The Global Economy’s Three Games

Oct 26, 2018 Jean Pisani-Ferry, Project Syndicate

Jean Pisani-Ferry, a professor at the Hertie School of Governance (Berlin) and Sciences Po (Paris), holds the Tommaso Padoa-Schioppa chair at the European University Institute and is a senior fellow at Bruegel, a Brussels-based think tank.

Three major players – the United States, China, and a loose coalition formed by the other members of the G7 – are shaping the future of the international economic and geopolitical order. And they are all engaged in three contests simultaneously, without knowing which one is the most important.

PARIS – Chess masters are able to play simultaneously on several boards with several partners. And the more time passes, the more US President Donald Trump’s international economic strategy looks like such a match.

There are three major players: the United States, China, and a loose coalition formed by the other members of the G7. And there are three games, each of which involves all three players. Unlike chess, however, these games are interdependent. And no one – perhaps not even Trump – knows which game will take precedence.

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Europe Is Left in the Dust as U.S. Stocks Roar

Date: 30-09-2018
Source: The Wall Street Journal

While U.S. and Japanese shares raced ahead, Europe’s shares were left behind in third quarter

European stocks have been left behind by a rally that has taken the U.S. market to record highs in the third quarter.

Few analysts see the region catching up soon, unless there is clarity on the political and trade concerns that pushed investors to sell.

Investors have withdrawn money from European equity funds in 28 of the past 29 weeks, driving the share of Europe in global portfolios to its lowest since January 2015, when the European Central Bank announced its massive bond-purchase program, according to data from fund tracker EPFR and the Institute of International Finance.

That has largely reversed the tide of cash that poured into the region in early 2017, when an election in France elevated investors’ preferred candidate to power. In contrast, funds in the U.S., Japan and even some emerging-market equities have drawn inflows this year.

The Stoxx Europe 600 index rose less than 1% in the third quarter, compared with a 7.2% gain for the S&P 500 and 8.1% for Japan’s Nikkei Stock Average. The European index is now trading below where it was one year ago, compared with an 8.2% gain in a broad index of world stocks.

“U.S. client interest in Europe is very low right now—almost as low as it gets,” said Richard Turnill, BlackRock’s global chief investment strategist.

As the U.S. economy continues its robust run, the gap between 10-year German and U.S. government bond yields has reached its widest since the euro was launched in 1999, according to data from Tradeweb and Thomson Reuters.

The downbeat sentiment comes even as Europe’s earnings expectations for the year have remained stable, the euro and British pound have stopped climbing, and the region’s economy has shown signs of stabilizing after a tricky start.

“Our view on Europe is predominantly politically driven,” said Candice Bangsund, portfolio manager at Fiera Capital, which currently holds a smaller-than-usual allocation to European stocks.

The future trading relationship between the U.K., one of the region’s largest economies, and the rest of the continent remains uncertain as Brexit negotiations drag on. Italy’s new government, meanwhile, has significantly widened its budget-deficit target, raising questions about the country’s debt sustainability and relationship with Brussels.

The U.K. and Italy’s benchmark stock indexes have both seen double-digit percentage falls in their price-to-earnings ratios this year amid the uncertainty.

European companies are also more exposed than those in the U.S. to emerging markets, and the developing world has been hit by a rising dollar, expensive oil and concerns about trade protectionism.

Roughly 19% of revenues from companies listed in the Stoxx Europe 600 come from emerging markets, according to FactSet. That compares with 14% for the S&P 500, an index of large-cap U.S. stocks.

Roland Kaloyan, head of European equity strategy at Société Générale, said the correlations between European stocks and emerging markets recently reached levels last seen in 2010.

But trade protectionism is by far the biggest risk to Europe’s outlook, analysts say.

Europe’s auto sector has been hit particularly hard by worries about tariffs, trading down about 23% from its peak in January.

“Europe is more exposed to protectionism because it has a more open economy and has closer ties to China,” said Silvia Dall’Angelo, senior economist at Hermes Investment Management.

