You are currently browsing the tag archive for the ‘Trump’ tag.

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.

      

 

Advertisements

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?!

 Peak America? The Numbers Say, Yes!

By   Shlomo Maital

 

   Writing in the Washington Post, (and on his GPS program on CNN), Fareed Zakharia cites Morgan Stanley expert Ruchir Sharma, who argues that America may at this moment be at its peak of economic and financial power – and heading downward.

   “As Morgan Stanley’s Ruchir Sharma has pointed out, the global economy looks as if it’s at “peak America.” U.S. stocks have outperformed the rest of the world this decade, and that sort of trend rarely lasts. The current recovery is now the second-longest in history, and it is due for a downturn. Interest rates are rising, corporate profit growth is slowing, and budget deficits are surging. Even President Trump seems aware of the likelihood of a dip, which is why he has been preparing the ground for it, blaming the Federal Reserve for raising interest rates.”

   Sharma notes this striking fact: US stock markets have tripled in value since 2010, while all other stock markets in the world have risen by only an average of 50%.

   The last time such an imbalance happened? 1999 (just before the dot.com bubble burst). And before that?   1929.

   Zakharia notes:   “Anywhere one goes in the world these days, leaders talk about the United States’ retreat from the world stage. They note that it began before Trump. Most date it to the aftermath of the Iraq War, spanning the administrations of George W. Bush, Barack Obama and now Trump. And while the Trump administration is bellicose in its policies, especially on trade, they are all in service of a Fortress America mentality that seeks less engagement with the world, politically and economically.”

   And he continues: “Foreign leaders also note that the United States is likely to be increasingly constrained by its mounting budget woes. The Financial Times’s Gillian Tett points out that the U.S. government now spends $1.4 billion a day on its debt, 10 times more than the next major industrialized country does. As interest rates rise and more Americans reach the age of collecting Social Security and Medicare, the federal government will be unable to fund much else. Ezra Klein has quipped that the American government is “an insurance conglomerate protected by a large, standing army,” and that is becoming truer every day.”

   Many in the US and abroad loathe President Trump. They should not, however, gloat when he makes America decline (again)   (MAD).   A world with a declining America will be chaotic, violent and troubled.

     Zakharia: “American retreat will not produce a better world. It will be messier and uglier. To get a glimpse of it, look at the Middle East today. As the United States has withdrawn from its traditional role as the region’s power-broker — maintaining relations with all sides and striving to achieve some degree of stability — Iran, Turkey and Saudi Arabia are all jockeying for influence. The United States has simply subcontracted its policy to Riyadh, encouraging the Saudis’ reckless behavior and resulting in the world’s gravest humanitarian crisis, the war in Yemen, where 12 million people are on the verge of famine.”

 

   

 

 

 

State & City Budgets:

Dangerous Hot Potato

By   Shlomo Maital

      US State and Local Budget Deficit/Surplus, 1960-2016

     Amazon has just announced it will split its new headquarters buildings between Long Island City, Queen’s, and Northern Virginia, and a smaller center in Nashville.   According to CNBC: “The company said it will receive up to $2.2 billion in performance-based incentives from the three areas: $1.5 billion associated with its investment in Long Island City, $573 million in Arlington and up to $102 million in Nashville. The incentives take the form of cash grants and tax credits, and some take effect over time.”

     The announcement highlights an interesting fact. As MIT Dean Lester Thurow noted once, companies once paid taxes to cities, and now cities pay taxes to companies (like the huge grants Amazon received). True, Amazon will invest substantially – but giving over $2 billion to a company whose stock is worth $800 billion? That made $3 billion in profit in 2017?   From city budgets that are already strapped? Amazon’s Jeff Bezos, of course, cleverly strategized by creating a competition among cities over who would give him the best deal.  

   And there is a much deeper problem, too.

   The U.S. federal government recorded a $100.5 billion budget deficit in October, an increase of about 60 percent from a year earlier. That is the gap between what the federal government spent and what it earned in taxes, in just one month!. On a yearly basis, the federal deficit is headed for a record 1 trillion dollars, or over 5 % of US GDP. The cause? Mainly, the massive Trump tax cut passed in 2017. Most of it went to businesses, and they in turn spent it on buying back their shares and on dividends. Very little went to capital investment.

     How will this deficit affect ordinary Americans? The press focuses on the massive $20 trillion US public debt that future generations will have to pay, as the federal government borrows tons of money to pay its bills. But there are deeper reasons for concern.

     Many experts predict an imminent slowdown in the US economy – perhaps, a recession. What happened in the last recession that followed the 2008 financial crash?

