Monday, May 8, 2017

Monday, May 8, Morning Global Market Roundup: Euro Hits 6-Month High, Asia Shares Firm After French Vote Relief

By Hideyuki Sano 
May 8, 2017

The euro hit a six-month high against the dollar on Monday while Asian shares gained and U.S. stock futures briefly touched a record high, on investor relief after centrist Emmanuel Macron comfortably won the French presidential election.

Macron's emphatic victory brought comfort to investors and European allies alike, who had been nervous about the risk of another populist upheaval, following Britain's vote to quit the EU and Donald Trump's election as U.S. president - neither of which had been predicted by pollsters or bookmakers.

European shares look set to advance, with financial spread betters expecting a 0.9 percent gain in France's CAC .FCHI, up 0.8 percent in Germany's DAX .GDAXI and 0.4 percent higher in Britain's FTSE .FTSE.

"Looking ahead towards the end of month, there appear to be few potential risk factors. 'Sell in May' may not happen this year," said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

The common currency gave up gains later, with some market participants citing uncertainties on whether Macron's, rebranded La Republique En Marche, can get a parliamentary majority in elections in June, as a factor.

"We expect the focus to shift to French legislative elections in June. These will be crucial for determining Macron's ability to implement his economic program, which includes labor market reforms that would make it easier for French businesses to hire and fire," said analysts at BlackRock in a note.

Still, the relief of the centrist's victory was palpable.

The euro rose to as high as $1.1024 EUR=, its highest in about six months, before stepping back to $1.0984, 0.1 percent below late U.S. levels last week.

"The uncertainty had been low in the first place so we are seeing some buy-on-rumor-sell-on-facts type of trading. But fundamentally, I don't see any changes in the euro's uptrend," said Kazushige Kaida, head of foreign exchange at State Street in Tokyo.

Earlier the common currency hit a one-year high of 124.58 yen EURJPY=R and a five-month high of 1.08865 Swiss franc EURCHF=R.

Easing risk aversion helped the dollar rise to a seven-week high 113.14 yen JPY=.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS added 0.8 percent, snapping a three-day losing streak.

Japan's Nikkei .N225 gained 2.3 percent to hit a near 1 1/2-year high after a five-day weekend due to the Golden Week holidays.

The S&P 500 mini futures ESc1 gained 0.2 percent to hit a record high of 2,403.75 in early trade before giving up the gains to trade flat.

"Political risk in Europe has been considered as a major market theme this year. But in the Netherlands (anti-EU party leader Geert) Wilders lost in March. The French election is now out of the way," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

"And in Germany the ruling Christian Democrats are recovering. The political risks in Europe have receded," he said.

Chancellor Angela Merkel's conservatives won a decisive victory in a vote in Germany's northern state of Schleswig-Holstein on Sunday, boosting her prospects of winning a national election in September.

Full Employment In U.S. 

Stock markets had a welcome surprise on Friday from solid U.S. employment numbers. Nonfarm payrolls surged by 211,000 last month after a paltry gain of 79,000 in March, and the unemployment rate dropped to 4.4 percent, near a 10-year low and well below the most recent Federal Reserve median forecast for full employment.

The hiring rebound supports the U.S. central bank's contention that the pedestrian 0.7 percent annualized economic growth in the first quarter was likely "transitory," and its optimism that economic activity would expand at a "moderate" pace.

The 10-year Treasury yield US10YT=RR ticked up to 2.360 percent. And Fed fund rate futures FFM7 are pricing in almost a full chance of a Fed rate hike in June.

Chinese exports and imports both missed economists' expectations in April but the markets took it in stride.

The data did little to change the perception that China's growth is likely to slow after expanding 6.9 percent in January-March as authorities step up their battle to cool the property sector and curb debt risks.

Shanghai shares .SSEC dropped 0.8 percent, hitting their lowest levels since January on regulation worries.

Crude oil prices extended their rebound from Friday's five-month lows, as investors bet key producers could extend output cuts beyond an agreed June cut-off.

Saudi Arabia's OPEC governor said on Friday there was an emerging consensus among member and non-member countries on the need to extend the output-control agreement beyond June to help clear the supply glut.

Brent futures traded at $49.76 per barrel LCOc1, up 66 cents or 1.3 percent.

Article Link To Reuters:

Oil Rises On Prospect That Output Cut Could Extend Beyond 2017

By Henning Gloystein 
May 8, 2017

Oil prices rose on Monday as Saudi Arabia's energy minister said an OPEC-led production cut scheduled to end in June would likely be extended to cover all of the year, or even into 2018, although another increase in U.S. drilling capped gains.

Brent crude futures were at $49.48 per barrel, up 38 cents, or 0.75 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $46.52 per barrel, up 30 cents, or 0.7 percent.

Saudi Arabia's energy minister Khalid Al-Falih said on Monday oil markets were rebalancing after years of oversupply, but that he still expected the OPEC-led deal to cut output during the first half of the year to be extended.

