Thursday, November 08, 2018

Thoughts from Hamburg, Germany: 8.11.18

Spanish life is not always likeable but it is compellingly loveable. 
- Christopher Howse: A Pilgrim in Spain. 

If you've arrived here because of an interest in Galicia or Pontevedra, see my web page here. Garish but informative.

Matters Hamburg/German
  • As I've said, all the (plentiful) museum, etc. translations into English here are excellent. I'm almost missing the amusement and irritation I experience when dealing with the Iberian equivalents. Assumed to be done by a relation of the commissioner. With access to a computer.
  • And, so far, everyone everywhere has displayed an impressive command of English. Including the café which has on its window A ruff day? Come in and relax with a coffee.
Matters Spanish
  • Think Spain tells us here that the speed limit on all secondary roads will drop from 100 to 90kph as of January. I have to admit I thought it already had. So, I now feel cheated of 10kph during several months, in my attempt to avoid my 13th motoring fine. (Just to remind you: Fines in the other 15-20 countries I've driven in – Nil).
  • Reader María rightly rails in her blog against the judicial decision to favour the banks as regards the 'stamp duty' tax on mortgage documents. And the Olive Press reports on this iniquity here. But this morning, in his Business over Tapas, Lenox Napier advises that: On Wednesday, Pedro Sánchez announced that from Thursday, and following a Government order, the banks will henceforth pay the tax on mortgages. Confused? Well, I certainly am.
  • Lenox cites an El País report that the number of British expats living in Spain has dropped by 40% since 2012. This is blamed on Brexit-inspired concern over what will happen once the UK quits the EU and on more expensive living costs due to the fall of sterling. I have to say I'm astonished that no mention is made of the Modelo 720 law on overseas assets introduced in the base year – 2012. In contrast, in the years that followed, there were several reports of tens of thousands of Brits leaving Spain out of fear of being taxed hugely on expensive UK properties.
  • Last night, I was thinking of writing today that it was a treat to be in a country where strangers are aware of my existence and take this into consideration, for example when deciding where to walk. Or shout. And then, by coincidence, I got this El Pais article from reader (and friend) Eamon in La Coruña. As I usually sleep on the (quiet) night train to Madrid, I haven't experienced anything like what's recounted therein. But my daughter, travelling on the day train, has certainly suffered something similar, if not quite as bad. And I do now recall being irritated for hours on a day train by noisy kids whose activities were ignored by their parents. As I often say, the Spanish can be exceptionally kind and noble but, by god, they can also be astonishingly impolite and inconsiderate by the standards of other cultures. And it really upsets them if you point this out, regarding themselves as a singularly polite and generous people. Which they truly are with people with whom they have a personal connection. Which, by definition, rules out strangers.
Note to reader(s): I'm perfectly aware that bad behaviour happens in other countries, specifically the UK. But this is a blog about Spain . . .

Matters USA
  • Below is a nice Times article on the 5 things learnt from the mid-term election results. Some of these are pretty mood-lowering, if not depressing.
  • Following that are: 1. An article on how the Democrats are still struggling, and 2. An Ambrose Evans Pritchard article on Fart's 'reckless' (and failing) economic gamble'. The political noose, claims AEP, is tightening around his neck. One can but hope, especially after his press conference performance last night and the disgusting lies about the CNN reporter promulgated by that awful spokeswoman immediately after it.
  1. Word of the Day: Pesado
  2. The problems of a sexist language. In this case French but the same surely applies to Spanish. (Can you believe the Twain article on German is cited here?)
© [David] Colin Davies, Hamburg: 8.11.18


1. US midterms: Five things we learnt: Ben Hoyle, The Times

1. President Trump can and will claim a victory for himself
To an unprecedented extent the president made these congressional elections an explicit referendum on his performance. “Pretend I’m on the ballot,” he told supporters at a rally in Mississippi last month. He held about two dozen rallies in the closing weeks, largely in support of Senate candidates and almost exclusively in states that he won in 2016. The candidates he backed went on to win. That gives Mr Trump ammunition to argue, as Sarah Huckabee Sanders, the White House press secretary, did that the night was a “huge victory for the president”. Mr Trump himself tweeted last night: “Tremendous success tonight. Thank you to all!”

But it could equally be seen as a pragmatic exercise in cutting his losses. By focusing on the Senate, where Republicans were heavily favoured to win for weeks, he distanced himself from the likely loss of the House of Representatives, which then came to pass. According to early exit polls two thirds of voters yesterday said they were passing judgment on Mr Trump. After Barack Obama also lost the House of Representatives and narrowly held the Senate in 2010 he faced up to what he called a “shellacking” by the voters. Mr Trump, the president who once promised his supporters that they would “get tired of winning” is not about to say anything similar.

