, New York, or elsewhere to advance additional money to EM borrowers, he should discreetly exit his positions.

Visit http://www.euromoney.com/reprints for additional distribution rights. For more articles like this, follow us @euromoney on Twitter.

Ground Hog Day 2016: Results just in from Punxsutawney: No more winter

The Boston Globe anticipated this happy results:

Troubling budget dynamics, and economic insights from the Wicked Witch of the West

I just read an article on the federal deficit occasioned by the release of the January 2016 CBO projections. The CBO assumes 1.8% real GDP growth over the next five years, no new programs or program cuts, and interest rates staying below 3%.

The key points are as follows:

1. The deficit now begins to increase as a percent of GDP after falling for some years from the stimulus peaks.
2. Interest expense is over half the deficit this year and grows in importance over time.

The thing that struck me about these numbers is that whether or not the deficit is a problem or a disaster depends importantly on three factors:

1. The future rate of GDP growth. (1.8% is assumed; if it is higher, the deficit goes down, or, conversely, if lower it goes up.)
2. The assumed interest rates. (The CBO is assuming that the federal government will continue to finance the deficit at 1960s' rates. 1.7% this year rising to 2.9% in 2020)
3. The numbers do not include the deficits in social security and the other trust funds.

I do not know how this will all turn out, but I am reminded of the scene in the Wizard of Oz where the Wicked Witch of the West holds Dorothy prisoner in her castle and notes that Dorothy would certainly die, but that "how" was the question, because, "these matters must be handled delicately." Janet Yellin will need all her finesse in the years to come.

Is corruption protecting Nigeria from a downturn? Will the pain be felt in Switzerland?

Oil was 70% of Nigerian government revenues but is expected to be just one third this year due to the drop in prices. Nonetheless, the economy is expected to grow 3.25% this year, up from 2.8% last year and the budget deficit is expected to be only 2.2% of GDP. (Less that the US's 2.5%)

It is possible that the effects of the low oil price are attenuated in Nigeria by the fact that much of the oil money never reaches the economy in the first place. In 2014, for example, the head of the central bank lost his job when he complained to President Goodluck Jonathan that $20 billion had "disappeared" from the central bank's vaults over a single 18-month period. Likewise, when it turned out that despite having a big defense budget the Nigerian army soldiers sent to fight Boko Haram didn't have ammunition, one senator lamented that "we thought they were siphoning off 75% but it turns out it was 90%."

But no disadvantage is without some corresponding advantage, and we we seeing it in Nigeria. Since the money never reached the people, they do not feel its absence. The people who will ultimately suffer are the poor Swiss.

You may read the FT article on Nigeria's request for a $2.5 bn World Bank loan by clicking the picture below:

Retail sales trend say no US recession in the near term

The 0.7% annual rate increase in 4th quarter GDP was quite disappointing.  It was dragged down by negative numbers for investment and net exports.  But personal consumption remained strong at +2.2%.  The chart below from Fear & Greed Trader at Seeking Alpha indicates that the recession won't come until the Fat Lady (i.e. the consumer) stops singing.

4th quarter US GDP bodes ill for the future

GDP grew at 0.7% (annual rate) in the 4th quarter.  This is a weak result, albeit positive, and the balance of the sources of growth are unhealthy:

Personal consumption expenditures: +1.46%.
Gross private domestic investment:   -0.41%
Net exports of goods and services:    -0.47%
Government:                                      +0.12%
                                                           +0.70%

The biggest negative was net exports, and this is despite the positive effects of low oil prices in the balance.  The strong dollar is hollowing up US manufacturing; it is like the great sucking sound of famously heard  by Ross Perot.  The decline in investment also bodes ill for the future.

Consumption and government spending increasing are not sustainable sources of growth in the absence of the others.

2016 Outlook? Here is an cautionary anecdote about forecasting

From Prof. Schneider on Quora:

"Theodore Streleski spent 19 years working on his PhD at Stanford, and then beat his advisor to death with a ball-peen hammer, feeling that he had hurt his reputation and denied him scholarly support. . . 

"The irony is that the murder was in 1978, and Streleski was released in 1985, meaning he spent less time in prison for the murder than he originally spent in his PhD program. Upon his release he said 'I have no intention of killing again. On the other hand, I cannot predict the future.'"

I think that Streleski's humility is a healthy example for investors like us.

Canadian cash and all-in oil prod. costs are the highest.

The Canadian costs mean that their 2.5 million bpd of oil sands production will shut down as soon as the hedges run out unless WTI is at $40/barrel or better (WCS sells at a $15 discount.) Longer term, they need $70+.

Now I know what happened to my portfolio in 2015

Here is an interesting factoid from Eric Delamarter's Half Moon Capital 4th quarter report:

"We found it noteworthy how narrow the breadth of the S&P 500’s 1.4% performance was in 2015. Remarkably, five mega-capitalization technology companies drove the whole market—accounting for over 300% of the indexes return. In other words, if it were not for that handful of stocks, the market would have been down approximately 3%. Further, stocks within the S&P 500 with market capitalizations less than $10B were down an average 12.6%."

