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ARTICULOS DE SUMO INTERES INTERNACIONAL

FMI Y CORTE DE PBI ;  CHINA;  JAPON;  MAULDIN Y GOLD FUNDAMENTALS

Publicado: 2017-06-28

Por:Dennis Falvy  

IMF CUTS US GROWTH FORECAST AS PROSPECTS FOR FISCAL STIMULUS FADE

The fund delivers sceptical assessment of Trump administration’s growth forecasts

By: Sam Fleming in Washingt

Falling forecasts: the IMF delivered a highly sceptical assessment of the US administration’s growth predictions © FT montage; Getty

President Donald Trump’s struggle to deliver a fiscal stimulus this year has prompted the International Monetary Fund to cut back its growth forecasts for the US economy — just months after it boosted its outlook on hopes of a policy overhaul.

Following slow progress by the White House and Capitol Hill on long-mooted tax reforms, the fund on Tuesday lowered its prediction for gross domestic product growth this year to 2.1 per cent, down from an earlier forecast of 2.3 per cent. The fund reduced its growth outlook for 2018 to 2.1 per cent from 2.5 per cent.

It also delivered a highly sceptical assessment of the administration’s growth predictions, pouring cold water on White House claims that its policies would help deliver a sustained 1 percentage point acceleration in annual growth. The fund warned that there were few recorded cases of advanced economies achieving such a leap.

Trump administration officials have vowed to boost growth by getting tax legislation to the floor of Congress in September as well as pushing through an infrastructure spending blitz. But infighting in the party over divisive healthcare reform plans, coupled with a White House distracted by the probe into alleged Russian interference in the US election, has contributed to repeated delays.

In its annual Article IV report on the US, the IMF said lawmakers should throw their weight behind a fundamental tax reform package that would, among other things, simplify the tax system, lower rates and strip away exemptions. But the fund said it had become clear during its discussions with the US authorities that “many details” on plans for tax, public spending and deficit reduction were still unsettled, meaning its forecast now assumes no change to existing policies.

“The consultation revealed differences on a range of policies and left open questions as to whether the administration’s proposed policy strategies are best suited to achieve their intended purpose,” the IMF said.

The fund’s critical assessment comes at a delicate time for its relations with the Trump administration. Christine Lagarde, IMF managing director, has worked hard to build ties with Treasury Secretary Steven Mnuchin and Gary Cohn, the National Economic Council director. But the administration has reacted angrily to previous IMF warnings against US protectionism, with commerce secretary Wilbur Ross dismissing them as “rubbish” in April.

The IMF on Tuesday urged Washington to be “judicious” in its use of import restrictions justified on national security grounds, as the administration considers whether steel imports pose a security threat. The fund warned that a retreat from cross-border integration would represent a “downside risk to trade, sentiment and growth”.

Mr Mnuchin and Mr Cohn unveiled tax ideas in April, but these were widely criticised as lacking in substance and implying a multi-trillion-dollar deficit blowout. The administration has also unveiled a budget plan that aims to balance the books over 10 years, but the IMF declined to build those ideas into its forecasts.

The fund signalled its scepticism about the budget as it described the underlying growth assumptions as “extremely optimistic”. While the administration built in growth projections of 3 per cent by 2021, the IMF sees US growth subsiding to an underlying potential rate of 1.8 per cent by 2020.

“Even with an ideal constellation of pro-growth policies, the potential growth dividend is likely to be less than that projected in the budget and will take longer to materialise,” it said.

While the report advocated targeting a federal primary surplus of 1 per cent of GDP in the medium term, it criticised the Trump budget for advocating swingeing cuts to discretionary spending.

These, it said, would put a “disproportionate share of the adjustment burden on low- and middle-income households”.More than half of the US population have lower inflation-adjusted incomes today than in 2000, prospects for upward mobility are “waning” and, at 13.5 per cent, the poverty rate is among the highest in advanced nations, it said.

As a result, the IMF said it was advocating a host of economic reforms, including tax changes to incentivise higher labour force participation and support for low and middle-income households.The IMF also set out recommendations to the Federal Reserve, which has embarked on a steady progression to more normal interest rates. The IMF said policy rates should continue to rise and that the Fed was right to be preparing an unwinding of its quantitative easing programme.

But the report added that given recent weaknesses in inflation data, the Fed should be ready to accept “some modest, temporary overshooting of its inflation goal” of 2 per cent.

MAD HAWK DISEASE STRIKES FEDERAL RESERVE

By : John Mauldin

“A serious writer may be a hawk or a buzzard or even a popinjay, but a solemn writer is always a bloody owl.”

– Ernest Hemingwa

Image: Magalle L’Abbe via Flickr

Longtime readers know I am not the Federal Reserve’s #1 fan. I can’t recall ever resting easy, confident that the Fed was ably looking out for our economy and banking system. However, I have experienced varying degrees of skepticism and distrust. I must also acknowledge that we are all still here despite the Fed’s many mistakes.

