5 december 2013

Woody Brock December 3 2013

een beetje te lui om te vertalen stuur ik het verslag van het verhaal van Woody Brock voor mijn deels Engelse collega's dat hij dinsdag bij ons vertelde in het Engels.

  • Why growth in the world will not be as high as in the past
  • QE will end badly
  • Why labour is getting so less of the GDP and so why profit growth is so good compared to GDP

 Why growth in the world will not be as high as in the past

It is not necessary for economic growth to be so low in the coming years, but there are several factors why growth will be lower in the coming years than in the last decades.

In the US good government investing could produce more growth, in Europe and Japan it is labour reform and in Emerging Markets it is less corruption/ a better judicial system that should provide much better economic growth. Woody is losing confidence in Abenomics because Abe is saying that labour reforms are too difficult.

 For the US: productivity growth has been high (1.5-4%) after WWII and this is not easy to repeat after a period with low investments. Demographics are hurting now but have helped last decades (low birth rate 1930-1946, baby boom until 1965). This also caused house prices to go up tremendously with big net wealth effects. The big consumer financing burden was created after the real incomes didn’t rise anymore. Two incomes per family was the biggest contributor to income growth.

All these factors go into reverse now.

Government debt will become a disaster when the labour force is shrinking and nominal GDP is not growing enough.

For the Emerging Markets: the big ones are leaving stage 1 of development (Rostow) where a command economy can force high economic growth. In stage 3 a good judicial system is necessary and less corruption. Innovation, ideas have to trigger growth and that will not happen in China with the vested interests only interested in the government companies they own/ get their money from. The current politicians have to give away their privileges and that will not happen easily. The BRIC’s don’t have the right structure with a balanced system of fairness (judicial system), care (social security so they don’t have to save half of their income) and freedom (competition, drive for innovations). India is best positioned but with its too much red tape it will not be good enough.

 (Of course I see things more positively: demographics are not that bad in the US, very favourable in many Emerging Markets (ex China and Russia) and corruption is going down because internet exposes it much more than in the past. The good example of Singapore, Hong Kong and South Korea is giving a clear road map how to get rich for the Emerging Markets. But the most positive is the knowledge explosion since internet that will drive the innovation cycle, human capital is up and that will compensate for the low physical capex of the last years and capex will grow in the coming years from very low levels in the West)

 All important will be if productivity growth will go down because there are no new all purpose innovations like internet, computers, steam machine, cars etc. Gordon thinks all communication innovations are not all purpose and will not contribute to productivity growth. Woody and I are more optimistic. Networks are bigger than in past, there was a knowledge explosion. But Woody thinks the innovation cycle will not lead to fast improving productivity soon.

QE will end badly: the unintended consequences

 Woody thinks a bit like William White/ FED governor Stein have written about the dangers of QE.

As told before by Woody monetary and macro policy could not succeed after 2008 because there are too many targets and not enough instruments (the failure against the Tinbergen axiom).

Since the credit crisis macro policy has to solve many new problems (system crisis, deleveraging of private sector, retiring baby boomers) while they initially didn’t had new instruments (QE is a new instrument, reforms another)

Monetary policy is now excessively overused.

We have seen the benefits now of QE, but the costs are not yet visible.

QE1 was necessary to rescue the system, but the QE after 2009 was dangerous, not necessary in the eyes of Woody (and maybe also of Stein).

The interest rates are extremely low, even the long dated yields. Artificial low interest rates cause wrong investments, can cause higher risk premiums (Stein arguments). Getting rid of QE can cause higher interest rates than the natural interest rate over some time (Koo argument, he thinks that is already happening now)

In normal times low interest rates will trigger more investments and consumer spending, less saving.

But the very low rates now are creating uncertainty about the long run. Business is now not investing more when interest rates are going down. People are now saving more with lower interest rates because they can’t leverage up and need to save more for their pensions at current low interest rates (PV: you also hear that QE hurts the private sector with the difference between the coupon yield of the bought bonds and the deposit rate).

Zero interest rates are not necessary thinks Woody. Other government policy is necessary: in the US productive government spending in infrastructure, R&D, in Europe/Japan labour reforms.

Woody agrees with McKinnon, stick with the devil you know: hike interest rates but buy more mortgages etc. when you want to stimulate the housing market

It was stunning that when the FED only talked about taper of QE but didn’t do it you got already such a big market reaction. When it really will take place markets could move more, but maybe not, see the UK.

 In the UK they suddenly tapered QE and nothing happened. In Germany long bond yields went down more than in the US without QE. So other factors than QE are having big influences on bond yields, changing beliefs determine the yields. When safe haven is important, credit risk is seen as high, yields decline.(also central banks in Asia buying Treasuries or selling when their currency is involuntarily weak is important).

It looks like only the shadow banking system is getting all the advantages of QE

The 30-Year Decline in Labor’s Share of Income

Why important according to woody:

       It deepens the “inequality” and the “hollowing out of the middle class” stories

       Political unrest can and will result

       The decline logically implies a hefty rise in corporate profits, just as we have seen

       The story is global

Of course for an investor the importance is: it is the main reason why equities are doing so well, why profit growth can be higher than GDP growth (or growth of business sales)

Reasons Why Labor’s Share Has Declined

       Decline in the relative price of Investment Goods

       Loss of bargaining power by labor unions

       Impact of the rise of China and of its illegitimate trade policies

       De-skilling of the workforce due to deteriorating educational performance

       Low interest rates

       “Ludditism” and new technologies (robots will do all the work cheaply)
But these factors will go into reverse in the coming years. The prices of investment goods, chips are declining slower, the bargaining power of individuals will go up, China is no longer cheap and is seeing high wage rises and the yuan is no longer very undervalued. The low interest rates will become less low. Ludditism was always exaggerated.

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