"Based on the consultations I have had with participating members, I am rather confident the agreement will be extended into the second half of the year and possibly beyond," said Falih, Saudi Minister of Energy, Industry and Mineral Resources, during an industry event in Malaysia's capital Kuala Lumpur on Monday.

The Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the de-facto leader, as well as other producers including Russia, pledged to cut output by almost 1.8 million barrels per day (bpd) during the first half of the year to prop up the market.

The comments from Falih and rising prices came after steep falls last week due to ample supply in countries that aren't participating in the cuts, including the United States where output is soaring.

A decision on whether to continue the production cuts is expected at OPEC's next official meeting on May 25.

"Oil may have seen the worst of the selloff for now, as the market turns its attention to the OPEC meeting at the end of the month," said Jeffrey Halley, senior market analyst at futures brokerage OANDA in Singapore.

Some traders said the victory of Emmanuel Macron in the French presidential election against far-right Marine Le Pen also supported oil prices as it raised hopes of a more stable European economy.

Still, both Brent and WTI crude are holding below $50 amid ample supplies.

U.S. drilling continued to pick up last week, with the rig count climbing by 6 to 703.

Since a low point in May 2016, U.S. producers have added 387 oil rigs, or about 123 percent, Goldman Sachs said.

On the demand side, China's crude oil imports in April eased by almost 9 percent from March to 8.37 million bpd, although this was largely due to refinery maintenance.

China's April crude imports were up 5.5 percent versus a year ago.

Article Link To Reuters:

Made In North Korea: As Tougher Sanctions Loom, More Local Goods In Stores

By Sue-Lin Wong and James Pearson
May 8, 2017

From carrot-flavored toothpaste and charcoal facemasks to motorcycles and solar panels, visitors to North Korea say they are seeing more and more locally made products in the isolated country's shops and supermarkets, replacing mostly Chinese imports.

As the Trump administration considers tougher economic sanctions to push the isolated country toward dismantling its weapons programs, North Korea is pursuing a dual strategy of developing both its military and economy.

The majority of consumer products in North Korea still come from China. But under leader Kim Jong Un, there's been an attempt to sell more domestically made goods, to avoid any outflow of currency and to reinforce the national ideology of juche, or self-reliance, visiting businessmen say.

There is no available data to show how much is being produced domestically. Export data from countries like China and Malaysia, which sell consumer goods to North Korea, may not be an accurate reflection.

China's commerce ministry declined to comment when asked whether China's exports to North Korea were decreasing due to an increase in locally-made products.

Visitors say that with the impetus from the top, large North Korean companies like military-controlled Air Koryo, the operator of the national airline, and the Naegohyang conglomerate have diversified into manufacturing consumer goods including cigarettes and sports clothing.

North Korea is one of the most insular countries in the world and visits by foreigners are highly regulated.

A Reuters team that was in the capital Pyongyang last month was allowed to go to a grocery store, accompanied by government minders, where shelves were filled with locally made drinks, biscuits and other basic food items. Other visitors have seen locally made canned goods, coffee, liquor, toothpaste, cosmetics, soap, bicycles and other goods on sale in the city.

"As new factories open, the branding, packaging and ingredients of our food products have improved," said shop assistant Rhee Kyong-sook, 33.

Kim Chul-ung, a 39-year old physical education teacher visiting the store, said: "I can taste real fruit in the drinks that are made in North Korea, compared to drinks from other countries."

Visitors say locally made consumer goods are becoming increasingly sophisticated and QR or matrix barcodes can been found on a wide range of products from make-up to soft drinks. Market vendors are also becoming more competitive, offering samples of their food to shoppers, something they didn't do five years ago.

"Around 2013, Kim Jong Un started talking about the need for import substitution," said Andray Abrahamian of Choson Exchange, a Singapore-based group that trains North Koreans in business skills.

"There was clearly recognition that too many products were being imported from China, not just high-end consumer goods but also lower-end ones like food."

"My Homeland"

Air Koryo's range of products now includes cigarettes, fizzy drinks, taxis and petrol stations.

"Naegohyang", or "My Homeland", began as a Pyongyang-based tobacco factory, but has expanded in recent years to produce playing cards, electronic goods and sports clothing. The company even sponsors a women's football team of the same name.

The North Korean companies were not available for comment and do not publish revenue or profit statements. It was not possible to identify any joint venture partners.

Traders and retail experts said the North Korean market was attractive, thanks to a growing class of "donju", or "masters of money," who generate wealth in a gray market economy that is being increasingly recognized and controlled by the state.

"The North Koreans increasingly don't want Chinese products because they think they are poor quality," said a trader from Southeast Asia who exports consumer goods to North Korea. The trader did not want to be identified.

China has been rocked by a number of food safety scandals in recent years, including contaminated rice and milk powder.

"Mothers in North Korea are no different to mothers in China or Canada, they want to feed their babies the best possible food," said Michael Spavor of Paektu Exchange, which brings delegations of investors, tourists and academics into North Korea.

