Hope you had a great break; we are now back to our regular editions of Top 10 links from around the Internet at 10:00 am today.
Mondays is me, Wednesdays its Bernard, and Fridays its a guest.
As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.
See all previous Top 10s here.
1. From [baby] boom to bust
Japan and Germany may not be outliers in the world's demography - they may become the norm.
The Economist reckons that one of the world's great transitions may in fact be happening right now - and if you are on a certain age (like me) you will find this truly amazing.
A whole bunch of us grew up with the notion that the world's expanding population was on a track to ruin. Books were written, philosophies established, 'rules' were made.
But we may not have read our tea leaves correctly; it looks like Asia is self correcting its population.
This will have huge implications.
Not mentioned by the Economist is that the one area that looks like it will have 'positive demographics' for most of this new century is North America. And New Zealand?
Over the past half-century the most profound influence upon the great majority of humankind has been the vast and gentle decline in the size of families. In 2014 (or thereabouts—such things are approximate) this huge change will reach a milestone. In the world’s most populous continent, Asia, the total fertility rate will fall to 2.1. The rate is the number of children a woman can expect to bear during her lifetime and 2.1 is a magic number because, if sustained, it produces long-term equilibrium in the population (it is known as the replacement rate). In 1960 Asia’s average fertility was 5.8.
The exact point at which fertility reaches replacement cannot be known for sure. The United Nations Population Division thinks it will happen at some point during 2015-20. But Chinese demographers think the UN is significantly overestimating China’s fertility rate, so 2014 is a reasonable guess.
2. 97 million and growing
New Zealand has been fortunate to get an early FTA with China. Others, including Australia, are scrambling. It has transformed our trade with them, including tourism. But we are a pimple to China. Although they may have reached it maximum population, it is still huge. As it ages and get more wealthy it is transforming into a 'normal' large country. And its people want to travel.
Their outbound travel industry is just getting started, and its already huge as the China Daily report shows.
Lets hope we go for tourism from there at the upper end of the market. Selective would be good. Swamping volumes - which they can supply - will do us no good at all, and probably not what the people who come want either.
China had the highest number of outbound tourists and amount of overseas spending in the world last year, according to a report released on Wednesday.
Ninety-seven million Chinese traveled abroad in 2013, beating the 2012 mark by roughly 14 million, according to the China National Tourism Administration. The number is expected to surpass 100 million this year.
The report released on Wednesday by the Tourist Research Center of the Chinese Academy of Social Sciences said that China's tourists have had the world's strongest purchasing power since 2012. They overtook German and US tourists as the world's biggest-spending travelers in 2012, spending US$102 billion overseas, a 40-percent increase from 2011.
Most Chinese tourists traveled to Asian and European countries, the report said, accounting for 75 percent of overseas tourists in those countries.
3. Is mobility the real issue?
'Everyone' is talking about inequality and the 1%. Indeed books have been written about it, movies made, and it has turned authors into politicians. Some are attracted because it supports their political views, others because they are genuinely worried about the trend. There is no doubt it is a troubling international trend, even here in New Zealand.
But now some are suggesting the problem is not really inequality, but mobility. They may have a point.
Using new US data, Brad Wilcox has identified three key factors that can help - or hurt - those on low incomes from improving themselves.
Obama is only the most prominent public figure to declare inequality Public Enemy #1 and the greatest threat to reducing poverty in America. CAP’s new Washington Center for Equitable Growth, Princeton economist Alan Krueger, and economist Miles Corak (with his famous Great Gatsby Curve) have all argued that it’s harder for the poor to climb the economic ladder today because the rungs in that ladder have grown farther apart. In Krueger’s words, countries like the United States with high inequality tend to have less upward mobility “for children from low-income families.”
But for all the new attention devoted to the 1 percent, a new dataset from the Equality of Opportunity Project at Harvard and Berkeley suggests that, if we care about upward mobility overall, we’re vastly exaggerating the dangers of the rich-poor gap. Inequality itself is not a particularly potent predictor of economic mobility, as sociologist Scott Winship noted in a recent article with his colleague Donald Schneider based on their analysis of this data.
So what factors, at the community level, do predict if poor children will move up the economic ladder as adults?