Once or twice a year the Fed rekindles my frustration and concern with a particularly boneheaded statement or policy change. Last summer, the Fed’s annual Jackson Hole Economic Policy Symposium outraged and saddened me at the same time – which, given my emotional makeup, is quite an accomplishment. I shared my rage with readers in “Monetary Mountain Madness.” Feel free to read it again if you enjoy a good rant. I would have been even more depressed if I had known that one of the academic presenters there, Marvin Goodfriend of Carnegie Mellon University, an unabashed cheerleader for NIRP, would appear on the short list of candidates for Donald Trump’s first two appointments to the Fed.

Goodfriend is nominally a monetarist, but he doesn’t quack or waddle like any monetarist I know. The session that he presented was entitled “Negative Nominal Interest Rates.” In the first paragraph of the first section of his paper, he says that “[M]y current paper makes the case for unencumbering interest rate policy so that negative nominal interest rates can be made freely available and fully effective as a realistic policy option in a future crisis.”

So the first appointment to the Fed that Donald Trump will reportedly make is an unabashed advocate of negative interest rates as a policy option. It doesn’t sound like Trump wants a Fed that is modeled on the far more disciplined principles of a Richard Fisher or a Kevin Warsh.

While my rant last summer was about the Fed’s apparent willingness to embrace negative rates, we now face the opposite risk. Janet Yellen & Co. are asserting that inflation is such a serious threat that they must tighten policy with a two-pronged approach. They are already raising the federal funds rate and will soon begin reducing the massive bond portfolio accumulated in the QE years.

I don’t think these moves will create a crisis on their own. Rather, I think the mentality that they reveal may lead to much bigger mistakes when the next recession arrives.

The mistakes may already be unfolding.

Here’s my key question: Is the Fed really as “data-dependent” as Yellen and others say, or do other factors influence them? I think the latter. You’ll see the other factors in a little bit.

INFLATION FAIL

That the previously dovish Janet Yellen took the Fed chair when she did is almost comedic. Ben Bernanke had uttered that word taper in 2013, signaling that quantitative easing’s days were numbered. No one knew how the Fed would extricate itself from years of QE and near-zero rates. But, to her credit, Yellen accepted the challenge in late 2013.

Having tapered the Fed’s bond buying down to zero (except for reinvestment of dividends and maturity rollovers) and begun the rate-hike cycle, Yellen has accomplished a few things; but normalizing interest rates under a Democratic president was not one of them.

Another objective Yellen hasn’t been able to achieve is to create enough inflation. Yes, you read that right. It is part of the Federal Reserve’s job to keep inflation at an acceptable level, which it defines as 2%. This mandate is articulated in the Federal Open Market Committee’s “Statement on Longer-Run Goals and Monetary Policy Strategy.”

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.

The Fed itself says monetary policy determines the inflation rate. The Fed determines monetary policy, so inflation (or lack thereof) falls squarely in their laps.

That is actually quite a startling statement, if you think about it. The Fed doesn’t just regulate inflation; the Fed causes inflation, not as a side effect of something else but because they think it is desirable. And they admit doing so, right in their own documents.

But wait, there’s more.

The Committee would be concerned if inflation were running persistently above or below this objective.

PCE inflation has lagged persistently below 2% for years now. The Committee reminds us at every meeting that it is, in fact, concerned about this. But its concern has not stopped it from plowing ahead with policies that produce everything but inflation.

Personally, I think low inflation is preferable to high. It preserves the purchasing power of our currency. The point here is that, by its own self-imposed goals and definitions, the Fed has failed to accomplish a key part of its mission. It wants 2% inflation. It says its policies can create inflation, but those policies haven’t. This is failure by any definition of the word.

Let me comment on the section that I bolded above: “The inflation rate over the longer run is primarily determined by monetary policy….”

Really? If inflation or deflation is primarily determined by monetary policy, why is there no inflation in Japan today, and why hasn’t there been for 25 years? With the most massive quantitative easing and extraordinarily low interest rates ever seen, Japan has been trying as hard as it can to create inflation; but Japan has been pushing on a string, and I think some of the same conditions (demographic and market) that have foiled Japan are beginning to apply in the US and Europe. And I suspect the Fed’s efforts will be as futile as the Bank of Japan’s have been.

When a person or an organization fails – and of course we all do – the best response is to show some humility, identify the problem, and modify the strategy. The Fed is doing the opposite.

IGNORING THE MARKET

FOMC members customarily enter a “quiet period” before each policy meeting. That means we get a heavy dose of speeches and interviews the week after they meet. Last week was that week, and it kicked off with New York Fed President William Dudley.