"I've seen people in a store in North Korea comparing a Chinese and a Korean product and picking the Korean one," he said.

Still Reliant

Nevertheless, North Korea is still heavily reliant on trade with China and the vast majority of raw materials to make consumer products still come from or through China.

For example, while domestically-made instant coffee is becoming increasingly common, the sugar used in it would likely come from China or another country that produces sugar and pass into North Korea via China, says Abrahamian.

"We're seeing a rise in domestically-made products, including motorcycles, solar panels and food, but the business relationships on which these products depend on are still Chinese."

Because of the reliance on China, it is likely these "Made in North Korea" companies will suffer if stiffer economic sanctions are imposed on the country.

Diplomats said this week Washington was negotiating with China on a possible stronger U.N. Security Council response - such as new sanctions - to North Korea's missile launches. 

"If you have a coal mining town of 10,000 people who are all in some way connected to the coal industry, then when sanctions are imposed against North Korean coal, the whole town's consumer market will suffer because people don't have the buying power anymore," said Abrahamian.

Article Link To Reuters:

Buffett Confronts Search For Next Big Thing After Missed Chances

It’s ‘no fun’ waiting for next deal while cash hoard grows; Berkshire affirms Apple bet, regrets missed chance on Google.

By Noah Buhayar
May 8, 2017

Underlying the festivities at Warren Buffett’s annual bash for Berkshire Hathaway Inc. shareholders over the weekend was a sobering fact: Finding the next big thing is hard.

The Berkshire chief executive officer spoke at length Saturday about his failure to pounce on opportunities in tech stocks, the challenge of lining up large deals, and his frustration with a cash pile that’s approaching $100 billion.

“We shouldn’t use your money that way for long periods,” Buffett said of the cash during his meeting in Omaha, Nebraska. “The question is, ‘Are we going to be able to deploy it?’ I would say that history is on our side, but it’d be more fun if the phone would ring.”

It was a notably downbeat moment for the billionaire, who’s spent the past five decades snapping up businesses and stocks. His investments transformed Berkshire from a struggling textile maker into a conglomerate with insurance companies, manufacturers, retailers, utilities and a railroad, as well as an equity portfolio valued at $135 billion.

With thousands of adoring fans watching live (and many more streaming video online), Buffett and Vice Chairman Charles Munger took questions for five hours from the audience, analysts and journalists on topics from investing to public policy.

Buffett, 86, said the Republican health plan that cleared the House of Representatives was sure to help the wealthy, and the billionaire reiterated his view that society needs to do more to help people he called “roadkill” because they get left behind by capitalism. The Berkshire CEO also took another swing at hedge funds.

Most of all, the billionaire expounded on his company and investments. Buffett said Wells Fargo & Co. mishandled its response to a fake-account scandal. And he predicted that Berkshire could make “a fair amount” on its recent airline investments if carriers keep a stronger grip on fares, while acknowledging “it is no cinch.”

Apple, IBM

For years, Buffett and Munger have told investors that the company’s size would be an anchor dragging down performance, only to defy their own predictions. But some missteps are now underscoring their warning.

Buffett recently scaled back an investment in International Business Machines Corp. and said that he was too optimistic about the company’s prospects in 2011. Berkshire has been piling into Apple Inc. in its latest technology bet.

The moves prompted a broader discussion about whether Berkshire had dropped the ball in a sector that’s come to dominate the ranks of the world’s largest businesses. For most of his career, Buffett avoided technology stocks, saying the companies were outside his expertise. On Saturday, however, he issued a mea culpa for being too late to spot their potential.

Companies like Apple, Inc. and Google parent Alphabet Inc.don’t require the large sums of capital that were required to sustain the giant industrial firms of an earlier era, Buffett said.

In hindsight, he said he could have been quicker to spot Google’s potential. Berkshire’s auto insurer Geico was an early customer of the search-engine firm, and its founders consulted him around the time they were taking the company public.

‘I Blew It’

“I had plenty of ways to ask questions, or anything of the sort, and educate myself,” Buffett said. “But I blew it.”

Buffett said his analysis on Apple differed from IBM, in part because the iPhone maker is more of a consumer-products company. Munger said the Apple investment was a good sign.

“Either you’ve gone crazy or you’re learning,” the vice chairman told Buffett. “I prefer the learning explanation.”

Steve Wallman, a money manager based in Middleton, Wisconsin, who’s been attending the meetings for more than three decades, said the remarks illustrated how Buffett and Munger are “fallible, thoughtful, and aware of how much the world has changed.”

They went through “a litany of trends they missed, mistakes they made,” Wallman said. “I’ve never seen them exhibit so much vulnerability.”

‘Foot To The Floor’

Buffett also expressed frustration on the acquisition front, saying Berkshire hasn’t put its “foot to the floor on anything for, really, a very long time.” The comment prompted an exchange with Munger, who said he thought Berkshire could now entertain deals up to $150 billion.

That would represent a giant leap for the conglomerate. Its largest buyout was the 2010 purchase of railroad Burlington Northern Santa Fe for about $34 billion.