     According to Tracy Gordon, Brookings Institute, Washington, “More than in past economic downturns, state and local governments were a prominent casualty of the recent recession. States in particular saw their revenues plunge. Although state taxes have been rebounding, local property taxes have dipped, consistent with a two- to three-year lag between home prices and property tax rolls. These reductions coincide with state cutbacks in local aid, further squeezing local budgets.

       [See Figure: State & Local Government Deficit/Surplus 1960-2016]

   Why is this a potential serious problem? Gordon continues,    

     “These are critical issues because states and localities perform most of the activities we commonly associate with government. They undertake most direct spending on public goods and services (including their expenditures from federal funds), and they bear primary responsibility for investments in education, social services, and infrastructure that directly affect our national economy and quality of life. States and localities are also key economic players, comprising 12 percent of Gross Domestic Product (GDP) and employing 1 out of 7 workers – more than any other industry, including health care, retail sales, and manufacturing.”

   In other words, state, local and city governments supply the things that underpin quality of life – health care, education, transportation, infrastructure. They generate one dollar in every 8 dollars of GDP and employ one worker out of every seven.

     So, here is a scenario that is a cause for worry. The US economy goes into recession in late 2019. The trillion dollar federal budget deficit swells dangerously. The federal government slashes spending where it can – cutting financial aid to state governments. State governments (many are constrained by law to balanced budgets) in turn slash their grants to municipal, local and city governments.

     And these, in turn, slash spending on the things that make life pleasant, or bearable, for most Americans. Potholes? Traffic jams? Dangerous roads?   No money available to fix them.

     This is a dangerous game of ‘hot potato’.   And it’s not a pipe dream. It happened in 2010.   Deficit hot potato passes from the federal government to the state government, which in turn tosses it on to local and city government. The buck stops there, and that hot potato burns our fingers. It happened before – it will happen again.

     On a recent trip to the US, my wife and I made frequent use of WAZE. WAZE kindly told us about every pothole. And there were a whole lot of them.   I don’t recall that feature in other countries.

       Even in good times, city budgets are strained. Seeking re-election, mayors spend their money on the short-term, while costly long-term capital spending is neglected. (Why spend money to help some future mayor, maybe a rival, get elected?).  

       There is a solution. Let state legislatures require cities to build five-year capital expenditure budgets, to accompany the one-year operating budgets. Let the federal government help the states and cities pay for interest costs on debt that finances capital spending. Protect those five-year budgets zealously from ‘theft’ (shifting spending from long-term to short-term).  

       Conservatives will scream, socialism!   Five-year plans are used, for instance, in China. OK – ever looked at China’s infrastructure? Fast trains, brand new airports?

       Hot potato crises for city budgets make no sense. It’s time for a change.

        Half the world’s population now lives in cities. By 2050 that will rise to 75%.   How cities spend their money and raise their revenues will have a huge impact on the wellbeing of the people who live in them. And there is a ‘hot potato’ problem. It’s time to fix it.

Blue Collars Lose Ground – Don’t Blame Trade

By Shlomo Maital

 

     Led by the Trump Administration in the US, worldwide there is a counter-revolution against globalization. Right wing governments are being elected in Hungary, Italy, Austria, partly in Germany, and elsewhere, reacting against the ravages of globalization – particularly, the claim that blue collar workers are being scalped by it – by migrants (free flow of labor) and by trade (free flow of goods).

     America, which invented this amazing system that made many emerging economies wealthy (East Asia, primarily) now leads the charge against it.

     And this whole counter-revolution is based on a falsehood. Don’t blame trade. Blue collar woes have another primary cause, according to Harvard University Professor Elhanan Helpman, in his new book Globalization and Inequality. It was not primarily free trade (globalization) that caused the large gap between blue collar and white collar wages.

     Earlier, in 2016, Helpman published an NBER working paper * showing this (typically understated, as academic researchers are wont to do):

       Trade played an appreciable role in increasing wage inequality, but its cumulative effect has      

       been modest, …globalization does not explain the preponderance of the rise in wage inequality

            within countries.

   What, then, does explain it? Technology and productivity.

     Studies show that the premium for a college education (i.e. skilled workers) was 63%.   The blue collar/white collar wage gap results from basic supply and demand factors, “…the dominant cause was an increase in the relative demand for skilled workers”.

   OK – so who is to blame?   American political leadership, for failing to find ways to upgrade the skills of blue-collar workers, especially in America’s failing and failed educational system.   And, as New York Times op-ed columnist David Brooks has noted – the educated elite simply ignored the plight of the non-educated elite – and the price they pay is the election of Donald Trump.

* Elhanan Helpman. “Globalization and wage inequality”.   NBER working paper 22944, Dec. 2016.

