Economische aanraders 14-04-2019
Economische aanraders: Veren of Lood biedt u op zondag wekelijks een inkijkje in (minstens) 15 belangrijke of informatieve artikelen en interviews die vooral de voorafgaande 7 dagen op economisch terrein verschenen op onafhankelijke sites.
De kop is de link naar het oorspronkelijke artikel, waarvan de samenvatting of de eerste (twee) alinea’s hier gegeven worden. Er zijn in deze rubriek altijd verschillende economische scholen vertegenwoordigd, en we streven er naar die diversiteit te handhaven.
We nemen wekelijks ook een paar extra links op naar artikelen die minder specialistische kennis vereisen. Deze met *** gemerkte artikelen zijn ons inziens ook interessant voor lezers met weinig basiskennis van economie.
Central Banks Are Heading Toward a Stagnant Global Zombie Economy – Daniel Lacalle
Liquidity injections and zero interest rate policies disguise risk and may give a false sense of security. This risk could not be more evident today. Not only have we seen large downgrades to consensus growth estimates and central banks’ expectations of GDP and inflation, leading indicators also point to a much weaker economy ahead.
There are similarities with 2008 that we should not ignore.
Shrinking middle-class leaves no room for millennials – Ben Rickert
The global middle-class is growing smaller and smaller sized, and millennials are being squeezed out…
Across the world, the middle class is experiencing an unprecedented decline, with younger generations facing an uphill battle in discovering monetary stability in lots of wealthier nations.
Only 6 of 10 millennials make enough to be deemed middle-class, compared with 7 of 10 baby boomers at the same age, according to a new report from the Organization for Economic Cooperation and Advancement.
Credit ratings and structured finance – Jens Josephson, Joel Shapiro
The poor performance of credit ratings of structured finance products in the financial crisis has prompted investigation into the role of credit rating agencies. This column discusses the incidence of rating inflation when such an agency both designs and rates securities, highlighting the role of demand from investors that face rating constraints, such as banks, pension funds, or insurance companies. It finds that ratings are accurate when these constraints are very tight or very lax, but inflated otherwise.
What Would Stocks Do in “a World Without Buybacks,” Goldman Asks – Wolf Richter
Companies buying back their own shares has “consistently been the largest source of US equity demand.” Without them, “demand for shares would fall dramatically.” Too painful to even imagine.
Goldman Sachs asked a nerve-racking question and came up with an equally nerve-racking answer: What would happen to stocks “in a world without buybacks.” Because buybacks are a huge deal.
In the fourth quarter 2018, share repurchases soared 62.8% from a year earlier to a record $223 billion, beating the prior quarterly record set in the third quarter last year, of $204 billion, according to S&P Dow Jones Indices on March 25. It was the fourth quarterly record in a row, the longest such streak in the 20 years of the data. For the whole year 2018, share buybacks soared 55% year-over-year to a record $806 billion, beating the prior record of $589 billion set in 2007 by a blistering 37%!
***The Economy Is Unprepared For A Drop In Tax Refunds – Danielle DiMartino-Booth
Don’t underestimate the negative impact of declining tax refunds on households…
Recent headlines touting a budding rebound in U.S. car sales should not be celebrated. The much lauded 17.5-million-unit figure reported for March auto sales was actually buoyed by fleet sales, which rose to a two-year high. Retail auto sales – a pure reflection of cars sold to individuals – fell 4 percent in March and by the same amount for the first quarter, according to Cox Automotive.
Even after accounting for seasonal factors such as which period had more selling days, the data paint a bleak picture of consumer spending, which isn’t likely to get any better given the trends we are seeing this tax season. Internal Revenue Service data show tax refunds are down 4.1 percent over 2018, and the strategists at UBS AG estimate refunds will be $25 billion lower than they’d initially estimated this year.
Perverse effects of centralised bargaining – Tito Boeri, Andrea Ichino, Enrico Moretti, Johanna Posch
In many European countries, wages are determined by collective bargaining agreements intended to improve wages and reduce inequality. This column compares the impact of different wage bargaining models in Italy, which has limited geographical wage differences in nominal terms and almost no relationship between local productivity and local nominal wages, and Germany, which has a tighter link between local wages and local productivity. The Italian system is successful at reducing nominal wage inequality, but creates costly geographic imbalances. If Italy were to adopt the German system, aggregate employment and earnings would increase by 11.04% and 7.45%, respectively.