2. The Democrats’ “blue wave” never materialised but the first steps to rebuilding have been taken.
High postal voting and turnout figures raised Democratic hopes of a liberal uprising at the ballot box but the final results suggested that voters from across the political spectrum had been strongly motivated to take part. As Rick Santorum, the former Republican presidential candidate, put it on CNN, “you can’t have a wave election when both sides are interested”. Flipping the Senate was always a remote prospect for Democrats because so few Republican seats were up for grabs and genuinely winnable. Failing to flip the House would have been a disaster for a party still recovering from the 2016 election defeat and that outcome was safely avoided.

3.The US political landscape is becoming more diverse 
More women than ever before ran for office this year, most of them Democrats and many of them first-time candidates. Last night, with results still coming in, the new Congress was on course to include a record number of female members. Jared Polis, a Democrat running in Colorado, also became the first openly gay man to be elected state governor. Alexandria Ocasio-Cortez, the 29-year-old progressive who won a stunning Democratic primary victory in New York’s 14th congressional district this year, duly became the youngest woman ever elected to Congress. Ilhan Omar of Minnesota and Rashid Tlaib of Michigan became the first Muslim women in Congress while Deb Haaland and Sharice Davids, Democrats from New Mexico and Kansas, became the first Native American congresswomen.

4.The United States is becoming more not less divided
Rural voters broke decisively for Republican candidates while people in the suburbs and the cities, including some areas that picked Mr Trump for president two years ago, skewed towards Democrats. Women, particularly better educated women, swung sharply left across the country, favouring Democrats over Republicans by 20%, according to exit polls. More than half of men voted Republican.

5. Politics is set to be even more adversarial heading towards 2020

Nancy Pelosi, the Democrats’ leader in the House of Representatives, called for greater cross-party co-operation last night “because we have all had enough of division” but only after she had said that her party’s mission was now “restoring the constitutional checks and balances to the Trump administration” that Republicans had chosen not to apply. Mr Trump welcomed Ms Pelosi’s call for bipartisanship but did so after spending weeks hammering campaign messages on immigration and security calculated to energise his base rather than to broaden the coalition that carried him to victory in 2016.

With control of the House, Democrats are expected to ratchet up scrutiny of the Trump White House and investigate and legally challenge everything from the president’s personal tax returns to his controversial immigration, health care and environmental agenda. Impeachment is a possibility. With Republicans defending the Senate, Mr Trump can continue to appoint conservative judges and administrative nominees and has a bulwark against possible impeachment by the House as a trial would occur in the Senate.

2. The 'rainbow' Democrats still have nothing to offer America's working class – women or men: Janet Daley, The Daily Telegraph

In the end, three predictable things happened: the Democrats took control of the House, the Republicans held the Senate and Donald Trump declared a famous victory.

Will anybody tell the truth about these events? Probably not immediately, while exultation and exculpation are the order of the day. But look closely at the results and there are some disturbing historic facts that cannot be ignored indefinitely.

Left liberals are celebrating this as “the year of the woman” because a record number of female candidates have been elected to Congress. But it is really the year of what they call in the US, “suburban” women - which is to say, the educated, middle class ones.

The terrible truth is that Democrats have almost nothing to say to working class women in those blue collar states where they are more worried about putting food on the table than breaking glass ceilings. Indeed, the party appears to have nothing to say to working class voters of either gender (except “I hate you and your ignorant prejudices which stand in the way of our great march toward enlightenment.”)

This election victory in the House confirmed that the Democrats are now committed to the concept of the “rainbow coalition”: an electoral alliance of women, ethnic and social minorities and their progressive supporters. Which is to say, they have completely abandoned their traditional constituency and left them prey to the demagoguery of anyone who professes love for them and seems to take their concerns seriously.

They appear to have learnt nothing from the Hillary Clinton debacle in which a confederation of like-minded minorities poured contempt on the great disenfranchised millions who once believed that the Democrats were the party of the working man. (It is no coincidence that Trump stole Franklin Roosevelt’s term “the forgotten man”.)