It’s not for a lack of trying. Buffett said Saturday that Berkshire and 3G Capital were each prepared to put $15 billion into a bid by their Kraft Heinz Co. for Unilever this year. The offer was pulled after the consumer-goods giant rejected the proposal.

David Rolfe, who manages about $6.8 billion including Berkshire shares at Wedgewood Partners, said he wasn’t surprised that Buffett is bummed out by the growing cash pile. Stock markets have been rising for years, making it harder to find attractive investments.

‘Cash Problem’

“A run-of-the-mill bear market could certainly solve the cash problem” by offering opportunities for Buffett, Rolfe said.

Berkshire gained 2.4 percent this year, trailing the 7.2 percent advance of the S&P 500 Index. Buffett’s company said after markets closed Friday that first-quarter operating profit slipped 4.8 percent to $3.56 billion, as insurance units faced claims from a cyclone in Australia.

The stream of earnings is a growing challenge. The company’s next CEO may have to allocate far more capital than Buffett ever did, the billionaire said Saturday. That will involve deciding how much to deploy to Berkshire subsidiaries, takeovers and stock picks while also considering whether to return funds to shareholders.

Buffett, who hasn’t publicly identified a successor, doesn’t pay a dividend and rarely repurchases stock, arguing that he can do better by retaining earnings. But investors pressed him about whether the record cash pile would force him to rethink his approach.

“At a point, the burden of proof really shifts to us, big time,’’ Buffett said. “There’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash.’’

Article Link To Bloomberg:

Be Afraid, Mr. President

Polls show that Trump’s base is holding firm. But that shouldn’t give him comfort.

By Albert R. Hunt
The Bloomberg View
May 8, 2017

President Donald Trump has the lowest poll standing of any new president at the 100-day mark, while his core supporters are holding firm.

Is this cause for optimism for Trump and his fans? Or for concern? Obviously it’ll depend on how the next 100 and 1,000 days play out. But after talking to some of the best pollsters and analyzing the surveys, I think the White House should be worried.

At this juncture in a presidency, public support is usually high. Presidents get honeymoons, tend to score some policy victories and get the chance to show off an appealing family or a good sense of humor to win over a few skeptics. Wit won’t work for Trump; he’s incapable of the self-deprecating humor deployed by presidents from John F. Kennedy to Ronald Reagan to Barack Obama.

Many voters don’t like Trump personally or favor his policies. And the opposition may be more passionate than his base supporters.

For sure, that base is holding. Most Trump voters are willing to overlook or excuse his ignorance on issues ranging from the Korean peninsula to the American Civil War, and many revel in his invective.

Ann Selzer, the pollster for Bloomberg and the Des Moines Register, recently conducted a dozen focus groups of Trump voters in the Upper Midwest. “Despite a few concerns,” she said, “they remain satisfied he’s doing what they expected.”

The Trump camp disputes surveys showing his poor ratings. John McLaughlin, who polled for Trump last year, recently wrote that there’s a “partisan bias” to media polls. Others say Trump’s negative poll numbers are no more reliable than the pre-election media polls last November that were supposedly far off the mark.

That’s a canard. The NBC/Wall Street Journal, CBS/New York Times and ABC/Washington Post final polls all showed Hillary Clinton winning by four percentage points. The Bloomberg poll, which I directed, had her winning by slightly less than three points. While losing in the Electoral College, she won the national popular vote by 2.1 percentage points, within all the polls’ margin of sampling error.

Today, the anti-Trump core is as solid as the president’s supporters, and may be more intense.

Look at the campaign in advance of the June 20 special election in Georgia to fill the House seat that came open when Republican Tom Price joined the Trump administration as secretary of health and human services. The Democratic candidate, Jon Ossoff, taking a lesson from Clinton’s flawed presidential campaign strategy, is focusing on issues and not just opposition to Trump. The Republican candidate, Karen Handel, had the president in for a fund-raiser but doesn’t mention him in her commercials.

That the Democrat is competitive in a suburban Atlanta district that Republicans have held for almost 40 years illustrates that anti-Trump passion is bringing out new Democratic voters. “Trump is the accelerant in our expansion of the voting universe,” said Ossoff’s pollster, John Anzalone.

Moreover, Trump’s supposedly hard-core support appears to be shakier than it’s usually thought to be. Exit polls on Election Day suggested that almost one in five voters in November disliked both candidates and chose Trump as the lesser evil. These voters, plus a few soft Clinton backers, are now a potential swing electorate that doesn’t like the Trump presidency so far.

“He’s losing the middle,” said Peter Hart, who conducts the Wall Street Journal/NBC News poll, noting almost half the voters are negative about Trump both on policy and personally. “Ultimately,” Hart said, “he needs some of those people.”

A string of successes -- creating lots of new jobs, a foreign policy victory -- would attract some of them. Conversely, the outcome of investigations into Russian interference in the election, or continued Republican efforts to gut popular health-care measures and jettison reasonable coverage for people with disabilities, could lose him more of them.