Speaking at a Business Roundtable event, Dudley reportedly expressed great confidence in both the economy and the Fed’s policy moves. (I’m relying on press reports here because the NY Fed did not release Dudley’s prepared remarks, if he had any.)

The Financial Times’ account captured it best:

Despite some jitters among investors, Mr Dudley reckons continued progress in the jobs market will push wages higher at a more rapid clip, something that would be expected to boost inflation closer to the Fed’s targets.

The policymaker added that stopping rate increases at this point could be dangerous for the economy. His stance echoes that of other senior central bankers who worry that with the jobless rate near levels seen as natural in a properly functioning economy, there is a rising risk of inflation overshoots.

I see zero indication that Dudley is even slightly concerned about the Fed’s overshooting with its rate hikes. However, he is supremely confident that inflation will overshoot if the Fed doesn’t tighten policy. Perhaps more disturbing, a MarketWatch story says that Dudley remarked that he “is not paying much attention to signals of concern from the bond market.”

Read that again. If someone has his exact quote, I’d love to see it, because this is astonishing. The NY Fed’s president is a permanent FOMC member precisely because he is closest to the bond market and is responsible for executing the Fed’s trades. Yet by his own admission he is ignoring the market’s concerns.

Could that be because Dudley doesn’t like the markets’ message? Futures prices show that traders do not believe the Fed will raise rates as aggressively as the FOMC’s dot plots say it will. That’s kind of an important signal. Dudley’s job is to listen to it. If he’s not listening, why not?

I have a theory.

GREAT FED ROTATION

All this is happening as the Fed is on the cusp of drastic change.

The Federal Reserve System has a seven-member Board of Governors. Three of those seven seats are currently vacant. President Trump has not nominated anyone yet, although two names have been floated in the press (including NIRP lover Goodfriend). Even if Trump were to nominate them tomorrow, they would still have to go through Senate confirmation, and the Senators have a lot on their plates.

Meanwhile, Janet Yellen’s term in the chair expires on February 8, 2018, and Vice-Chair Stanley Fischer’s term ends in June 2018. Their board terms are separate, so both could theoretically remain governors after their leadership terms expire, but most observers expect them to retire. Their staying would not be without precedent (I think there was one exception), but it certainly would be an eye-opener. So, if things go as expected, Trump will have two more seats to fill.

So, we are potentially one year away from a Board of Governors with at least five of the seven being Trump appointees. And it seems highly likely that Lael Brainard will not stick around much longer after Yellen leaves, and then the only question remaining is whether Jerome Powell steps down. I know nothing of his plans, but it could happen. Is his ideal career move to remain on the FOMC as the odd man out?

The seven Fed governors – when there are that many – all sit on the Federal Open Market Committee, which sets interest rates and makes other monetary policy. Also voting on the FOMC are the New York Fed’s president and a rotating cast of four other regional Fed presidents.

President Trump does not appoint the regional Fed bank presidents. They answer to their own boards, which comprise bankers from their regions. So the FOMC has both political appointees and commercial bank representatives. It was set up that way on purpose. But it’s also no accident that the political appointees constitute a majority – or will when more Trump appointees take their seats.

The FOMC works by consensus. Most of its decisions are unanimous or almost unanimous. Fed chairs strive mightily to get everyone on the same page, which I’m sure is tough, on the level of herding cats or getting Republicans in the House to agree. It’s also important – banks and private businesses want to see stability.

Enter Donald Trump, for whom stability is a lesser priority.

The FOMC members must see what is coming. Their beloved unity is in danger, and I doubt they are pleased. I believe a faction on the FOMC wants to cement its own preferred policies in place and make it difficult or impossible for a new majority to change course in 2018 or thereafter. Yellen, Fischer, and Dudley all seem to be of that mind, and they are now taking a hawkish approach to monetary policy. That’s why they don’t want to do the otherwise sensible thing, which is to wait for more evidence that inflation is a problem before tightening further, especially so late in the recovery cycle.

Note also that Yellen and Fischer can further complicate the situation by staying on the board next year. Yellen won’t be chair unless Trump reappoints her, but her board term runs through 2024. Fischer is likewise on the board until 2020.

Can Trump fire Fed governors, like he did the FBI director? Maybe. The Federal Reserve Act says governors can be “removed for cause by the president.” He could certainly find cause if he wished to do so. But firing Fed governors would send a horrible signal to markets. Far better to give them incentives to resign, which could be done quietly. And frankly, I think those around him would let him know that firing would be a really bad idea. Just not done. Independence of the Fed and all that…

In any case, right now we have a Fed that is arguably letting its own parochial political concerns seep into its policy decisions. By raising rates when inflation is nowhere near problematic, they risk tipping the economy into recession. We’re overdue for a recession anyway, and I get that they want to have room to cut rates if necessary. But that will be cold comfort if their own actions trigger the recession. But it even goes further than that…

BITTER ENEMIES

Division on the FOMC is a microcosm of a much broader problem: the increasingly bitter division within American society. I know many people blame the split on Donald Trump, but it was already well underway before he ran for office. I think Trump is a symptom, not a cause.

