Ross Rants again. (See 1 below.)
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It is all about power and money. (See 2 below.)
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The dirty secret about striving to be Green, (See 3 below.)
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Dick
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1)The attached item has nothing to do with economics, but is a perfect example of the insanity on many campuses today. It was a comment written by someone responding to an article written by a well known author.
I learned a lot at the Moody Economic Conference. It was an intense two days like I was back in Wharton except it was one class after another all day with a bunch of young geeky economists who do complex math models I have no ability to understand. Here are some highlights. There is so much, I will be adding much more over time in future Rants. Keep in mind this is based on the Moodys Analytics research, which is massive and covers the whole world in depth with hundreds of staff economists. It does not necessarily mean they are correct in their conclusions. Mark Zandi, Chief economist at Moodys and a close friend, who admits to an anti-Trump bias, believes we will hit recession in June 2020. He bases that on the end of tax cuts and dereg impacts, and the trade situation. However he admits it is a very soft forecast, and his staff believes it may be later than that. There is a lot here, and a lot to absorb, with much more to come.
The economy remains strong and will remain so well into 2020, and maybe beyond, assuming the tariff issues with Mexico get resolved quickly, and we do not get into an all-out trade war with China, which will hold down cap ex. In July we will be into the longest recovery in US history. There are several countries with much longer positive runs, so there is no such thing as a recovery being old. That is a fallacy. This record is the main reason why all the objective election models all have Trump being reelected. If China gets worked out, he wins big. The only sector suffering is retail. Factories are slowing, but the sector is still growing. U6 is 7.3% which is nearing a record low. U6 includes part-timers who are seeking full time work so it includes people who are at least partly employed. It does not include people in jail, on drugs etc. Other measures of unemployment like U1, which some believe are more accurate, are at extremely low levels. Wages are rising and now growing at 3.5% and that should increase over time. Wages at the bottom of the income ladder are growing faster than all others at 6%. Real wages, adjusted for inflation, are up 1.5% or more. Core consumer inflation remains around 1.6% using the PCE measure of the Fed. It is universally agreed that current measures of inflation do not fully capture value increments, so actual inflation is likely lower. Everyone admits the Fed method using PCE is OK, but not fully accurate. The CPI from the Labor Dept is not accurate at all. We are in a virtuous cycle where wages are growing and jobs are plentiful, so consumers are spending, which means more jobs, which means more spending and investment, which means more economic growth. It takes a major event to break this cycle. A real tariff war could do it. The working assumption is the Mexico tariffs will get resolved very soon and the China deal will get done sometime over the next several months. Studies have shown that data on consumer confidence has zero predictive ability and is of little value to economists.
Because inflation is so low, and remaining there, it allows the Fed to cut rates if needed, which is what Powell was really saying this week. If inflation were above 2% it would be a harder issue. Low inflation allows the Fed to cut rates. he key is productivity which is now at 1.5%. Real wages are now higher than productivity growth which is the first time in 30 years this has occurred. Not a good thing for containing inflation. The tax cut let companies retain profits growth so they did not have to raise prices with low inflation. That effect is now gone this year so companies will raise prices where they can to maintain margins. If there is no trade war rates could go up because the market and GDP will grow faster. Tariffs in the US are effectively 6% right now, but if a trade war that will rise. The impact on GDP will not be great, but will cause some loss of GDP. So far the Chinese are not eating part of the tariff increase, but they likely will if tariffs are raised. What is happening is Vietnam and India are big winners. A lot of production is moving out of China to Vietnam which already has the infrastructure in place, and a qualified labor force. It could one day happen that tariffs are applied to Vietnam if they become a huge supplier of goods to the US. Work arounds are happening already. Americans are shipping soybeans to Brazil then on to China as an example. It is considered highly unlikely the Chinese would try to dump US Treasuries as they would get hurt if they did.
Business sentiment has collapsed for the moment due to the uncertainty of trade wars and Congress inability to function. As a result cap ex has been flat. Not good news.
Brits think a hard Brexit is now at least 50% probable now, and it might be more. Not good news for the EU. The EU is very unprepared for a recession. The impact of a hard Brexit for the UK will not likely be a disaster now. They have had ample time to prepare, and they will get through, and then do a free trade deal with the US. In the end the UK will end up a lot better off than the EU. There is a major reduction in skilled labor migration into the UK right now, which Is not helpful. Cap ex in the UK is stalled out for the most part although Airbus just announced they are staying and expanding.
The world economy seems to have bottomed and is starting to show signs of recovery. The US is about as good as it gets and it remains the economy that is key to the world and N America. Latin America is in bad shape. Argentina is in a real recession. Brazil is benefiting from the big increase in soybean sales to China but that will not last.
