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Understanding the Brexit Disaster:

Ask the Psychologists!

By Shlomo Maital

I’ve been glued to our TV, for weeks, watching the British debate in Parliament what to do next about Brexit. I’ve watched how the world’s oldest elected Parliament cannot find a majority for anything – except, maybe, NOT to crash out of the EU. I’ve watched how the Trump-like PM Boris Johnson tries to circumvent Parliament, in the name of democracy but instead mortally wounding it. I studied for a year in Manchester, and feel deeply sorry for the people of Britain – and am trying to understand how they got into this pickle.

     Enter the psychologists. In the excellent podcast Hidden Brain, by Shankar Vedanta, the Harvard University psychologist Daniel Gilbert was recently interviewed. He spoke about this – we humans are incorrigibly bad at predicting the future,, specifically, in predicting how we will feel in future about a decision made in the present.

   The British people voted narrowly (52 for, 48 against) to leave the EU, in 2016. Mainly they voted for “take our country back”, a slogan pushed by pro-Brexit politicians, driven by anger at the flood of migrants crossing the English Channel that under EU rules could not be stopped.

     But what about other aspects of leaving the EU? What about the Ireland-Northern Ireland border? What about all the EU citizens living in Britain? What about trade, tariffs, customs? Then-PM David Cameron, who initiated the referendum, never believed it would pass, and never developed realistic future scenarios about how leaving the EU would be done. Former PM Theresa May stubbornly pushed the same leave-EU proposal to Parliament three times – despite zero chance of it passing.

       Professor Gilbert explains, basically, that when we make a decision, we are pretty hopeless about predicting how we will feel about it. As the Brits learn more about what leaving the EU means – crashing out with no deal, in particular, as Johnson obsessively wants — I believe they regret their initial vote in 2016. In particular — if only 1.5 per cent of those who voted “leave” now change their mind and would vote ‘stay’ – the referendum would be reversed.   Yet — cynics, in the name of democracy, say “the result of a referendum is set in stone” – even though Parliament, elected by the people, can change its mind a dozen times a day, also in the name of democracy.

     Basically – people are flawed in how they predict how they will feel about a decision in the future. We know this from the work of psychologists, and from our own introspection.

     Conclusion: Do another referendum on “leave or stay”. Take into account that humans are flawed. Give the British people another chance.

       But Johnson and pro-Brexit politicians insist this is undemocratic. Wrong.

       The 2016 referendum was terribly flawed. The British people were not told the full story. They voted on the basis of a narrow idea, ‘take our country back’. They weren’t told, how precisely this would be done.

       So – do it again. Offer clear precise scenarios. And offer a clear ‘leave’ plan, including Ireland.

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Why the World Economy is Slowing – And What You Should Do

 By Shlomo Maital  

             graph: Federal Reserve, Wells Fargo, Washington Post

What in the world is going on? It’s time to try to make some sense of it.

The Dow-Jones stock index takes its biggest plunge of the year. Bond markets are jumpy. And everyone talks about the inverted yield curve.   What is going on?

Let’s try to understand all this.

    The ‘yield curve’ is simply a chart or table, showing the rate of interest you make on your investment, and the length of time you invest the money. In normal times, the longer the time you commit your money, the higher the return or yield. It’s just natural. A longer time period means more risk.

    But once in a while, the normal order of things gets turned upside down. And that is what is happening now. Why?

     When investors are afraid that a recession – an economic slowdown — is brewing, they anticipate that Central Banks will have to lower interest rates in response. So they buy longer-term bonds to ‘lock in’ current higher rates, in the knowledge that soon those rates will come down.

   That rise in demand for, say, 10-year bonds, raises the price of the bonds, by the law of supply and demand, and when the price of a bond goes up, then its rate of interest goes down. Why? If the bond coupon is $3 for a $100 bond, and if you pay $110 for the bond, your return is 3/110 or only 2.7%. Higher bond price, lower yield.

   That is what is happening now. The last global recession was in 2008, after the financial crash and panic of 2007/8. The current global expansion has lasted 10 years. It’s one of the longest such expansions. It is long in the tooth. It is the nature of business that after booms, come busts, big or small. And it seems time for a bust.

   As the graph above shows, since 1980 every single time the long-term yield or interest rate falls below the short-term rate, there has been a recession, within a few months.

   Other signs confirm this. China’s economy is slowing, growing slower than it has for decades. Europe is slowing – Germany is in recession already, Britain will be in recession after a crash-out Brexit, Italy is again in deep hot water. The US economy is also slowing, buoyed only by consumer spending. Business investment is low, because of uncertainty over the trade war, and the belief China will hope for a Trump defeat in 2020 and is simply waiting it out. So when Europe, China AND the US economies slow – there are no locomotives to pull the global economy out of the mud.