The survey data is stark and horrifying. This is from a June 15 New York Times story titled “How We Became Bitter Political Enemies.”

“If you go back to the days of the Civil War, one can find cases in American political history where there was far more rancor and violence,” said Shanto Iyengar, a Stanford political scientist. “But in the modern era, there are no ‘ifs’ and ‘buts’ – partisan animus is at an all-time high.”

Mr. Iyengar doesn’t mean that the typical Democratic or Republican voter has adopted more extreme ideological views (although it is the case that elected officials in Congress have moved further apart). Rather, Democrats and Republicans truly think worse of each other, a trend that isn’t really about policy preferences. Members of the two parties are more likely today to describe each other unfavorably, as selfish, as threats to the nation, even as unsuitable marriage material.

This isn’t just party loyalty. A sizable majority of Americans of both parties now see the other political party as not just mistaken, but as close-minded, immoral, and dangerous, clueless on policy and the correct way to run the country. Again, that’s on both sides. The animus is also clearly visible in the disdain that party elites feel for the members of their own party – no matter what they say when they’re up at the podium.

The current split is even wider than what we think of as more divisive issues like race or gender identification. Regardless of which side you are on, this ought to be terrifying. How can we ever come to a national consensus on crucial issues when this is the underlying environment? More from the NYT story:

Mr. Iyengar also points out that Americans are willing to impugn members of the other party in ways that aren’t publicly acceptable with other groups, like minorities, women or gays. There simply aren’t strong social norms holding partisans back.

This is a terrible state of affairs, and I see no good way out of it. It’s going to manifest itself in many ways, in every institution and corner of society; and in many cases it already has – including at the Federal Reserve. That means it is affecting the economy.

Let me be clear: I am not trying to convert anyone to my own side of the aisle or assert that my side is morally superior. This is a bipartisan problem with plenty of blame to go around. Pretending it doesn’t exist helps no one. I write this because I must hold out hope that we can somehow restore a civic space where we can have adult conversations and somehow recover our lost national unity.

Like it or not, politics is not separate from our private and business lives. It has real-world consequences that affect everyone’s well-being.

And that brings me back to the Fed and their current actions. The following is speculation on my part and will be vigorously denied by anyone associated with the Fed.

I think there is a mixture of political bias and legacy-building that is driving Federal Reserve policy.

The simple fact of the matter is that the Fed should have been normalizing interest rates starting in 2013. Fifty basis points a year and we would be at 2% now. That is not exactly a torrid rate-hike path. It cannot be seen as putting your foot on the brakes; it’s simply moving to normalize a situation that everybody realizes is abnormal. I think that everyone on the FOMC recognizes that rates do have to be normalized, and they don’t want to leave the Committee with rates sub-1% as their legacy.

But when these governors walk into an FOMC meeting, try as they might, they can’t leave their biases in the anteroom. It’s a simple fact that for four years during a Democratic administration they basically refused to raise rates. They said their actions were data-dependent and that the data was telling them it was too early to tighten. Then Donald Trump gets elected, and all of a sudden the data is telling them it’s time to raise rates.

After they have blown a series of bubbles with their low rates, in housing, stocks, all sorts of debt instruments, the automobile market, markets of all sorts, now somehow the data is different, and we have to raise rates.

No two ways about it: There is no significant difference in the data today from that of four years ago – except that four years ago we didn’t have all the bubbles I ticked off above. And we are already late in the cycle. And – the elephant in the room – we now have a Republican president. Who is not going to reappoint these governors.

Let’s look at the data. Unemployment was low four years ago, and it is lower now. The Fed keeps talking about wage inflation, but there is no evidence of it. Further, the Fed’s models are backward-looking and based on historical economic trends and patterns that no longer exist.

In a future letter I’m going to write in depth about the difference between the service class and the working class. The working class generally makes stuff, working at trades and manufacturing jobs. The service class works in the retail sector, in stores and restaurants, and represeents the bulk of the country’s employees. The skill sets are entirely different. There may be in fact some wage pressure in the working class due to a lack of qualified and trained employees (welders, carpenters, and other craftsmen), but that is not the case for the service class. (There are indeed other classes of workers who are more information-oriented or who are professionals. But that is for another letter.)

When Sears goes bankrupt the next time, up to 160,000 people will be joining the unemployment rolls and looking for other service jobs. Ditto for all the other retail jobs that Amazon is gobbling up. There will be millions of such workers in the service industry looking to find jobs – not exactly the stuff that wage inflation in the service job market is made of.