Commodity prices have been generally down due to the economic uncertainty.
Oil will remain in the $55-$60 range, even though it is well below that at the moment. Fracking has upended the entire oil market so that oil no longer has the imp[act it once did either on inflation nor on geopolitics. The US is now oil independent, and the world’s largest producer at 12 million barrels. If prices rise, fracking increases. We just need mush more pipeline capacity which is finally being built after Obama had shut it down. Every recession since WWII has been preceded by a big oil spike. In 2007 oil spiked to $145. Such a spike is unlikely now due to fracking. If the left had gotten its way and shut down fracking, the US would be in real problems right now, economically and geopolitically. They still do not get it, because they never look at the data, nor do they have any understanding of the geopolitics of oil.
What could cause a recession now. A rise in unemployment which would trigger stock market decline, loss of confidence, added job reductions, and then it feeds on itself. That is not foreseen right now and further declines in unemployment are predicted all the way to maybe under 3%--if there is no trade war. The day they announce a real rise in unemployment by more than 25 basis points, is a bad day, and may be the day to sell stocks early in the day before the market collapses. It will signal a real possibility of recession coming. I may get a sense of such an event before it happens, but nobody is expecting it in the near term unless Mexico does nothing on immigration and the Trump Xi meeting is a complete failure, which nobody expects in either case. Inversion lasting three months will be another trigger. Right now it is only less than one month so not a concern yet. Watch the three month vs the ten year. If it is inverted for over 3 months then a recession is possible in one year hence. Right now the cost of funds which is based on short term rates, is negative, compared to loan rates, so lending will decline soon if the inversion continues several months. At the moment credit growth is 4%-5%, which is a sweet spot. Not too much or too little. Mortgage lending is under good control unlike in 2007. Whatever happens, growth slows from here due to shortage of labor.
Declining population, which is happening, and shortages of labor, create growth issues. Japan already has a declining population, as does Russia. The rest of the developed world is not far behind, including the US. Interesting, but the end of the one child rule in China did not cause an increase in the birth rate. Women in China now have real jobs, and couples do not want the cost and burden of two kids. They live in urban apartments, not on the farm, so there is no grandma to take care of the kids. Chinese population will flatten very soon, while India is increasing. Population growth is key to economic growth, and it is slowing across the world. There will be growing shortages of workers which may be mitigated by AI making workers much more productive. It may be that AI does not really reduce human worker demand because there will be a shortage of skilled workers. This is what all the scare headlines about AI putting people out of work seem not to understand. The UK has seen a material decline in immigration of skilled workers due to Brexit. This will become a problem until the immigration rules are sorted out after Brexit.
Banks remain very solid in the US, as are consumers. We do not have the same risks of overleverage we had in 2007. However, too many corporations have taken on too much debt. It is at very low rates so there Is no pressure right now, and no risk in the short term of defaults. If there is a downturn and the market starts to refuse to refinance some of this debt them we can get a snowball effect and a credit problem. The other real problem is, if there is a recession, and the major banks cut the credit lines to the shadow banks that now account for 50% of the mortgage market, and repo lines are shut off immediately as they would be, then we would have a real liquidity problem. Since the Dodd Frank rule now prohibits bailouts by the Fed, Dodd Frank would create a real recession issue instead of leaving the Fed to resolve the problem rationally. This is one of the political driven rules in Dodd that will come home to haunt us one day. It would be the exact problem Congress was warned not to create, but they did it anyway. The Fed was created to solve a liquidity crisis, but Dodd Frank took away their ability to do that critical function. Stupid is understating what Congress did. Today US banks are very liquid. Consumer balance sheets are in very good shape and debt to income ratios are very good right now. Savings are at 7%, which is solid. Adjustable mortgages are now only 15% of oustandings, and most people have refinanced at low fixed rates, so there should not be a housing finance crisis again.
Asia exports are down a lot due to the slowdown in China. Vietnam is the huge winner of all of Asia due to the trade war. India one day could face tariffs on services. They provide a lot of services to the US and it is growing rapidly.
China, for its own reasons of far too much leverage in the system and far too many bad loans hidden on bank balance sheets, has changed banking rules so that bad loans now must be recognized. Over time this will strengthen the Chinese banking system, but it may put a lot of small businesses out of business. Belt and Road is changing trade patterns and opening up areas of Asia and the Mideast to new opportunities for Chinese trade. It will in general be good for the world economy to help build the economies of underdeveloped countries.
US retail has no pricing power anymore even though demand has increased substantially. Amazon and Wal Mart have changed all of that along with all the other online shopping we do. This will not get better. Competition is fierce. More brick and mortar stores will disappear, but the consumer benefits hugely with minimal inflation pressures. Retail is the only place employment keeps declining.