Big Old Problem Just Re-Erupted on Eurozone’s Southern Flank – Don Quijones
Italy’s fiscal health is once again in serious decline. On Wednesday, Italy’s coalition government slashed its growth forecast for the Italian economy in 2019 to 0.2% – the weakest forecast in the Eurozone – from a previous forecast of 1%. Italy is already in a technical recession after chalking up two straight quarters of negative GDP growth in the second half of 2018.
The government’s budget for this year was based on the assumption that the economy would expand by 1% this year. Now, it seems the economy may not grow at all; it could even shrink.
The great disinflation in emerging and developing economies – Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge
Emerging market and developing economies have achieved a remarkable decline in inflation since the early 1970s, supported by robust monetary policy frameworks, strengthening of global trade, financial integration, and the disruptions caused by the global crisis. The column argues that a continuation of low and stable inflation in these countries is not guaranteed. If this wave of structural and policy-related factors loses momentum, elevated inflation could re-emerge. Policymakers may find that maintaining low inflation is as difficult as achieving it.
Central Banks Are Propping Up Stock Prices – Thorsten Polleit
Financial markets seem to have a great deal of confidence in the effectiveness of central bank monetary policy — in the sense that by keeping interest rates low, or bring interest rates down, the economies will keep expanding and asset prices, in particular, will keep rising. There is, however, good reason for savers and investors alike to think very carefully about the truth value of such a proposition.
The key question is this: What is the actual relation between the interest rate and asset prices, stock prices in particular? To answer this question, it may be helpful to take a brief look at the well-known “Gordon Growth Model”. It shows the functional relation between a firm’s stock price and its profit level, the interest rate, and the firm’s profit growth rate.
***How Big or Tiny of an Apartment Can the Median Household Income Afford to Rent in the 100 Largest US Cities? – Wolf Richter
In some cities, you get what is considered a walk-in closet of a McMansion.
It’s not totally fair to compare rents in Tulsa with rents in San Francisco because household incomes are different as well. One way to look at this is to figure out how big of an apartment a household can rent by paying 30% of the local median household income in rent. And you guessed it, in a number of cities the local median household income, as high as it may be, can only rent what would be considered a walk-in closet in a McMansion.
***Perpetually wrong forecasts – John H.Cochrane
Torsten Slok of Deutsche Bank sends along the following fascinating graphs.
The titles seem a little off. Yes, the market is expecting rate cuts (forward rate) but the market has been exactly wrong about everything for 10 years (and longer) first forecasting the recovery that never came, then forecasting much slower interest rate rises than actually happened. Survey expectations seem to match the forward curves well except perhaps at the very end.
The Menace of Sub-Zero Interest-Rate Policy – Brendan Brown
Sub-zero interest rate policy as Europe and Japan have practiced for many years menaces global economic prosperity. Yet Congress and the White House are strangely silent on the issue; even a prophetic messenger would not arouse them.
Two monetary episodes – one historical and counterfactual, the other contemporary and real – highlight the nature of the danger.
First, history: throughout the heyday of the gold standard from the mid-1860s to 1914, short term money market rates in London rarely fell below 1-2% p.a. and then only briefly. Typically, these short rates were highly volatile day-to-day, but few cared.
The IMF at 75: Reforming the global reserve system – José Antonio Ocampo
The IMF will turn 75 this year. Updating and reforming of some aspects of its core functions should be considered to reflect the current global monetary context. This column analyses the IMF’s global reserve system, identifying three issues and suggesting two alternatives. Ultimately, greater use of the Fund’s Special Drawing Rights would mitigate several problems in the current system.
Here We Go Again: Tech Bubble 2.0 but “This Time It’s Different” – Charles Hugh Smith
The doses of Delusionol(tm) required to believe “this time it’s different” are becoming dangerous.
Here we go again, another tech bubble is expanding like a supernova and the financial media is declaring (as it does during every bubble) “this time it’s different.” File Tech Bubble 2.0 under memories are getting shorter or this time is never different:
The “Uber of dog-walkers” is worth a cool $1 billion pre-IPO. Or maybe it’s the AirBNB of dog-walkers, but who cares? Just as any company with no hope of profits skyrocketed once it put blockchain or crypto in its name during the cryptocurrency mania of late 2017, now calling a dead-on-arrival start-up “the Uber of….” is enough to justify a billion-dollar valuation.