Based on my OLS regression analyses of the data, of the factors that Chetty has highlighted, the following three seem to be most predictive of rags-to-riches mobility in a given community:
- Per-capita income growth
- Prevalence of single mothers (where correlation is strong, but negative)
- Per-capita local government spendingIn other words, communities with high levels of per-capita income growth, high percentages of two-parent families, and high local government spending - which may be a proxy for good schools - are the most likely to help poor children relive the Horatio Alger story.
4. Putting bank margins in perspective
Here's something to consider. Bank margins by our retail banks are not rising, well not at least on a per unit basis. They may not be at their lowest level currently, but they are lower than over most of the period the RBNZ has been collecting this data - since 1996, almost 18 years ago.
Over the same period, mortgage lending has trebled, and other lending has doubled. Deposits have grown 240%. So the base on which these declining margins have been earned has grown fairly substantially - at a compound rate of loan growth of 7.3% per year, and way faster than our economy.
5. The US$9 trillion sale
The editors of the Economist magazine are recommending that Governments should launch a new wave of privatisations, this time centred on property.
There goal is to unlock "huge value" that is being wasted or ignored.
I will let you decide whether they make a good argument, but it seems New Zealand is leading this trend - again.
Imagine you were heavily in debt, owned a large portfolio of equities and under-used property and were having trouble cutting your spending—much like most Western governments. Wouldn’t you think of offloading some of your assets?
Politicians push privatisation at different times for different reasons. In Britain in the 1980s, Margaret Thatcher used it to curb the power of the unions. Eastern European countries employed it later to dismantle command economies. Today, with public indebtedness at its highest peacetime level in advanced economies, the main rationale is to raise cash.
Taxpayers might think that the best family silver has already been sold, but plenty is still in the cupboard (see article). State-owned enterprises in OECD countries are worth around $2 trillion. Then there are minority stakes in companies, plus $2 trillion or so in utilities and other assets held by local governments. But the real treasures are “non-financial” assets—buildings, land, subsoil resources—which the IMF believes are worth three-quarters of GDP on average in rich economies: $35 trillion across the OECD.
Some of these assets could not or should not be sold. What price the Louvre, the Parthenon or Yellowstone National Park? Murky government accounting makes it impossible to know what portion of the total such treasures make up. But it is clear that the overall list includes thousands of marketable holdings with little or no heritage value.
6. 'Expect 1 3-4% total return for bonds in 2014'
"There's 50 ways to leave your lover and maybe more than that to lose your money," says Bill Gross at PIMCO in his latest column.
Gross knows that firsthand. His flagship fund suffered losses last year along with the rest of the bond market as interest rates rose. Investors pulled more money out of his fund than any other bond fund last year, according to Morningstar.
Anyway, here he is doing his best to convince his readers that 2014 will be a good one for PIMCO bond clients who have more than US$2 trillion invested.
But riding the bond market seesaw doesn’t always mean negative returns, especially when it comes to other “carry” components inherent in fixed income securities. As I pointed out in my August 2013 Investment Outlook titled “Bond Wars,” maturity extension is just one of the ways to produce carry and total return in a fixed income portfolio. In addition there are 1) credit spreads, 2) volatility sales, 3) curve and 4) currency-related characteristics that when combined with maturity can produce returns over and above those microscopic Treasury bill rates, and still keep you from “breaking the buck” under a majority of scenarios.
On the “down” side of an interest rate teeter totter these carry components can help a portfolio benchmarked to a 5-year duration bond market index float above water and even enjoy swimming! Likewise, they become major components of low duration and “unconstrained bond portfolios” that do more than dog-paddle in a marketplace where bonds, stocks and alternative assets are competing for total returns. So in 2014, look for PIMCO to stress credit, curve, volatility and a tiny bit of currency while deemphasizing 10- and 30-year maturities that are Taper affected.
Still, a seesaw rider should not get carried away by this metaphor that seems to guarantee that what goes up must come down. Bond prices as shown in Chart 1 have already come down a lot since April of 2013 or July of 2012 – whenever you want to label the peak. And bond prices – especially those at the front end of yield curves – say 1-5 years, are critically dependent on the future level of Fed Funds, not the glidepath of the almost preordained Fed Taper which should end in 2014.
7. How does the exchange rate affect the real economy?
The NZ Treasury has published a whole series of working papers in the week before the Christmas shutdown. (H/T Peter E.) The 39 page one that looks at the exchange rate's affect on our economy is interesting - if only because it appears the whole issue has the experts stumped. They find that our commodity exports are quite insensitive to the FX rate, but our manufactured exports are.