According to a Merrill Lynch study, auto production is going to drop from the projected 17.9 million for this year to 13.8 million in 2021, due to lease roll-offs and other pressures. That dramatic dip in production is going to make a huge dent in the need for workers in the working class. This is not the stuff of wage-pressure-induced inflation.

Subprime auto loan defaults are rising, as are student loan defaults. There are signs everywhere that we are much closer to the end of this business cycle than we were in 2012. There are so many data points that seem to be rolling over. We are not at the end yet, but we’re a lot closer.

The FOMC members are now coming to the realization that leaving the Committee without normalizing rates is going to be disastrous for their legacy, whatever that is. And so they are embarked on a tightening cycle. And they no longer have to worry about creating a recession during a Democratic administration. How convenient. Although they would aggressively deny that any such thing would be ever part of their decision-making process.

And intellectually, I think they are being totally honest. But our emotional biases are not part of our intellectual makeup: This fact of life is basically behavioral psychology 101. Our biases cause us to look at situations (and economic data) in ways that are not always entirely rational. Overcoming our own personal biases is one of the single most difficult things humans can do. So I am not really criticizing the members of the FOMC; I’m just making some observations and freely admitting that I am chief among sinners when it comes to allowing biases to influence thinking.

As David Rosenberg has pointed out, Fed tightening cycles always end with a US market crash or an emerging-market crash or both (but usually just a US market crash).

The Fed keeps tightening until we get an unpleasant event.

You really can’t ignore the fact that the FOMC is telling you they are going to raise rates at least once more this year. I know that the two-year bond doesn’t believe that, but I think you need to take it very, very seriously. And I would bet on a January rate hike, in the last month of Yellen’s chairmanship. Doesn’t quite get us to 2% rates but… close enough for government work.

They are hoping that by raising rates slowly they won’t push the economy into a slowdown before they can abandon ship. Then the next chairman and the Fed can deal with it.

One last thought: I want to reiterate that the potential appointment of Marvin Goodfriend is disturbing to me. I’m sure he’s a good guy and a brilliant economist; but it all boils down to this: If you can wrap your head around negative interest rates, I don’t want you anywhere near the policy steering wheel.

If the Goodfriend choice is part of a trend and Mnuchin or whoever is advising the president on these choices, that suggests to me that the Trump team is not looking to appoint a hawkish, less activist FOMC. That means we are not going to get a Kevin Warsh or a Richard Fisher as chairman. We’re certainly not going to get a Volcker. I truly, deeply, sincerely hope I am wrong. I hope I have to eat those words.

Thinking the unthinkable: Could we see a return to QE before the end of Trump’s first term? It’s way too early to tell, and maybe somebody will get with the president and discuss the dynamics of Federal Reserve policy and the problems of quantitative easing and NIRP or zero boundary rates. A recent Princeton study (pointed out to me by Lyric Hughes Hale) suggests that when rates fall below 2% there is no real stimulative value and, in fact, rates that low hurt the economy.

We need a new mindset at the Fed. If we don’t not change the underlying philosophical posture that 12 people can sit around a table and set the price of the most important item in the world, money, and do that better than the market can, we will continue to flounder. If, after all the new appointments, we still end up with an activist FOMC that believes in its own models, which have been preposterously wrong for 30 years and that will continue to blow a series of bubbles in all markets, which will eventually crash, then we are destined to a wash, rinse, and repeat series of financial crises.

This Fed has already engineered the next crisis, just as Greenspan kept rates too low for too long, ignored his regulatory responsibility, and engineered the housing bubble and subprime crisis. If you can’t see this next crisis coming, you’re not paying the right kind of attention. The Trump Fed is going to have to deal with that crisis, but we still have many questions as to what a Trump Fed will actually look like or do.

But make no mistake, whomever Trump puts on the FOMC, it will be an FOMC that he will have to take full ownership of, no matter what they do. Very few other presidents have ever had the opportunity to reshape the FOMC as completely as Trump will do.

And make no mistake, if we plunge into a recession and the market drops 50%, ardent pleas will issue from all points of the world to give us more quantitative easing. Just give us one more fix, the market will beg. “This time we promise not to get too irrationally exuberant again. Just give us a few more rounds of even more massive QE….”

With each passing quarter, the Great Reset is coming nearer. You need to think hard about how you’re positioned in the markets and in your own personal life and businesses, in order to weather the crisis that’s coming as skillfully as posible.

ANOTHER LESSON FROM JAPAN

By : Stephen S. Roach


NEW HAVEN – Yet another in a long string of negative inflation surprises is at hand. In the United States, the so-called core CPI (consumer price index) – which excludes food and energy – has headed down just when it was supposed to be going up. Over the three months ending in May, the core CPI was basically unchanged, holding, at just 1.7% above its year-earlier level.