 Infrastructure:  Europe, China – and America
By Shlomo  Maital 
 
    In Economics, there are not many principles we can cite with absolute certainty.  Here are two of them:
   1.  The rate of return on investment in Research and Development is in many cases astronomical.  In 1958 Prof. Zvi Griliches found that investing in research in hybrid corn “paid a return of at least 700 per cent”.   Few other social investments can rival this. Yet countries continue to underinvest in R&D.
   2.  The rate of return on investment in infrastructure (roads, transportation, communication, education) is equally astronomical.  Yet in the West countries continue to undersave and underinvest in infrastructure.
   The contrast between Europe, China – and the US under Trump is stark.
    The EU, not noted for bold innovation, is undertaking a huge infrastructure project that will link Malmo, a Scandinavian port, with Palermo, a port in Italy.  This project will help reduce the large gap between the wealthy Northern EU and the relatively poor Southern EU.  It will do much to knit the fractured EU together, in the wake of Brexit. 
     China has a bold vastly expensive program to build a new Silk Road, linking China with Europe, the Mideast and Africa.   The One Belt One Road initiative, now changed to “Belt and Road Initiative”   is, according to Wikipedia “one of the largest infrastructure and investment mega-projects in history, covering more than 68 countries, equivalent to 65% of the world’s population and 40% of the global GDP as of 2017.”
     And the US?   Well,  on a recent visit there, I used Waze (an application developed originally in Israel, now owned by Google) to navigate.  In the US,  Waze informs the driver of potholes. And, trust me – I heard about a LOT of potholes from Waze while driving in the eastern United states.  Some of them were big enough to swallow Trump’s ego.
      President Trump speaks often about infrastructure.  He has plans to fix it, including thousands of crumbling bridges. But here’s the catch.  The latest Trump tax cut put a huge hole in the government budget and added $1.5 trillion to the deficit.   So there is no money left for infrastructure investment.  The solution?  Trump thinks he can get private industry to finance it, using tax credits.
       This is science fiction.  Basic economics shows, the return on infrastructure investment is largely “social”,  that is,  not captured by private investors, but accruing in a diffuse manner to all of us.  So why would private money invest in it? 
         China, EU – and the US.  Another instance of how the US has become a Third World nation, and China, in the Third World, is becoming First World. 

 3 Decades in 364 Words:
A Guide for the Perplexed
By Shlomo  Maital   
  
     The world has become a chaotic, complex system, hard to understand, impossible to predict.  Here in 300 words is a vestpocket history since 1989 –hope it will help.
      On Nov. 9 1989 the Berlin Wall fell.  This led to the rapid unification of the two Germany’s (note: this can also happen to the 2 Korea’s, equally fast), which accelerated the European Union, and marks the onset of true globalization – free movement of ideas, capital, labor, goods, services and information across borders. 
       Globalization created massive wealth for a handful smart enough to take advantage.  It created unprecedented growth for China and other Asian nations; for Germany to some extent; for India, and some poor countries.  But most poor nations were left out, especially those in Africa. 
        Capitalism broke down.  Great wealth bought political influence, and corruption became rampant, in Russia,  and elsewhere.   The huge canyon between rich and poor led desperate people in corrupt nations (Mideast, Africa, some Central and Latin American countries) to migrate, at risk of life and limb, toward the wealth.  Meanwhile, in many countries democracy regressed.  The EU pushed union too far, seeking to unify politically, leading to widespread pushback and Britain’s exit.  The flood of migrants to Europe threatened the foundations of European unity. 
      In the ongoing historical cycle, the wave of democracy that swept the world after WWII,  and during globalization,  began to retreat, as corruption, influence of money and wealth disparities led democracy to break down in many places that tried it.  The Arab Spring became the Mideast winter.  Russia, China and other nations seemed to entrench leaders permanently.   Globalization receded.
       Even America, a bastion of democracy,  regressed under Trump, embracing the backlash of the white minority against migrants.  Trump’s “trade wars are good” reflects abysmal ignorance of the last Great Trade War, 1933, that brought a world depression.  Italy’s election tomorrow will focus not on key issues (economy, jobs) but on Italy’s 650,000 migrants.   In my country Israel, a right-wing government seeks to illegally expel African migrants, against their will.
      This cycle will play itself out.  We will eventually return to democracy and globalization will again grow and spread.  We will find ways to include poor nations left out of the global system.  Racist ignorant leaders will be deposed.  We are seeing signs everywhere of an uprising, of young people taking responsibility.  Take a long view of history and remain hopeful.

= = = = = =
A brief p.s.     In May, if sufficient numbers register,  I will offer a one-week course on How to Change the World With Ideas, at a beautiful spot in northern Greece.  If this interests you, check out:   http://unboundprometheus.com/program-one/

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
March 2019
M T W T F S S
« Feb    
 123
45678910
11121314151617
18192021222324
25262728293031

Pages

Archives

Advertisements