Unless Trump’s popularity rises, voting against him in Congress won’t imperil many Republican lawmakers from swing districts, or the vast majority of Democrats. Generally, he’s neither respected nor feared.

Whit Ayers, a prominent Republican pollster, noted that Obama’s approval ratings settled in the mid-40s after his honeymoon period, not much better than Trump’s now. “It wasn’t until the very end that Obama broke through 50 percent,” Ayres said.

He added: “That said, job approval in the mid-40s has historically been bad news for the president’s party in midterm elections.” The Democrats lost 63 House seats in 2010.

Article Link To The Bloomberg View:

China Is Bent On World Domination -- But Not In The Way You Think

By Fred Hiatt
The Washington Post
May 8, 2017

China is bent on world domination — not with its missiles and aircraft carriers, but by controlling solar energy, cloud computing and other industries of the future.

That is an only slightly exaggerated version of a warning coming from the American chamber of commerce in China. It sent a delegation to Washington last week to warn that “China’s aggressive mercantilist policies are one of the most serious threats facing the future of U.S. advanced technology sectors,” as their policy paper says — and that the U.S. government isn’t doing enough to counter the threat.

The warning is especially startling coming from AmCham China, as it calls itself, which for years flexed its advocacy muscle persuading the United States to let China into the world trading system and rebutting Americans who it felt were too hard on China.

“Now we’re saying that things are really lopsided, and the government needs to wake up and take action,” James McGregor, chairman of APCO Worldwide in China and part of last week’s delegation, told me during a visit to The Post. “This is aimed at domination of the industries of the future. We’re talking about artificial intelligence and all the things that are important to the American economy.”

Given President Trump’s anti-China rhetoric during the campaign, you might expect U.S. executives in Beijing and Shanghai to feel optimistic about the prospects for a U.S. response. They are hopeful — but they are also nervous, for reasons I’ll get to in a minute, that the administration may miss this opportunity to course-correct.

First, though: Why has AmCham changed its tune so dramatically since the upbeat days of China’s entry into the World Trade Organization?

The chamber’s answer: China has changed, not us. Its policy has shifted, McGregor said, from “reform and opening” to “reform and closing.” The Communist regime still wants economic growth and market mechanisms, in other words, but without subjecting its economy to open competition from outside. In fact, a recent survey showed that more than 80 percent of the chamber’s members “feel less welcome than before,” another delegation member, Lester Ross of the WilmerHale law firm, told me.

China has a well-developed, long-term industrial strategy, the chamber says. It limits U.S. firms’ access to its market; demands that American companies share their advanced technology to get even that limited access; buys foreign companies that possess technology it needs while preventing U.S. firms from investing in China; shovels resources to Chinese companies as they ramp up; and then, once those Chinese firms have fattened on the vast and protected Chinese market, sends them out to compete in the world.

“The economic relationship is critical to both the United States and China,” said William M. Zarit, a former U.S. diplomat and now senior counselor at the Cohen Group and chairman of AmCham China. “But as strong as it might be, we have an investment and trade relationship that is out of whack. . . . We need to address this.”

During the campaign, Trump maintained that China was “ripping us left and right.”

“There are people who wish I wouldn’t refer to China as our enemy,” he wrote in 2015. “But that’s exactly what they are.”

But will his earlier skepticism translate into smart policy?

Since meeting Chinese President Xi Jinping, Trump has seemed very taken with the Communist leader and the budding U.S.-China relationship, which he described as “something very special, something very different than we’ve ever had.”

This could be a prelude, U.S. executives worry, to economic concessions designed to win cooperation on North Korea. They also worry that, to the extent the administration remains focused on the economy, it is on iron, steel and other heavy manufacturing sectors rather than technologies that will be crucial in the future.

Most of all they worry, though, because it wouldn’t be easy for anyone to come up with an intelligent response to the uneven relationship.

“Our systems are fundamentally different,” explained Timothy P. Stratford, a delegation member who worked in the U.S. trade representative’s office from 2005 to 2010. “We follow process. . . . China is focused on outcomes.”

If U.S. law allows a Chinese company to buy an American one, in other words, the U.S. government isn’t going to interfere — even if U.S. firms are being blocked in China and the overall situation seems unfair.

The delegation did not come with detailed policy proposals, though several members called for new levels of review for proposed Chinese investments. Mostly they want a recognition that the Chinese economy is not operating as Americans hoped it would during the push to open the global trading system — and that waiting for it to “evolve” is no longer a viable option.

“The solution has to be some combination of offense and defense,” said Randal L. Phillips, Asia managing partner for the Mintz Group. “China has to face some consequence.”

Article Link To The Washington Post:

Trump’s Low-Growth Trap

By Robert J. Samuelson 
The Washington Post
May 8, 2017

We are defining prosperity down — or, more accurately, prosperity is defining itself down. We are eight years into the recovery from the Great Recession, the unemployment rate has dropped to 4.4 percent, the stock market is pushing record highs, and consumer confidence seems robust. And yet the economy doesn’t feel as good as it looks. Anxieties lurk.