Uncertainty about future trade relations has already hit eurozone exports. In manufacturing, export orders failed to grow for the first time in five years.

All this means there will be bargains in Europe, should more clarity come on the political front, some investors say.

European stocks now trade at 13.9 times future expected earnings, compared with 15 at the start of the year.

European companies are seeing revenue upgrades for the first time in a year, according to strategists at UBS . “A lot of investors are looking at valuations and looking for a reason to come back” to Europe, said Mr. Kaloyan.

“If we got some sort of clarity on Italy or Brexit, we could see a rebound.”

Much will also depend on whether investors continue to favor so-called growth stocks such as technology companies, which make up a small portion of European indexes. Tech stocks in the S&P 500 are up roughly 19% this year and now make up 21% of that index. Tech makes up just 5% of the Stoxx Europe 600. Unless value stocks—those that are trading for the lowest prices relative to their earnings or underlying net worth—start to outperform, it will be difficult for Europe to pull ahead, fund managers say.

Japan’s Successful Economic Model

Sep 20, 2018 Adair Turner, Project Syndicate

Adair Turner, a former chairman of the United Kingdom’s Financial Services Authority and former member of the UK’s Financial Policy Committee, is Chairman of the Institute for New Economic Thinking. His latest book is Between Debt and the Devil.

Japan’s GDP growth lags most other developed economies, and will likely continue to do so as the population slowly declines. But what matters for human welfare is GDP per capita, and on this front, the country excels.

TOKYO – Nearly everyone says that Japan’s economic model has imploded. Since 1991, growth has averaged just 0.9% versus 4.5% over the previous two decades. Slow growth, combined with large fiscal deficits and near zero inflation, has driven government debt from 50% of GDP to 236% of GDP.

Abenomics, the cluster of reforms initiated by Prime Minister Shinzo Abe when he came to power six years ago, promised to get inflation up to 2%. But five years of zero interest rates and massive quantitative easing have failed to achieve this. A fertility rate of 1.4 and near-zero immigration mean that Japan’s workforce could shrink by 28% over the next 50 years, making health care for the elderly unaffordable and dramatically increasing the fiscal deficit, which is already running at 4% of GDP.

Japan im Wandel: Ein Land geht in Rente

Date: 16-09-2018
Source: SPIEGEL

TV-Spots für Senioren-Windeln, Probeliegen im Sarg auf der Todesmesse: Japans Industrie stellt sich auf die vergreisende Bevölkerung ein. Für das Land ist der Wandel ein gigantisches Problem.

Seit 1995 berichtet Wieland Wagner, mit Unterbrechungen, für den SPIEGEL aus Tokio. Über Jahrzehnte hat er das Land bereist, Menschen getroffen, die Kultur durchdrungen. Das folgende Kapitel aus seinem neuen Buch „Japan. Abstieg in Würde“ widmet sich der Industrie rund ums Älterwerden.

Wieland Wagner:
Japan. Abstieg in Würde
Wie ein alterndes Land um seine Zukunft ringt

Die Japaner leben im Durchschnitt immer länger, und darauf waren sie lange durchaus stolz: Alljährlich, zum Tag der Ehrung der Alten, den die Nation am dritten Montag im September als amtlichen Feiertag begeht, bekamen die über Hundertjährigen im Namen des Premiers Silberbecher überreicht.

Inzwischen ist diese respektvolle Geste dem Staat zu teuer geworden. Im Jahr 2016 lebten bereits 65.692 über Hundertjährige in Japan, etwa so viele, wie eine mittlere deutsche Stadt Einwohner hat. Von den Hochbetagten waren 87,5 Prozent Frauen. Bei der ersten offiziellen Zählung 1963 hatte Japan dagegen erst 153 Hundertjährige. Dieser Tage, wo die Jubilare zahlreicher und zahlreicher werden, sind die Becher, die sie geschenkt bekommen, nur noch versilbert.