   This is bad news for President Trump. His overall approval rating is way below 50%. But his approval rating on the US economy alone is well above 50%. An economic slump could cost him re-election.  And he knows it.

     Trump has been fiercely critical of Jay Powell, Chair of the US Federal Reserve (central bank). For once, maybe only once, he is kind of right. Last September, the Fed raised interest rates slightly, by 25 basis points (0.25%) to current levels, the highest since April 2008. Whooops… not wise, when a slowdown is imminent, and when the Fed may hence have to do a sharp U-turn that lowers its credibility.

       For us working people, what does all this mean? Cut back on your spending somewhat. Set aside some money. The recession may be short, it may be long, or it may not happen. But chances are it will. Good to have a cushion on hand, if it comes. You never know.

 

In Politics – Too Many Lawyers?

 By   Shlomo Maital

 

     “98% of lawyers give the rest a bad name.” There are an infinite number of such jibes, most of them worse. I am an economist – Personally I think economists have done far more damage to the world than lawyers.

       But after watching the Mueller testimony, before two House of Representative committees… I can make the case that lawyer-dominated legislatures generally miss the point.

       The US House of Representatives has 535 members, of whom 168 are lawyers, by far the leading profession. In contrast there are only 11 physicians and three psychologists. Yet this body writes the laws for healthcare in the US.

         The US Senate has 50 lawyers, fully half of the 100 senators. Only 3 Senators are physicians.

         So what is the problem?

         In the Mueller hearings before the House Judiciary Committee (naturally, mostly lawyers, it makes sense) and the House Intelligence committee (also, lots of lawyers), one question dominated what members asked Mueller:

         Did President Trump break the law? Did he conspire? Did he tamper with witnesses?

         That’s the wrong question. Even if he did break the law, he cannot be prosecuted. That is what the Department of Justice says. He can be impeached – but not convicted, because Republicans dominate the Senate.

           So the legal approach is pointless.

           Then, what IS the point?

           Did President Trump act disloyally, treasonously, unethically, immorally? Did he act really really badly?  

           THAT is the question. THAT should have been the focus. It was, for a handful of House members. But mostly the lawyers dominated. And that played into Trump’s hands. Mueller was greatly limited in what he could say, because Special Counsel is a prosecutor – and prosecutors cannot say a whole lot. That in part is why his answers were hesitant. Plus – YOU try working long hours for 22 months, at age 74 and then testify for 8 hours before two committees, while having trouble hearing the questions (I really think Mueller needs hearing aids – vanity may prevent this, trust me, I know personally!).

           We voters should expect our elected leaders to behave honestly, morally, and to speak wisely, respecting everyone, especially their opponents. When they don’t — kick them out.

           2020 cannot come soon enough.      

World’s First & Greatest Democracy: R.I.P.

 By Shlomo Maital  

 

   This is a very sad, wrenching eulogy for Britain. The world’s first and greatest democracy is at a dead end.  Rest in Peace.

     I often watch Parliamentary debates on BBC TV, and enjoy the thrust and parry between the Prime Minister and her critics. Democracy at its best.

     This is why I am saddened today, when crackpot Boris Johnson will be chosen Conservative Leader, and automatically Prime Minister – by 1% of the British electorate. The other 99% have no say. Why? That’s how the system was set up. It must be changed.

       Johnson has vowed to take Britain out of the EU, come what may, by Oct. 31. This implies a ‘hard Brexit’ (exit without a signed agreed deal). Here is what Bloomberg thinks about this option:

   The U.K.’s planned exit from the European Union may have already pushed the U.K. into a technical recession, according to the National Institute of Economic and Social Research.   In a gloomy set of new forecasts, Niesr predicted that, even assuming a smooth exit in October, the nation will grow 1% in 2019 and 1% in 2020. There’s an around a one-in-four chance that the economy is already shrinking, the think tank said.

Britain may already be in recession, because of Brexit. Not a great time for a crackpot leader.

     Crackpot? Isn’t that disrespectful, extreme, exaggerated? No.

    Today’s New York Times: “Is Johnson how Britain will end?”

       Tackling Britain’s deep divisions requires depth of character, conviction and principle, none of which its incoming prime minister has ever hinted at possessing….he prizes victory above government –his first ambition as a child was to be ‘world king’ – and his political career has been marked by ferocity of campaigning and indifference in office, both as London mayor and foreign secretary…

     And another NYT article:

     In his pursuit to become prime minister, Mr. Johnson has adapted his old habits – the theatrics, the polysyllabic putdowns, the outlandish plans –for the Brexit era…..his promise to extract Britain from the EU by the end of October has left many Britons worrying he will send the country hurtling toward a potentially calamitous no-deal Brexit.