There is an explanation, argues Ruchir Sharma. This doesn’t feel like a typical business cycle recovery, because it isn’t. We have entered a new era of low economic growth and high political disappointment. Our democratic system requires strong-enough economic growth to raise living standards and support activist government. These expectations, present in most advanced democracies, are no longer realistic, because the global economy has changed in ways that reduce growth.

Sharma, a top investment strategist at Morgan Stanley, lays out his thesis in the current issue of Foreign Affairs. In a standard recovery, low interest rates, big government budget deficits, the repayment of private debt and the sell-off of surplus inventories and investments suffice to restore satisfactory economic growth. By Sharma’s logic, this didn’t happen after the Great Recession, because deeper forces dominated.

He writes:

“The causes of the current slowdown can be summed up as the Three Ds: depopulation, deleveraging and deglobalization. Between the end of World War II and the financial crisis of 2008, the global economy was supercharged by explosive population growth, a debt boom that fueled investment and boosted productivity, and an astonishing increase in cross-border flows of goods, money and people. Today, all three trends have begun to sharply decelerate: families are having fewer children . . . , banks are not expanding their lending [as before] . . . , and countries are engaging in less cross-border trade.”

Sharma calls this the “low-growth trap,” which has now been inherited by President Trump. Sharma worries about its political consequences as much as its economic effects. Already, it seems a breeding ground for nationalist and populist surges in many countries. (Read: Trump, Britain’s Brexit, Russia’s Vladimir Putin and France’s Marine Le Pen.) He expects more tension and discontent:

“Many governments are still trying to push their economies to reach unrealistic growth targets. Their desperation is understandable, for few voters have accepted the new [economic] reality either. . . . This growing disconnect between the political mood and the economic reality could prove dangerous. . . . Some leaders are. . . scapegoating foreigners or launching military adventures to divert the public’s attention from the economy.”

Note that Sharma is not forecasting anything like another Great Depression or even a repetition of the 2007-09 Great Recession. He’s simply predicting an extended slowdown of economic growth. “No region of the world is growing as fast as it was before 2008,” he writes, “and none should expect to.”

For the United States, Europe and other developed nations, this means that “anything over 1.5 percent [annually] should be seen as healthy,” he says. This would be a big drop for the United States. Since World War II, the American economy has usually grown each year by 3 percent or better.

Less-developed economies can still take advantage of existing technologies and under-schooled workers. Growth rates can be faster — but not as fast as before. China, Russia and Vietnam had all grown at annual rates of 7 percent or better, but that won’t continue. All in all, the world economy will slow.

To be fair, there’s no technical consensus on these issues. Consider another recent report by innovation experts Michael Mandel and Bret Swanson. Contrary to Sharma, they predict a productivity boom that would boost annual U.S. economic growth closer to 3 percent a year — a target of the Trump administration — from the 2 percent of recent years.

They argue that roughly 70 percent of U.S. business sectors (including manufacturing, construction, health care and transportation) have underinvested in digital technologies. But this is changing, they say, and it promises major gains in efficiency and economic growth. The point is not to arbitrate between these views; it is rather to acknowledge legitimate differences.

Still, Sharma’s broader point remains: The real threat of the economic slowdown is to political stability. For decades, advanced democracies, including the United States, have adopted a similar political model. It assumed that economic growth could deliver social peace and loyalty to democratic values. Protective social institutions — widely called the “welfare state” elsewhere and the “social safety net” in the United States — shielded against economic upsets and personal misfortune. Democracy mitigated capitalism’s worst excesses.

The system’s victims and critics could be bought off. But the model required — and most people took for granted — a dynamic economy that could boost living standards and expand welfare benefits. This assurance has now gone missing. At best, the model desperately needs repair; at worst, it is busted.

Article Link To The Washington Post:

Investors Are Breathing A Sigh Of Relief Over France, For Now

Macron victory seen by some as vote of confidence in European Union.

By William Watts
May 8, 2017

A more united Europe?

A French presidential election victory Sunday by centrist Emmanuel Macron, a former investment banker who campaigned as an unabashedly pro-European reformer, over euroskeptic nationalist Marine Le Pen will feed the notion that a populist wave that led to Britain’s Brexit vote last June and Donald Trump’s U.S. presidential victory has crested.

This is the narrative financial markets have increasingly reflected over the past two weeks, following Macron’s first-place finish in the first round of the French vote. Investors, encouraged by a strengthening European economy and wary of stretched U.S. stock valuations, have already shown increased interest in European equities. The euro EURUSD, -0.1182% rose 0.2% following the results, and has been on an uptrend since the first-round election vote two weeks ago.

French stocks on Friday finished at their highest level since 2008.

Erik Nielsen, chief group economist at UniCredit, argued in a Sunday note that Macron, in fact, was successful because he focused on pro-European values.

Nielsen wrote that changes outside and inside Europe have focused “vast majority” of Europeans’ minds on shared core values and that Macron “saw this earlier than most, and ran with it.