Consumer spending is likely to keep up with growth in the economy. But as job growth slows spending will slow. Wages will increase faster as jobs remain very tight. The quit rate is rising which leads to faster job growth as companies try to retain trained workers. However, as interest rates stay very low, other personal income is not growing much on an after tax basis beyond wage growth. Wealth is now growing more slowly as home prices grow more slowly and as the stock market remains in a hold level until China gets resolved. Wealth effect does matter. The top 1% have 31% of household wealth, but without stockholdings it is 25%, so investing in the stock market makes a huge difference. The general savings rate is 7%, which is good and is likely to hold there. Consumer borrowing and debt generally is growing more slowly than disposable income which indicates consumers are being prudent and lenders much more careful. Lending standards have tightened lately in a meaningful way which will keep consumers from getting over levered like in 2007. Mortgage credit quality is generally still good, but is deteriorating. Consumer delinquency rates are still very low. Debt to income is still a very good ratio. There is no correction coming in the near term as to consumers and mortgages. Measures of consumer confidence have proven to be a very unreliable indicator of spending. Do not pay much attention to these measures. They are not materially predictive. 2016 was the low point of home ownership at 63%. It is now 64.3% which is an add of 3 million. It will level at 65%in mid 2014-5. About where it normally is. The millennials are now getting the age where they have kids and the costs of many major urban areas is too high for many with two kids. They are starting to move out of downtown rental apartments. The issue is affordability and lack of sufficient down payment. Many young people have student loans or simply have not saved enough yet. The problem is not mortgage rates- it is purely home prices rose too much and lack of cash down.
Housing. There is only a 4 moth supply of homes for sale. Record low. Demand is 1.7 mill and inventory being constructed is 1.4 mill. Household formation is 1.25 million per yr and 300,000 house become uninhabitable per yr. The there is second home demand of 150,000 per yr. You see the number do not work which continues to drive up home prices. Vacancy is at record low of 3.3%. Much tighter mortgage standards take out a material number of buyers. As wages rise affordability is rising slowly in 2019. It is a race between rising incomes and rising home prices. Mortgage rates have little to do with it as they are very low. It is all about saving for the down payment. Sprawl has reached a point where the distance to commute for a low cost house has become too far so people are more concentrated in closer in urban sprawl areas which costs more. The demand for houses side will get greater as more millennials are having babies. Prices will not drop except in high cost urban areas like NYC or the Hamptons, where SALT has had a major impact.
On the flip side, the usual rule of 30% of income to rent means many more can afford a nice apartment. Vacancy rates remain low at around 4%. More can move out of their parent’s house.
Overall, housing is in very good shape for the foreseeable future, and no home mortgage crisis is going to happen. 50% of all home mortgages are now made by shadow banks outside the regulatory system, but so far they have been fairly careful because they need to sell the mortgages to Fannie or Freddie or the RMBS market. For now there is still discipline, but that can go away.
This ends round one of class- Lots more nesx Rant.
Not from the conference:
The hotel industry for several years has tried to claim Airbnb was no threat, and was just booking rooms that were created demand. None of that nonsense was ever true. Airbnb always took room nights from hotels. Now the industry is finally beginning to reluctantly acknowledge the truth. Airbnb is far too big to lie about, and has proven to be able to provide very good and satisfactory accommodations that are very competitive with hotels. The reluctance of the hotel industry to realize and acknowledge they had a major competitor, is the same mentality that they apply to data. They only talk about Revpar and never about cash flow because Revpar is top line and has been growing, albeit slowly, but cash flow for many hotels has been declining due to higher labor costs and property taxes. Now here is the really interesting part. Airbnb has wrecked the rental market in the Hamptons this year. A season rental is often in the range of $75,000 to as much as $250,000 for Memorial Day thru Labor day. No, those are not mistaken numbers, nor unusual here. So now Airbnb offers beautiful homes anywhere from one week to one month, or more, for much less. So a lot of people have realized they really only wanted a place for maybe two or four weeks, so Airbnb is the solution. Plus they get to change homes if they don’t like the first one. Thereby the home rental market in the Hamptons has cratered this year along with the sale market which cratered due to SALT. I don’t know what is happening elsewhere, but one assumes if this is happening in the Hamptons, it is happening across the country.
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2)
IT'S ALL ABOUT MONEY & POWER!
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China and India Will Watch the West Destroy Itself
China and India will allow the West — led by the United States and the European Union — to destroy themselves through dysfunctional domestic and continent-wide politics. This isn't a Donald Trump or E.U. issue, but electorates having a vague understanding of how societies function, particularly when it comes to energy.