For a US economy that is widely presumed to be nearing the hallowed ground of full employment, this comes as a rude awakening – particularly for the Federal Reserve, which has pulled out all the stops to get inflation back to its 2% target.

Halfway around the world, a similar story continues to play out in Japan. But, for the deflation-prone Japanese economy, it’s a much tougher story.

Through April, Japan’s core CPI was basically flat relative to its year-earlier level, with a similar outcome evident in May for the Tokyo metropolitan area. For the Bank of Japan (BoJ), which committed an unprecedented arsenal of unconventional policy weapons to arrest a 19-year stretch of 16.5% deflation lasting from 1994 to 2013, this is more than just a rude awakening. It is an embarrassment bordering on defeat.

This story is global in scope. Yes, there are a few notable outliers – namely, the United Kingdom, where currency pressures and one-off holiday distortions are temporarily boosting core inflation to 2.4%, and Malaysia, where the removal of fuel subsidies has boosted headline inflation, yet left the core stable at around 2.5%. But they are exceptions in an otherwise inflationless world.

The International Monetary Fund’s latest forecasts bear this out. Notwithstanding a modest firming of global economic growth, inflation in the advanced economies is expected to average slightly less than 2% in 2017-2018.

The first chapter of this tale was written many years ago, in Japan. From asset bubbles and excess leverage to currency suppression and productivity impairment, Japan’s experience – with lost decades now stretching to a quarter-century – is testament to all that can go wrong in large and wealthy economies.

But no lesson is more profound than that of a series of policy blunders made by the BoJ. Not only did reckless monetary accommodation set the stage for Japan’s demise; the country’s central bank compounded the problem by taking policy rates to the zero bound (and even lower), embracing quantitative easing, and manipulating long-term interest rates in the hopes of reviving the economy. This has created an unhealthy dependency from which there is no easy exit.

Though Japan’s experience since the early 1990s provides many lessons, the rest of the world has failed miserably at heeding them. Volumes have been written, countless symposiums have been held, and famous promises have been made by the likes of former US Fed chairman Ben Bernanke never to repeat Japan’s mistakes. Yet time and again, other major central banks – especially the Fed and the European Central Bank – have been quick to follow, with equally dire consequences.

The inflation surprise of 2017 offers three key insights. First, the relationship between inflation and economic slack – the so-called Phillips curve – has broken down. Courtesy of what the University of Geneva’s Richard Baldwin calls the “second unbundling” of globalization, the world is awash in the excess supply of increasingly fragmented global supply chains.

Outsourcing via these supply chains dramatically expands the elasticity of the global supply curve, fundamentally altering the concept of slack in labor and product markets, as well as the pressure such slack might put on inflation.

Second, today’s globalization is inherently asymmetric. For a variety of reasons – hangovers from balance-sheet recessions in Japan and the US, fear-driven precautionary saving in China, and anemic consumption in productivity-constrained Europe – the demand side of most major economies remains severely impaired. Juxtaposed against a backdrop of ever-expanding supply, the resulting imbalance is inherently deflationary.

Third, central banks are all but powerless to cope with the moving target of what can be called a non-stationary liquidity trap. First observed by John Maynard Keynes during the Great Depression of the 1930s, the liquidity trap describes a situation in which policy interest rates, having reached the zero bound, are unable to stimulate chronically deficient aggregate demand.

Sound familiar? The novel twist today is the ever-expanding global supply curve. That makes today’s central banks even more impotent than they were in the 1930s.

This is not an incurable disease. In a world of hyper-globalization – barring a protectionist relapse led by the America Firsters – treatment needs to be focused on the demand side of the equation. The most important lesson from the 1930s, as well as from the modern-day Japanese experience, is that monetary policy provides no answer for a chronic deficiency of aggregate demand. Addressing it is a task primarily for fiscal authorities. The idea that central banks should consider making a new promise to raise their inflation targets is hardly credible.

In the meantime, Fed Chair Janet Yellen is right (finally) to push the Fed to normalize policy, putting an end to a failed experiment that has long outlived its usefulness. The danger all along has been that open-ended unconventional monetary easing would fail to achieve traction in the real economy, and would inject excess liquidity into US and global financial markets that could lead to asset bubbles, reckless risk taking, and the next crisis. Moreover, because unconventional easing was a strategy designed for an emergency that no longer exists, it leaves the Fed with no ammunition to fight the inevitable next downturn and crisis.

We ignore history at great peril. The latest disappointment for inflation-targeting central banks is really not a surprise after all. The same is true of the related drop in long-term interest rates.

There is much to be gained by studying carefully the lessons of Japan.