I suppose that makes sense. Manufacturers making me-too products probably can't expect not to be affected. But if we have commodities (milk, meat, wood) that others need, the buyer will pay what they have to to get them.
There is no simple answer to how exchange rate movements affect the real economy. Exchange rates respond to many different types of shocks. These shocks may be fundamental shocks which have a persistent effect on the equilibrium exchange rate or non-fundamental disturbances which push the exchange rate away from its equilibrium level. Misalignments may be persistent or extremely transitory. In order to understand the relationship between the exchange rate and the real economy it is necessary to understand what types of shocks are affecting the exchange rate.
However, despite this detailed theoretical literature and extensive empirical testing, there are few definitive conclusions or clear guidance for policymakers. This is particularly true for advanced economies such as New Zealand, as most empirical work has focused on emerging market economies. Most other advanced economies are relatively closed or have large domestic markets, so the impact of shocks on the real economy through the exchange rate is not a significant focus. In addition, it is difficult for policymakers to identify accurately the nature of the shocks affecting the economy. The economy may also be affected by multiple shocks at the same time.
Determining the contribution of each shock can be difficult, especially in real time. So conclusions that can be drawn from the literature are:
- While the New Zealand dollar exchange rate may be above its equilibrium value, fundamental shocks, such as higher export commodity prices, may also have played a role in its recent appreciation. This suggests that the equilibrium value of the exchange rate may also have risen.
- Tradable sector output growth has declined since the mid-2000s, but within the tradable sector, activity in resource-based industries has risen strongly, while manufacturing output and exports of services has declined. This is consistent with ‘Dutch disease’ effects, as higher commodity prices crowd out non-commodity exports.
- Sensitivity to exchange rate movements varies across New Zealand’s economic sectors and industries. The agricultural sector is relatively insensitive to exchange rate movements, while the manufacturing and service sectors are more vulnerable.
8. 'Higher pay for everyone'
Shinzo Abe is the Prime Minister of Japan, and he has written a defense of his adventurous economic policies at Project Syndicate.
Basically, he is saying that his new direction in 2013 saw the Japanese economy turn the corner on two decades of stagnation. And the future will be bright he says, because of 'an emerging consensus that long-term recovery cannot be achieved without a concerted effort to increase workers' wages and bonuses'.
The wage surprise draws its inspiration from the Netherlands, where a consensus emerged in the early 1980’s that in order to sustain employment, the burden of taming rampant inflation should be shared by employers and the employed. That consensus was enshrined in the 1982 “Wassenaar Agreement,” named after The Hague suburb where it was forged.
Japan is now witnessing the emergence of a similar national consensus, or, rather, the Dutch consensus in reverse: a shared sense that the government, major industries, and organized labor should work together to increase wages and bonuses (while facilitating incentives that could enhance productivity).
Needless to say, wage levels ought to be determined solely by management and workers. But it is equally true that the emerging consensus among the government, business leaders, and trade unions already has led a growing number of companies to promise significantly higher wages and bonuses.
This is the essence of the wage surprise. It will be an entirely new phenomenon, one that, together with the massive ¥5 trillion fiscal stimulus, will more than offset the potential negative effect of a sales-tax increase. Most important, it will continue to put Japan’s economy on a sustainable growth trajectory. Of this I am certain.
9. A lot of rethinking to do
Last week I asked how we could address the issues confronting society from the fact that machines can now do much of the labour people are currently employed to do. There were few suggestions; it has many people stumped. The issue is causing growing inequality and poor mobility.
Tom Friedman at the NY Times reviewed a very new book by two American professors called The Second Machine Age. Friedman highlights some of their 'solutions'.
Put all these advances together, say the authors, and you can see that our generation will have more power to improve (or destroy) the world than any before, relying on fewer people and more technology. But it also means that we need to rethink deeply our social contracts, because labor is so important to a person’s identity and dignity and to societal stability.
They suggest that we consider lowering taxes on human labor to make it cheaper relative to digital labor, that we reinvent education so more people can “race with machines” not against them, that we do much more to foster the entrepreneurship that invents new industries and jobs, and even consider guaranteeing every American a basic income. We’ve got a lot of rethinking to do, they argue, because we’re not only in a recession-induced employment slump. We’re in technological hurricane reshaping the workplace - and it just keeps doubling.
10. Today's quote
"Business is the art of extracting money from another man’s pocket without resorting to violence." - Max Amsterdam
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