“In other words, this is likely the beginning of a trend in Europe, rather than a one-off,” he said.

Nielsen and others expect Macron to find an enthusiastic partner in German Chancellor Angela Merkel, who faces her own election challenge later this year. And it should be noted that even if Merkel’s center-right Christian Democratic Union were to be defeated by Christian Schulz’s center-left Social Democratic Party, it would be a traditional changing of the guard between two very pro-European parties rather than an upset of postwar political order.

The wild card remains Italy, which must hold elections within the next year and where the euroskeptic 5 Star Movement remains in the driver’s seat. Former prime minister Matteo Renzi’s victory in an April 30 contest to claim back leadership of the center-left Democratic Party has only partially soothed concerns related to the potential for future Italian turmoil.

And a modicum of caution may still be a good idea on France itself.

Macron was far from a traditional candidate, having built his En Marche movement after leaving the Socialist party. Indeed, the election saw both the center-left and center-right parties shut out of the runoff for the first time.

This points to “a very strong resentment of how politics has been conducted for the past decades,” wrote analysts at Eurasia Group, in a note.

“So far, this has clearly benefited Macron. But the new president still needs to prove himself to the 48% of voters who voted for an even more radically ‘different’ candidate in the first round, as well as the 20% of center-right voters who feel they have been robbed,” they wrote.

Macron, they said, still has to show voters that his plans for economic reforms will be in their own interest, a difficult challenge.

For investors, a sigh of relief over France is understandable. But the election may not yet be the final word.

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What Macron Can Do For Free Markets Everywhere

He can help open the way for better economic governance in the West rather than just setting the stage for a bigger political shock.

By Mohamed A. El-Erian
The Bloomberg View
May 8, 2017

Once the initial market relief plays out -- that, even during an unprecedented “anti-establishment” wave in both Europe and the U.S., French voters rejected a far right president in Marine Le Pen of the National Front -- interest will shift to how relative newcomer Emmanuel Macron will manage to govern in a country accustomed to mainstream politics. And it is not just about his prospects for reinvigorating the French economy and, working closely with Germany, spearheading a modernization of Europe. It is also about a bigger and more consequential issue: the extent to which endogenous political disruptions are opening the way for better economic governance in the West rather than just setting the stage for a bigger eventual political shock.

Preliminary results from France confirm what markets were expecting: a decisive loss for Le Pen. With the markets’ near certainty now becoming certainty, this is likely to give a further boost to risk sentiment in the short-run. However, the resulting rise in stocks, the appreciation of the Euro, and the fall in the France-Germany government bond spreads will likely be tempered by what has already been priced following Macron’s first round win and the opinion polls forecasting Sunday’s vote. Meanwhile, the European Central Bank and the Swiss National Bank will be putting their contingency plans back on the shelf, with the ECB also preparing for greater pressure to ease off the monetary policy accelerator.

Beyond the immediate reactions, much will depend on the consequences of an establishment shakeup that speaks to considerable dissatisfaction among younger citizens. Remember, over half of them voted in the first round for fringe candidates: Le Pen of the extreme right and Jean-Luc Melenchon on the far left.

Like her father's loss to Jacques Chirac in 2002, Le Pen was unable to convert her relatively good first round showing into sufficient country-wide support in the second round of the presidential elections. Instead, she lost to a combination of genuine support for Macron and the coming together of voters insisting that France should not be led by someone from the National Front.

This highlights the challenges facing Macron who, just a few months ago, was a long shot in a crowded presidential field. He inherits a divided nation that, yes, resisted extreme politics yet remains highly dissatisfied with a system that has staggered through too many years of low growth, high youth unemployment, and glaring inequalities.

Now that Macron has been elected, markets will be gradually shifting their focus to his ability to overcome gridlock both at home and in Europe. Ahead of parliamentary elections in June, his choice of prime minister will signal how he intends to “cohabitate” as he tries to reinvigorate France within what he hopes will be a stronger and more coherent growth-oriented Europe. He must both cooperate with and shape a National Assembly whose long-standing mainstream parties just suffered a humiliating defeat at the polls.

It is a challenge that, in many ways, is similar to that facing two other G7 leaders who came to their countries’ highest office on the back of the anti-establishment wave -- President Donald Trump of the U.S. and Prime Minister Theresa May of Britain. All three leaders agree that the economy can -- and should -- benefit from low corporate tax rates and a slimmed-down government. They also agree that regionalization and globalization -- as well as the evolution of national identity -- need to pay greater attention to both real and perceived economic losers, even if they constitute a minority relative to the beneficiaries.

More generally, the Macron-May-Trump outcomes speak to an historic internal disruption to the functioning of traditional politics in the advanced world. And it is part of the larger erosion of trust, credibility, and effectiveness of the establishment, and not just in the public sector.

The jury is still out as to whether these three leaders will be able to lead mainstream-dominated parliaments in unleashing productivity, economic growth, and more inclusive market-based economies. Much will depend on the reaction of establishment forces that remain in control of significant parts of the public and private sectors.