GOLD'S TRUE FUNDAMENTALS

By: Steven Saville 

To paraphrase Jim Grant, gold's perceived value in US$ terms is the reciprocal of confidence in the Fed and/or the US economy. Consequently, what I refer to as gold's true fundamentals are measures of confidence in the Fed and/or the US economy. I've been covering these fundamental drivers of the gold price in TSI commentaries for almost 17 years. It doesn't seem that long, but time flies when you're having fun.

Note that I use the word "true" to distinguish the actual fundamental drivers of the gold price from the drivers that are regularly cited by gold market analysts and commentators. According to many pontificators on the gold market, gold's fundamentals include the volume of metal flowing into the inventories of gold ETFs, China's gold imports, the volume of gold being transferred out of the Shanghai Futures Exchange inventory, the amount of "registered" gold at the COMEX, India's monsoon and wedding seasons, jewellery demand, the amount of gold being bought/sold by various central banks, changes in mine production and scrap supply, and wild guesses regarding JP Morgan's exposure to gold. These aren't true fundamental price drivers. At best, they are distractions.

In no particular order, the gold market's six most important fundamental price drivers are the trends in 1) the real interest rate, 2) the yield curve, 3) credit spreads, 4) the relative strength of the banking sector, 5) the US dollar's exchange rate, and 6) commodity prices, in general. Even though it creates some duplication, the bond/dollar ratio should also be included.

Until recently, I took the above-mentioned price drivers into account to arrive at a qualitative assessment of whether the fundamental backdrop was bullish, bearish, or neutral for gold.

However, to remove all subjectivity and also to enable changes in the overall fundamental backdrop to be charted over time, I have developed a model that combines the above-mentioned seven influences to arrive at a number that indicates the extent to which the fundamental backdrop is gold-bullish.

Specifically, for each of the seven fundamental drivers/influences, I determined the weekly moving average (MA) for which an MA crossover catches the most trend changes in timely fashion with the least number of 'whipsaws'. It's a trade-off, because the shorter the MA, the sooner it will be crossed following a genuine trend change but the more false trend-change signals it will cause to be generated. I then assign a value of 100 or 0 to the driver depending on whether its position relative to the MA is gold-bullish or gold-bearish. For example, if the yield-curve indicator is ABOVE its pre-determined weekly MA, then it will be assigned a value of 100 by the model, because being above the MA points to a steepening yield-curve trend (bullish for gold). Otherwise, it will be zero. For another example, if the real interest rate indicator is BELOW its pre-determined weekly MA, then it will be assigned a value of 100 by the model, because being below the MA points to a falling real-interest-rate trend (bullish for gold). Otherwise, it will be zero.

The seven numbers, each of which is either 0 or 100, are then averaged to arrive at a single number that indicates the extent to which the fundamental backdrop is gold-bullish, with 100 indicating maximum bullishness and 0 indicating minimum bullishness (maximum bearishness).

The neutral level is 50, but the model's output will always be either above 50 (bullish) or below 50 (bearish).

That's simply a function of having an odd number of inputs.

Before showing a chart of the Gold True Fundamentals Model (GTFM) it's worth noting that:

1) The fundamental situation should be viewed as pressure, with a bullish situation putting upward pressure on the price and a bearish situation putting downward pressure on the price.

It is certainly possible for the price to move counter to the fundamental pressure for a while, although it's extremely likely that a large price advance will coincide with the GTFM being in bullish territory most of the time and that a large price decline will coincide with the GTFM being in bearish territory most of the time.

2) The effectiveness of fundamental pressure will be strongly influenced by sentiment (as primarily indicated by the COT data) and relative valuation (as primarily indicated by the gold/commodity ratio). For example, if the fundamental backdrop is bullish and at the same time the gold/commodity ratio is high and the COT data indicate that speculators are aggressively betting on a higher gold price, then it is likely that the bullish fundamental backdrop has been factored into the current price and that the remaining upside potential is minimal. The best buying opportunities therefore occur when a bullish fundamental backdrop coincides with pessimistic sentiment and a low gold/commodity ratio.

Getting down to brass tacks, here is a weekly chart comparing the GTFM with the US$ gold price since the beginning of 2011.

A positive correlation between the GTFM and the gold price is apparent on the above chart, which, of course, should be the case if the GTFM is a valid model. If you look closely, it should also be apparent that the fundamentals (as represented by the GTFM) tend to lead the gold price at important turning points. For example, the GTFM turned down in advance of the gold price during 2011-2012 and turned up in advance of the gold price in 2015 (the GTFM bottomed in mid-2015 whereas the gold price didn't bottom until December 2015).

The tendency for gold to react to, rather than anticipate, changes in the fundamentals is not a new development, as evidenced by gold's delayed reaction to a major fundamental change in the late-1970s. I'm referring to the fact that by the second half of 1978, the monetary environment had turned decisively gold-bearish, but the gold price subsequently experienced a massive rally that didn't culminate until January 1980.