This divergence of price movement among large categories is remarkable.

(You might take a look at friend Eric's fund: http://halfmooncapital.com/ His performance is solid and he is a meticulous value investor.)

Dire Situation in Venezuela: Widespread food shortages. Debt default seems inevitable.

Russ Dallen of Latinvest in Caracas just emailed me an article about the dire situation in Venezuela. The Central Bank is selling the country's gold reserves to meet near term debt payments. Food shortages are widespread.

The low oil prices has brought to a climax a situation that was already spiraling downward.

The article is in Spanish and can be accessed at by clicking on the picture.

Here is an excerpt, courtesy of Google translate:

Venezuelans are beginning to suffer situations of anguish and despair at the lack of food. Over the weekend, more than 10,000 people closed an important avenue of Caracas to protest food shortages, while scuffles among people queuing have become everyday despite the surveillance of armed officers of the National Guard.

On Monday, a resident of the town known as "The Cambur" Carabobo state, sent the following message to a radio station through social networks: "No food, no nothing. There are children and the elderly. Please help".

But today much of the country's ports are vacant, by the shortage of hard currency, and forecasts for the remainder of the first quarter of the year look very encouraging.

"I think we are between four and six weeks in a really extreme situation," he said from Caracas economist Orlando Ochoa, speaking on current levels and projected shortages worsen in the near future.

Ochoa added that the country needs additional funds to overcome the situation, but above all requires a general reorganization of the economy to correct the major imbalances in the economy accumulated along the Bolivarian Revolution.

And the economic collapse of Venezuela really is not being caused by falling oil prices, he said.

The crisis was caused by a series of measures implemented in the country since 2005, including the loss of independence of the Central Bank and the use of international reserves to finance public spending, the nationalization of the telecommunications, steel, cement industry and food, the financing of public sector deficits with inorganic money, the implementation of exchange controls and the system of price controls, he said.

"Then, in 2013 and 2014, Maduro does not take steps that could have been taken to correct, and problems caused by inaction are now accentuated by the fall in oil prices," noted Ochoa.

"Maduro insists on treating the macroeconomic problem as a problem of Marxist sociology. There is no doubt that political bias, ideological bias, the burden of the legacy of Chavez, it is choking and choking him simultaneously to the country, "he said.

http://www.elnuevoherald.com/noticias/mundo/america-latina/venezuela-es/article56657168.html#storylink=cpy

Tautology of the day

from the FT article on hedge funds today (p. 13,"Ackman falls . . ."):

"The returns for hedge funds in 2015 overall were unsatisfactory because they lost money for investors," said Rick Sopher,LCH chairman, "However, once again the top managers outperformed the average hedge fund manager."

This sighting is, in fact, that of a particularly rare sub-species, the double tautology. But I repeat myself.

Most of the world's oil production is unprofitable at today's prices, figures the Economist

The Economist calculates that most of world oil production is unprofitable at $30. (The snapshot is at $40, still mostly unprofitable.) Their calculations, if correct, point to $100/barrel in the long run because that is what a lot of the production needs. I was guessing the the equilibrium price would be around $50 and I suppose I'll stick with that and point to Saudi Arabia's plans to increase its production in the future, which would indicate a lower equilibrium than that of the Economist, which assumes a static world.

They have a calculator that allows you to see which countries can produce profitably at a given price. Here's the link: http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart-6?fsrc=scn/tw/te/bl/dc/st/adjustingthetapsonoilprice

New Hampshire Primary Update: Voters are cowed.

Vive la différence! France's secret defense against excessive immigration

In today's FT, which I am reading online because it still has not been delivered even once this year due to trouble with the paper carriers, there is an article on page 3 that says that asylum seekers consider France a stop-over and not a destination.

The reason? Here it is:




It's not so much the language that is difficult to master but more the pronunciation.  As Prof. Henry Higgins said in My Fair Lady, "The French don't mind what you say as long as you pronounce it correctly."

We have almost won the global war against extreme poverty

The World Bank defines "extreme poverty" as living on less than $1.90/day/person. By this measure, extreme poverty has fallen from almost 40% of the world's population in 1990 to less than 10% today, according to the World Bank.




The Wall Street Journal, in its "Outlook 2016" special section on January 20, 2016, where I got this graph, wrote: "Unprecedented economic growth over the past quarter century has lifted an estimated 1.25 billion people out of poverty, in one of the greatest recent (sic) achievements in human history."

The following chart from Branko Milanovic at CUNY, recently circulated by Prof. Zonis, is the flip side of this good news. The decline in world poverty has resulted from a partial equalization of incomes with the first world middle class.




The effects of globalization on middle class incomes are well known. This data shows that Trump is more correct about the source of the problem than is Sanders, although Sanders is also correct that the results are not desirable.

I think it safe to say, however, and I believe that I speak not only for myself but for the entire world, that we are all happy that extreme poverty has been so greatly reduced.