Year of the Octopus, Part 2

By John Mauldin, January 12, 2018

Optimism and Hong Kong
Easterling: Correction and Continuation
Jensen: The US Is 1980s Japan
Lebowitz: Buy the Dip?
Lewitt: Charts Point to Caution
Insights from Lacy Hunt
Housel: What a Time to Be Alive

Only two weeks in and 2018 is already breaking records – mostly in a good way. But that leaves 50 potentially less enjoyable weeks to go. So rather than focus on promising current events, I think I’d better dip back into my annual forecast bag and share a few more highlights with you.

 

Last week I called 2018 “the Year of the Octopus” because it has so many tentacles. There are many more than eight, so I should probably have made it the Year of the Centipede. In any case, let’s run through a few more projections from my still-growing pile.

Optimism and Hong Kong

Two years ago, when I was at the same Bank of America Merrill Lynch investment conference that I attended last week in Hong Kong, the mood in the room was quite somber, even bearish. The sentiment, shared by many at that gathering, turned out to be wrong.

Last week (while still suffering mightily from jet lag) I had a good conversation with my host, Ajay Kapur (who could not have been more delightful), in which we noted the mood of this year’s conference, which was almost universally upbeat. There was a clear consensus among these very seasoned and powerful traders. Given how wrong the mood was last time, Ajay and I wondered whether we should perhaps be a little trepidatious about the Chinese, Hong Kong, and other Asian markets. I’m not sure what to make of the mood this year, but I just thought I would share that experience. Now let’s move on to the forecasts of some of my other friends.

A small town in Japan doubles its fertility rate

Date: 10-01-2018
Source: The Economist

Subsidising parenthood appears to work wonders

A PATCHWORK of nondescript houses nestled at the foot of a mountain, Nagicho looks like an ordinary Japanese town. On closer inspection, something extraordinary marks it out: babies. Yuki Fukuda is one of many local mothers with three children. The bump under her winter coat indicates that another is on the way, part of a baby bonanza that has seen the town’s fertility rate double since 2005.

Not surprisingly, reporters have flocked to this remote corner of the country to see if there is something that promotes fecundity in the water flowing down from Mount Nagi. The cause appears to be more prosaic: economics. Alarmed by the dearth of children, the local government increased incentives to have babies. The fertility rate rose from 1.4 (meaning that the average woman will have 1.4 children in her lifetime, roughly the national rate) to 2.8 in 2014.

Mrs Fukuda will receive a “celebratory” gift of ¥300,000 ($3,530) when she gives birth. A subsidised baby-sitting service is available for just ¥1,800 a day, along with subsidised carseats and other baby accessories. When her children reach secondary school, she will receive ¥90,000 a year for each one who attends. In theory, this stipend is to cover the cost of getting children to school, especially for people who live relatively far away. And whereas usually all but the poorest and the old in Japan have to pay 30% of their health-care bills (with the national government picking up the rest), in Nagicho the local government pays the 30% for children.

Parent firms’ resources and productivity of foreign subsidiaries

Kaoru Hosono

Professor of Economics, Gakushuin University

Daisuke Miyakawa

Associate Professor of Economics at the Graduate School of International Corporate Strategy (ICS), Hitotsubashi University

Miho Takizawa

Associate Professor at the Faculty of Economics, Toyo University

Kaoru Hosono, Daisuke Miyakawa, Miho Takizawa 12 November 2017, voxeu

Several studies have examined the profitability and productivity of foreign subsidiaries, but less is known about the determinants of success. This column looks at the contribution of resources from 3,800 Japanese parent firms to the business activities of their 20,000 overseas subsidiaries. The results suggest a positive contribution of parent firms’ intangibles to subsidiaries’ production, in particular for smaller subsidiaries.

Given that firms’ overseas activities through foreign direct investment (FDI) have been expanding over the last several decades (Urata and Kawai 2000), numerous studies have examined the determinants of FDI (Head and Ries 2003, Kimura and Kiyota 2006, Todo 2011), as well as its economic implications, such as what kinds of economic gains parent firms obtain from FDI (Federico and Minerva 2008, Todo and Shimizutani 2008, Yamashita and Fukao 2010, Hijzen et al. 2011), and what kinds of economic gains are obtained by firms located in host countries (Todo 2006).