Capitalism is not the problem – Peter Schiff
How are all of these unprofitable companies staying afloat and even making big splashes with media-hyped IPOs?
Peter Schiff addressed this question, along with the supposed “failure” of capitalism in his most recent podcast.
The rideshare company Lyft had its lowest close since going public yesterday (April 9). In fact, the company has only closed above its IPO price twice – the day it went public and last Friday. This probably shouldn’t shock anybody, given that the company has never turned a profit.
Meanwhile, social media company Pinterest is gearing up for its IPO with a lot of media hype. The company has been around since 2010. It’s never made any money either.
This is How Stocks Get Hit When BBB-Rated Companies Try to Dodge a Downgrade to “Junk” – Wolf Richter
There are now many of them. Shoring up the balance sheet is the opposite of “shareholder friendly.” It’s “creditor friendly.”
The amount of investment-grade corporate bonds outstanding by non-financial companies in the US and Europe – so excluding bonds issued by banks, insurance companies, and the like – has more than tripled (+204%) over the past ten years, from $1.66 trillion at the beginning of 2009 to $5.06 trillion by the end of 2018.
Does Economic Stability Contribute to Growth? – Frank Shostak
During the period 1920 to 1960, we can observe that the annual growth rate of production was more volatile than between the period 1961 to February 2019. During the first period the maximum growth rate stood at 62% and the minimum growth rate at minus 33.7%. Between 1961 to present, the maximum growth rate stood at 13.4% and the minimum growth rate at minus 15.3%, (see chart). One is tempted to conclude from this that this raises the likelihood that fiscal and monetary policies are currently more successful than in the past in stabilizing the economy.
For most economic experts the role of central authorities is to make the so-called economy as stable as possible. What do they mean by economic stability?
Whole Foods’ Existential Threat? – John McNellis
“Amazon’s plunge into the $800 billion US grocery industry posed an existential threat to rivals”: CNN, August 2018. So let’s see.
A couple questions remained in the wake of Whole Foods’ announcement last week that it was dropping prices on over five hundred items by twenty percent. Is this Amazon’s long-awaited spring offensive or is the grocer playing defense, treading water, simply trying to keep its market share? Stretched over a broader canvas: Is Amazon truly the existential threat to the grocery business the click-baiters would have you believe?
Before we get to existentialism, let’s consider a smaller question. Was it really a price reduction at all? Maybe not. The New York Times sent a couple reporters to shop their local Whole Foods for a basket of identical items before and after the ballyhooed price reduction. The total post price-cut savings was five cents on a fifty-five dollar purchase. The paper also used a Morgan Stanley study to report that Whole Foods prices are fifteen percent higher than those at a typical supermarket.
The Neutral Interest Rate: The Fed’s Impossible Goal – Frank Shostak
It is widely accepted that by means of suitable monetary policies the US central bank can navigate the economy towards a growth path of economic stability and prosperity. The key ingredient in achieving this is price stability. Most experts are of the view that what prevents the attainment of price stability are the fluctuations of the federal funds rate around the neutral interest rate.
The neutral interest rate, it is held, is one that is consistent with stable prices and a balanced economy. What is required is for Fed policy makers to successfully target the federal funds rate towards the neutral interest rate.
This framework of thinking, which has its origins in the 18th century writings of British economist Henry Thornton, was articulated in late 19th century by the Swedish economist Knut Wicksell.
Changing the tiger’s stripes: Reform of Chinese state-owned enterprises in the penumbra of the state – Ann Harrison, Marshall W. Meyer, Will Wang, Linda Zhao, Minyuan Zhao
The conventional wisdom that privatisation of state-owned enterprises reduces their dependence on the state and yields positive economic benefits has not always been borne out by empirical work. Using a comprehensive dataset from China, this column shows that privatised SOEs continue to benefit from government support in the form of low-interest loans and subsidies relative to private enterprises that have never been state-owned. Although there are clear improvements in performance post-privatisation, privatised SOEs continue to significantly under-perform compared to private firms.
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