     While Trump ruins America, now Johnson will ruin Britain. Two of the West’s great economies and democracies, heading down the tubes because of a broken democratic process – Russian interference in the US, and an archaic totalitarian system for choosing the Tory leader in the UK.

       Very sad.

    

 

 

 

 

 

        

US GDP Growth: NOT What It Seems!

By   Shlomo Maital

I recently wrote a column titled: Why Can’t Economists Talk Straight?, in the Jerusalem Report. It was a book review of a book by a friend, an expert on behavioral economics. It explains why economists befuddle, use impenetrable jargon, and in general confuse and obfuscate.

     Here is a recent example.   US First Quarter GDP figures were headlined as: US economy growth surprises!   3.2% growth. Way above what was expected. It was predicted that a recession was on the way. But it’s not!   Yeeayyy!    This is what journalists wrote. I can understand that. They are not trained to read the economic X-Ray data. But economists?   Where ARE they?   Nowhere.

     The first quarter GDP news is BAD BAD BAD! Not good.   Here is why.

       A large part of that 3.2%   growth was “inventories”. Nearly a quarter. Without that, growth would have been 2.5%. Much worse ….. But what IS that inventory thing???

        Here is the straight talk.   GDP growth reflects what is PRODUCED   — not what is SOLD.   Some of GDP is sold. Some is NOT. So it is put into warehouses. This is then called ‘inventories’ or ‘inventory change’.  

       A whole lot of stuff was produced in the first quarter – but companies couldn’t sell it.   So cars, fridges, computers, motorcycles, appliances, etc. went into warehouses.  

       That is bad news. Because in the 2nd quarter, companies will sell off that inventory rather than produce new stuff. That will greatly reduce GDP growth rate.   In 2nd quarter, we will see numbers that begin to herald a recession. Trust me.   Set aside some money – we ARE heading for a slowdown.

      Now, is that bad news? Or good?     As we head toward elections in November 2020, a recession will help defeat Donald Trump.   People DO vote their pockets, to some degree. And the likely Democratic candidate Joe Biden is running a campaign to enlist support of working people.   Trump has not even begun to deliver on his promises to them. And they are beginning to get it. Moreover, Biden has pulled Trump’s chain, and got Trump to attack unions (dues-sucking!).  

       So bottom line:   NOT 3.2% growth, but 2.5% growth (subtracting inventories), to reflect what people actually BOUGHT. They are buying less. This is a slowdown signal.   I can find nowhere where this is widely and clearly reported. A great shame.

 

 

Why Rising Stock Market Is Bad News     
      By   Shlomo Maital

   The New York Times reports: “The US stock market is off to its best start (of the year) since 1987”. Good news? And then the bad news….”investors are expected to dump hundreds of billions of dollars of shares this year.” Bad news.

     So what in the world is going on? The article, by Matt Phillips ,has an uncharacteristically clear, simple explanation.

     Remember that Trump tax cut? The one that put billions of dollars into the pockets of the wealthy and the corporations? Well it made the corporaitons cash flush.

     What did they do with the cash?

     Invest it, in infrastructure, R&D, innovation?

     Not exactly.

     They mostly used it to buy back their own shares, massively.

     Why? Simply – to funnel that big tax cut directly into the pockets of shareholders, at low (capital gains) tax rates.

       Share buy back by corporations drove the market up.   Even at a time when armchair investors, funds, etc…. were selling.    Investors aren’t dumb. They will take their profits, before the market crumbles when the buy backs of corporations stop.

       I avoid the stock market. But for those who want to listen, I counsel, don’t hold shares of businesses that buy back their own shares. Why? If the best investment businesses can make, is buying back their own shares, rather than developing new and better products, well —   dump them. Share buy backs are abysmal.  They are caused by CEO’s seeking to look good, in the short years they hold the position, under pressure of myopic shareholders and Boards.

         Share buy backs have now cemented corporations as the leading source of demand for shares – their own. This is a fundamental change in the way the stock market works. It is a change for the worse. When companies STOP buying back their own shares, they will pull the rug out from under the market.

     This will happen, perhaps, when the US enters recession – something most economists expect to happen by 2021.

      

 

World Economy: Heading South West (That’s Not Good)

By   Shlomo Maital    

I know I am repeating myself.  I wrote about this just recently.  But, the latest Ifo (Munich think tank) survey reveals this:        

  “In the first quarter of 2019, the economic climate indicator for the advanced economies has tumbled to its lowest value since the fourth quarter of 2012” 

                                  
  The graph above shows on the x axis, “assessment of the current economic situation”  and on the y axis,  “economic expectations” (how you think the economy will trend in the coming 6 months). 
    The worst outcome is:  the ‘dot’ moves south west (i.e. the economy is declining, and it will continue to decline in the near future).
     Ifo Munich gathers data on the world economy, by region, by a survey of experts. 
     Look closely at the graph –the “world economy” moves strongly south west.  So do the Euro area and advanced economies.  Same for Mideast and North Africa.  Nowhere does any economy move other than west (down). 
      Why?   How about – US -China trade war, global uncertainty, Brexit,  EU disunity, and….   The list is long. 
       We can blame part of this on Trump.   He has thrown a monkey wrench into the world trading system, introduced massive uncertainty….and the world economy has cooled.    When the two largest economies in the world, US and China,  AND Europe, all cool at once….   We are in trouble.
       Fasten your seat belts.  It will get worse before it gets better. 