The GTFM was slightly bearish over the past two weeks, but three of the model's seven components are close to tipping points, so it wouldn't take much from here to bring about a shift into bullish territory or a further shift into bearish territory. The former is the more likely and could occur as soon as today (23rd June).

REVISITING THE GLOBAL ORDER

By : Javier Solana

MADRID – As many analysts have observed, the Pax Americana of recent decades is on life support. After the first 150 days of Donald Trump’s “America First” – or, more accurately, “America Alone” – presidency, it seems that America’s traditional stabilizing role can no longer be viewed as a given.

As the primacy of the US in the international arena – and, thus, America’s status as the world’s “indispensable nation” – erodes, other states and even non-state actors are gaining prominence.

What does this mean for the so-called liberal international order?

Burgeoning multipolarity does not have to be at odds with an inclusive and mutually beneficial global system. Rising powers like China are equipped to act as responsible stakeholders. And the European Union, which seems to be regaining its confidence, can still be counted on to play a constructive role.

In international relations theory, “liberal internationalism” is characterized by the promotion of openness and order, and is enshrined in multilateral organizations. At the end of World War II, these principles provided the ideological foundation for treaties such as the General Agreement on Tariffs and Trade, which would later develop into the World Trade Organization.

The Cold War greatly damaged the globalizing ambition of liberal internationalism, a creed closely associated with the geopolitical West, and especially with the US and the UK. The fall of the Berlin Wall in November 1989 resulted in a period of indisputable hegemony for the US, and paved the way for the spread of governing structures promoted by the West. But that diffusion didn’t occur as fast, or as widely, as anticipated.

Today, the world remains fragmented. The September 11, 2001, attacks in the US led many countries to close ranks around America. But the attacks also revealed a deeper trend toward disruption by unexpected actors – a trend that would only grow stronger over the subsequent 15 years.

The divergence among countries was economic as well. Not even the “Great Recession” of 2007-2009 was as global as conventional wisdom in the developed countries suggests. In 2009, when global GDP contracted, the economies of the world’s two most populous countries, China and India, grew at rates above 8%.

The countries that are unraveling the liberal order today are those that invested the most political capital in creating it. Brexit in the UK and Trump’s election in the US reflect growing frustration with some economic and social effects of globalization, such as offshoring. This frustration has revitalized a form of nationalism based on exclusion. A renewed emphasis on Westphalian sovereignty is spreading, leading some to predict that great-power rivalries will again be the order of the day. Proponents of this school of thought often point to the US-China relationship as the most likely source of friction.

But this is an excessively alarmist view. While China’s dizzying rise generates great mistrust in Western capitals, China may not be as revisionist a power as some think. Recently, the Chinese government distanced itself from the Trump administration, as it reaffirmed its support for the Paris climate agreement, from which the US intends to withdraw. In his symbolic speech at the World Economic Forum’s Annual Meeting in Davos in January, President Xi Jinping established himself as a firm defender of globalization. According to Xi, countries should “refrain from pursuing their own interests at the expense of others.”

The Chinese authorities are well aware of how much their country has benefited from becoming deeply integrated into the global economy. And they are not prepared to risk the basis of their domestic legitimacy: economic growth. The Belt and Road Initiative (BRI, formerly called One Belt, One Road) – which Xi has baptized “the project of the century” – is a true reflection of China’s strategic choice to strengthen commercial links with the rest of Eurasia and Africa, taking advantage of the opportunity to accumulate “soft power.”

In doing so, however, China is not openly calling into question the foundations of the liberal order. The remarkable communiqué from world leaders participating in the BRI Forum in Beijing last month committed more than 30 countries and international organizations to the promotion of “peace, justice, social cohesion, inclusiveness, democracy, good governance, the rule of law, human rights, gender equality,” and the empowerment of women.

It would be a mistake to interpret this communiqué literally, or to ignore China’s neo-mercantilist tendencies and illiberal domestic regulations.

But neither would it be correct to view China as a monolith, with values that are entirely incompatible with those attributed to the West. Such an oversimplification is no more accurate for China than it would be for the US, where Hillary Clinton won the popular vote over Trump, or the UK, where those who wanted to remain in the EU lost the Brexit referendum by the slimmest of margins.

At this time of uncertainty and disharmony, the EU is in a position to assume a leading role.

Emmanuel Macron’s victory in the French presidential election should encourage defenders of a liberal order, which, despite its deficiencies, still represents the most attractive and flexible paradigm for international relations.

A united EU can also help catalyze reforms that might reinvigorate ailing multilateral institutions, injecting them with new momentum. If we reach out to emerging countries, it is not too late to construct a truly global order. Unlike after 1989, however, this time we must not leave the job unfinished.


Escrito por

dennis falvy

Economista de la Universidad Católica con un master en administración en la Universidad de Harvard; periodista en economía .


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