The "Green New Deal" is evident of that fact. The plan has no chance of ever working under current technology and the taxpayer monies available — not to mention that the first "New Deal" was a failure. China and India will allow the U.S., the E.U., NATO, and their Asian allies to "[m]uddle through endemic crises menacing to [their] very existence (e.g., economic stagnation, demographic decline, rising unassimilated Islamic populations in many EU democracies, high taxes, mounting debt and the fiscal unsustainability of Western European social democracy)."
Without energy, you have nothing. China and India understand this better than the West, since their citizenries and leaders view energy through the lens of what will help over two billion combined citizens: join the prosperous, consumer-driven Western world. Most Western, environmentally sensitive nations believe that fossil fuels are evil. Instead, Western countries strive for renewable energy and to be carbon-free. Even if the U.S. were to cut its CO2 emissions "100 percent[,] it would not make a difference in abating global warming."
China and India have never bought into that notion of energy, or economies based on supposedly carbon-free renewables that inspire their nations toward a cleaner world. I wish they would, but that isn't reality. Both countries will continue importing, exporting, and excavating tankers full of coal, oil, and natural gas from countries that are authoritarian human rights–abusers such as Saudi Arabia, Russia, Iran, Venezuela, Iraq, Nigeria, Angola, and Algeria.
Furthermore, Chinese and Indian politicians, and increasingly African politicians, will never allow lack of pipelines, domestic politics, or sensitivity to Western environmentalists keep them from first-world status enjoyed by the U.S., the E.U., and Asian nations like South Korea and Japan.
Naïve thinking, bordering on Western suicide, reflects that China and India will stop using fossil fuels, led by coal. Each country understands that coal is plentiful ("estimated 1.1 trillion tonnes of proven coal reserves worldwide that at current rates of production will last 150 years"), and it is scalable, reliable, and cost-effective to the end user, with the best energy density of all fossil fuels or renewables available.
China is currently building hundreds of new coal-fired power plants. To counter China, "India has 589 coal-fired power plants, [and it is] building 446 more, bringing [the] total to 1,036." These figures are after both governments signed the Paris Climate Accord and touted their green credentials.
Since the U.S., Russia, China and India have the largest global coal reserves, and each country is vying for geopolitical dominance, they will continue using coal in record amounts. Energy is then a geopolitical weapon. Europe does not understand this fact.
Only Donald Trump seems to have gained clarity on this issue, with the U.S. using its newfound shale oil and natural gas power to its geopolitical and global advantage. Daily global media onslaughts, U.S. Democrats, and NeverTrump Republicans constrain Trump at every turn and facilitate the U.S.'s waning power. China and India sit back and do nothing, knowing that the West is too weak to come to the U.S.'s or Trump's rescue.
Renewable energy advocates can speak, write, and publicly lobby claiming that solar- and wind-produced electricity is the same cost or dropping compared to oil, natural gas, coal, and nuclear. This claim is false. Renewables cost more to ratepayers and nations compared to fossil fuels or nuclear.
Without having a basic understanding that every single wind turbine and solar panel is intermittent and has to be continually backed -up by fossil fuels, the West is committing environmental degradation and putting itself at risk against China, Russia, Iran, and North Korea. Based on self-interest rightly understood, India will then choose aligning with countries hostile to Western interests over environmental concerns.
A great power struggle has broken out between the world's largest democracy — India — and the world's largest authoritarian state — China — and whichever country uses the most energy will win Asia for the rest of this century. National security and the competition between them over Asia are at the crux of why they will watch the West destroy its own economies over bad energy policies.
Sure, India and China will use natural gas, nuclear, and oil, but coal is where each economy finds its basic energy resource. Horrible for world emissions, air pollution, and global health, but how do Westerners, the United Nations, and environmental organizations tell both growing countries they cannot have access to the same energy opportunities and growth the West has now had for over seventy years?
It simply won't happen: world health organizations, research universities, think-tanks, and multinational corporations interested in global longevity and clean air should begin working toward clean coal technology.
All great nations, including China and India, view energy as a domain of power. The West already has its power but no longer knows how to use it the way it did during the Cold War. Global warming, abortion, marriage, and renewables versus fossil fuels have overtaken realism in all facets of government, military strategy, and economics, as well as countering the global threats from China, Russia, Iran, Venezuela and North Korea.
Raw, amoral geopolitics that will grow economies, engage realist strategies, house militaries, and feed energy-hungry populations is the new Cold War. Social issues are important, but unless you are talking about the unintended consequences of abortion in the U.S. and China, these issues have no valid correlation within energy geopolitics. Energy and electricity are at the forefront of which ideological viewpoint will win the 21st century.
Accessible energy becomes more important than ever as the competition between China and India heats up. Unless something drastically changes, the West will diminish significantly — ushering in the "Asian century," with China and India biding their time to take over the U.S.-led liberal order that was created after World War II ended.
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