Global Slowdown – Beware!
By   Shlomo Maital

 
  
  I regularly participate in an economic survey run by a Munich-based research institute, that tracks how the world economy is doing.  The latest results are not good.
  The heat map shown above indicates whether economies are booming green or slowing yellow, orange, light red, dark red. 
    You can see at a glance looking at the ‘heat map’,  that the US, Europe and emerging and developing economies in Asia are all slowing.  Basically the whole world is slowing down, economically.
     Why?   The US is cooling, as businesses choose not to invest the tax windfall given by the Trump Administration but rather to buy back their shares.  China is cooling, owing to the trade war with the US.  Europe is cooling, owing to deep uncertainties about Britain, Italy, Hungary and other nations, and a growing spat between France and Italy.
    In short – look for a global slowdown, that feeds on itself —  US demand slows, hurts China, which hurts the Asian economic ecosystem..which in turns slows….
     A good time to set aside some savings, for rainy days ahead.

Distraction – Our Greatest Threat
By   Shlomo Maital
 
      It is easy to identify a lot of things that have gone wrong in the world.  Britain is in a deadly stalemate, facing an urgent decision and with no majority for anything.  Right wing governments threaten democracy in Venezuela, Poland, Hungary and even Italy.  America is stuck in a stupid conflict between a stubborn President and stubborn Democrats.   Israel goes to elections on April 9 that according to polls will change absolutely nothing.
        But underlying all this is a little-noted problem. Distraction.  Small children are easy to distract; parents do it all the time.  Apparently world leaders are also easy to distract.
Trump obsesses over a wall, while America’s economy slows, and its infrastructure crumble.  Israel faces threats on its borders, but its Prime Minister obsesses about his impending indictment for bribery.  Europe struggles with migrants, and debt, but is totally distracted by Brexit and will be for months.  China and the US grapple over Huawei and cell phone technology, while their trade war causes the entire world economy to slow.
       
        The world has lost focus.  The 30-second news cycle has led to massive myopia, neglecting longer term problems.  Elections focus on personalities.  Try to find a comprehensive well-designed political platform for any political party anywhere. 
      I think the distraction of non-news and personalities is a major threat – if it continues, we will never even begin to grapple with the real major problems the world faces.
     So, let’s decide – Just because our leaders are distracted, and purposely try to distract all of us with pipsqueak inconsequential matters,  we don’t have to play.  Where possible, let’s find ways to refocus the political system on the things that really matter – saving, education, investment, schools, roads, corruption, equality, and overall creating a better world.
      Make America Make the World Great Again.

 Kids Sue Elders: Is This What We’ve Come To??

By   Shlomo Maital

   I recently wrote a column in the fortnightly magazine Jerusalem Report, titled “Waging War on our Children”. The title was a direct quote from Professor Larry Kotlikoff, Boston University. Kotlikoff pioneered economic studies of “intergenerational equity” – how one generation passes on a better (or a worse) economy and society to the younger generation.

   Today, Kotlikoff’s meticulous studies show, it is …worse! Much much worse. Because, when you take the present value of US spending obligations (education, health, pensions), and the present value of US tax revenues, there is an enormous fiscal gap of $200 trillion, or 10 times US GDP.   This is the debt burden the US is dumping on its young people. And this is true of other countries too, including my own, Israel.  (see Kotlikoff.net)

       In the latest issue of NATURE magazine (Nov. 8), I spotted this amazing short article.   American ‘kids’ (young people) are suing the government (older generation), for ruining the climate and leaving them with a bloody mess.

       This is a serious suit. Of course the Trump administration seeks to have it dismissed. But the Supreme Court will debate it seriously.

       Is this where we’re at? Is this how low we’ve sunk? Our kids have to sue us, to get us to do something about the god-awful mess we’ve left them?  

       Hey kids. It’s not just the climate. It’s the toxic volatile divisive angry political situation, the hollowed-out economy (industry sent abroad), the spend-and-borrow society, the crummy schools, and much more.   Broaden your suit. Sue us for the mess in general, not just climate change.   Maybe that will wake us up?!

Blog entries written by Prof. Shlomo Maital

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