Rather than a decisive blow to anti-establishment wave, as some are claiming, Macron's victory is a stop along a journey whose destination is still in question.

If the internal political disruption France and other Western countries are experiencing delivers higher and more inclusive growth, it will mark a revitalization of liberal democracies in a pro-market fashion. If it fails, it is just a matter of time before France will be dealing with a more mainstream National Front, more inward anti-establishment forces, and greater sympathy for the view that the Eurozone is about the past and not the future. And that is an outcome that markets would find destabilizing.

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In France, The 'Can't Lose' Candidate Pays A Price

Emmanuel Macron won by a landslide over the far-right candidate. Leading a coalition will be harder.

By Megan McArdle
The Bloomberg View
May 8, 2017

Emmanuel Macron was the “can’t lose” candidate in the French presidential election. Impeccably well-credentialed. Handsome and sharp. Running against a far-right populist who spurs frightened talk of fascism. The polls showed him comfortably ahead, said the analysts. There was little chance that his opponent, Marine Le Pen of the National Front, could close such an enormous gap.

“Where have we heard that before?” muttered Americans.

As Election Day waned on on Sunday, slight traces of nervousness could be observed. Voter turnout was down from previous second-round elections, a circumstance that was thought to favor Le Pen. Brexit …. Trump … could Le Pen be about to add her name to the litany of nasty surprises for the globe’s cosmopolitan ruling class?

Yeah, no. By 8 p.m., Paris time, Macron had been projected the landslide winner, with early returns showing him sweeping into office with roughly two-thirds of the vote. History may repeat itself. But the question is always “Which bit of history?” In the past few years, old establishments have been swept out by populist movements complaining that long rule had made them far too comfortable in their positions, too little responsive to the ordinary people who kept putting them in office. Well, this time around, a clear majority of those ordinary folks have opted for continuity with that past, rather than a radical break from it.

On Saturday, I asked Arun Kapil, a political scientist, to run down the implications of various vote tallies Le Pen might get. He broke it down for me thus:

45 percent of the vote: “An earthquake”

40 percent of the vote: “Very good for her”

High 30s: “Good, about what she’s expecting”

Low 30s: “A disappointment”

Under 30 percent, he said, she would lose control of the party her father founded.

It looks like Le Pen will get about 35 percent, the electoral equivalent of “meh.” On the one hand, this is a very good result for the National Front, which has long struggled to get political representation in line with the percentage of the population that supports them. France’s two-round elections make it hard for them to win seats in the legislature, much less the presidency, because even if they make it into the second round, all the other parties gang up to deny them a win. The last time the National Front was in the second-round presidential election, in 2002, Le Pen’s father collected only 17.7 percent of the vote. Marine Le Pen has doubled that.

In part, that’s because neither the parties nor the voters mounted as fierce an effort to hold down her vote totals. Francois Fillon, the mainstream conservative candidate, immediately urged his supporters to turn out and vote for Macron. But Jean-Luc Mélenchon, the far left candidate who outperformed the stalwart old-guard left of the Socialist Party, was not so supportive. And voters, apparently almost as sick of politics-as-usual as they are afraid of Le Pen, often decided to stay home rather than turn out to vote “Anyone but Le Pen.”

But if this is not a terrible result for the National Front, neither is it terribly exciting for them, no matter how hard they try to spin it into a moral victory. Getting a third of the vote is all very well, but France’s system is structured to require a clear majority. In a dispirited year, when populist waves seem to be advancing everywhere, two-thirds of voters rejected the party's politics in favor of an upstart no one had heard of a couple of years ago. Perhaps they are on an upswing that will deliver them the presidency five years hence. But then, perhaps they have a cap that will forever keep them distant from power -- close enough to see the presidency in reach, but never to reach it.

That does not, however, mean that politics-as-usual can simply keep on keeping on. For one thing, Macron's En Marche party still faces legislative elections in June. If it cannot get a legislative majority it will enter “La Cohabitation,” an uneasy alliance with another party that will weaken the position Macron has just won. And while France tends to deliver its presidents legislative majorities to go along with their new office, a brand-new party like this one is not as well positioned as the old standbys to take the majority that Macron will need to govern as he wants.

The deeper issue is the fact that French voters were forced into the position of voting for a far-right nationalist or “God no, not that!”

Depressed turnout and record support for the National Front suggest that something real has happened in French politics, something that should worry the establishment. Even if the party never makes it to the presidency, it may be able to play spoiler in future second rounds, effectively forcing the choice of president back to the first round of the elections.

But it seems very possible that presidents who make it into office that way could find themselves without the political capital that comes from winning an election because a majority of voters wanted you, or at least, wanted your side of the political spectrum. Those who gain office simply by being somewhat less horrifying than the alternative may find it hard to amass the popular support, and legislative majorities, they need to get anything done. Becoming the "can't lose" candidate could thus very easily turn out to be a no-win proposition.

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