Japan’s Demographic Lessons for Europe

Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.

Nov 8, 2017 Daniel Gros, Project Syndicate

Contrary to popular belief, Japan has been extraordinarily successful in achieving economic growth, given its rapidly aging population and lack of inflation. For Europe, where the demographic future looks a lot like Japan’s past, there is much to be learned from this experience.

BRUSSELS – Demography is not destiny, at least not entirely. Over centuries, policy can affect fertility decisions, and migration can transform a country, as the experience of the United States shows. Over shorter time horizons, however, demographic trends must be taken as given, and can have a profound impact on growth. Yet demographic factors are often neglected in economic reporting, leading to significant distortions in assessments of countries’ performance. Nowhere is this more apparent than in Japan.

With real output – the key measure of economic performance – having risen by only about 15% since 2000, or less than 1% per year, Japan easily seems the least dynamic of the worlds’ major economies. But given Japan’s demographics – the country’s working-age population has been shrinking by almost 1% per year since the start of this century – this result is remarkable.

The End of Asia’s Strategic Miracle?

Richard N. Haass

Richard N. Haass, President of the Council on Foreign Relations, previously served as Director of Policy Planning for the US State Department (2001-2003), and was President George W. Bush’s special envoy to Northern Ireland and Coordinator for the Future of Afghanistan. He is the author of A World in Disarray: American Foreign Policy and the Crisis of the Old Order.

AUG 16, 2017 Project Syndicate

TOKYO – It is too soon to know whether and how the challenge posed by North Korea’s nuclear and missile programs will be resolved. But it is not too early to consider what that challenge could mean for a part of the world that has in many ways defied history.

The moniker “Asian Miracle” goes some way toward conveying just how extraordinary the last half-century of economic growth in many Asian countries has been. The first economy to take off was Japan, which, despite a slowdown in recent decades and a relatively small population, remains the world’s third-largest economy.

China’s ascent began a bit later, but is no less impressive: the country achieved over three decades of double-digit average GDP growth, making it the world’s second-largest economy today. India, soon to be the world’s most populous country, has lately been experiencing an impressive 7-8% annual rate of GDP growth. And the ten members of the Association of Southeast Asian Nations averaged some 5% growth in recent years.

Nie wieder Finanzkrise?

Von André Tomfort, Wiener Zeitung, 21/07/2017

• Gastkommentar: Warum sich die Chefin der US-Notenbank fatal geirrt haben könnte.

Vor kurzem machte die Chefin der US-Notenbank, Janet Yellen, eine bemerkenswerte Aussage: Auf einer Pressekonferenz in London sagte sie, dass sie nicht mehr damit rechne, in ihrem Leben nochmals eine schwere Finanzkrise wie im Jahr 2008 zu erleben. Sie begründete ihren Optimismus mit den Reformen des Finanzsystems und damit, dass die Banken jetzt krisenfest seien.

Können wir der Fed-Chefin wirklich glauben? Der Sturm der vergangenen Finanzkrise ist abgeebbt, und die Aktien- und Immobilienmärkte bewegen sich in einem langfristigen Aufwärtstrend. Dies ist nicht zuletzt der expansiven Geldpolitik von Yellen und ihren Kollegen in der Eurozone und in Asien zu verdanken. Knapp ein Jahrzehnt lang rekordtiefe Zinsen verfehlen ihre Wirkung an den Finanzmärkten nicht, und auch die globale Konjunktur hat seit einiger Zeit wieder an Fahrt aufgenommen. Trotzdem ist die Nervosität überall zu spüren, und viele Anleger fragen sich: „Wo stehen wir heute? Und wie sicher sind unsere Anlagen?“

Die Immobilienkrise 2008 und 2009 war kein Einzelfall