But, you might argue, perhaps the time has come for politics to move away from that old class-based idea of party loyalty. That was a dangerous Marxist myth, wasn’t it? Maybe it is better to have parties that align along common interests and ideals rather than locking people into pre-ordained social position and economic categories. Yes indeed. But that can only work if the new alignments and the new messages connect with the reality of people’s lives. If you are a victim of the post-industrial apocalypse in a rust belt state, you want to believe that somebody in Washington understands your anger and does not regard your inchoate rage as despicable. If that is not forthcoming from a respectable candidate then you will turn to one who tells lies, who propagates terrifying myths and who deals in hate. The Democrats have more than their electoral prospects to consider.

There is a matter of moral responsibility here too. Speak to, and for, the angry mob - or they will turn in their desperation to something very dangerous.
3. Trump's reckless economic gamble has failed and the political noose is tightening: Ambrose Evans-Pritchard

Donald Trump’s economic deal with the devil has failed even in its most immediate and cynical objective. It is downhill on every front from now on.

The President debased the US public accounts with a Peronist fiscal policy of staggering irresponsibility in order to keep control of Congress - or rather to buy Congress with $1.5 trillion of future public debt might be a better description.

He lost the House anyway, and with it his chances of avoiding a blizzard of subpoenas from the Oversight and Intelligence Committees.  The Democrats won the popular vote by 7% at the absolute apogee of a Republican fiscal boom.

The sugar rush of unwarranted stimulus so late in the economic cycle is already starting to fade. The slippage is what hedge funds call the ‘second derivative’. Over the course of 2019 the Faustian Pact will progressively close in on Mr Trump, and on the credit-rating of the US Treasury.

Morgan Stanley said the stimulus will turn ineluctably into “fiscal drag” as the months pass unless there are more handouts to feed the monster.

Perhaps Speaker Nancy Pelosi will give Trump a partial reprieve of sorts. Common ground exists on spending for roads, bridges, and infrastructure. But the Democrats will keep him on a tight leash before the next election. “They are not going to give him anything to run on, any victories,” said Steve Blitz from TS Lombard.

The first ominous signs are already evident in sectors most sensitive to higher borrowing costs. The Freddie Mac rate for a 30-year fixed mortgage has risen 100 basis points to 4.83% over the last year. Home sales have dropped by 21%. Average prices have slipped 3.5%. The homebuilders’ equity index is on the cusp of a full-blown bear market.

This is remarkable given that the fiscal pedal is pushed to floor. The federal budget deficit is nearing 5% of GDP,  at a time when full employment and bulging tax revenues should restore balance. Bill Clinton had a surplus of 2.3% at the end of the 1990s expansion, a model of rectitude.

The US has never run a late-cycle deficit of this scale in peacetime. The stimulus has washed over the economy like a deluge of rain on parched soil, a flash flood that leaves only damage. “They have had a terrible bang for the buck,” said Adam Posen, chairman of the Peterson Institute.
“They are racking up debt with a low fiscal multiplier. The tax cuts have not unleashed investment and have added almost nothing to GDP on a sustained basis,” he said. What remains is an overheated economy with early signs of stagflation.

Above all, there remains the future debt claims on American taxpayers. The International Monetary Fund says America’s gross public debt will be 106% of GDP this year, 110% in 2020, and 117% in 2023, but without the huge pool of internal savings and external assets that have made it possible for Japan to defy gravity for two decades.

It was 61% as recently as 2006. The task of taming America’s runaway entitlements will be that much harder by the time Trump has finished his handiwork, perhaps impossible. This is how to ruin a great country.

It one reason why former-Fed chief Alan Greenspan calls Trump “the closest thing that America has produced to a Latin American-style populist” - the Caudillo del Norte, millionaire voice of the descamisados.

The other reason is Trump’s clientelism: how he coddles incumbent interests - coal, steel, cars, the declining industries - that stand in the way of economic progress and creative destruction.

Trump’s policies flout the cardinal Keynesian rule - “the boom, not the slump is the right time for austerity” - without achieving its stated supply-side objectives. The President claimed a year ago that his ‘Tax Cuts and Jobs Act’ would lead to a Reaganesque investment boom and would be “rocket fuel for the US economy”.  

It has done no such thing. Capex spending by business has been falling. Non-residential investment is the slowest in two years. The ‘happy hand-over’ from fiscal fizz to a durable surge in productivity is nowhere to be seen.

The cut in corporate tax rates from 35% to 21% has instead fed stock buybacks by US companies. Why would they invest a decade into an ageing boom, and in the midst of a global trade war?

This is not a replay of Reaganomics in the 1980s. The Reagan tax cuts came earlier in the cycle when there was still an output gap. Marginal tax rates were then much higher. There was at least some plausibility to Laffer Curve claims that tax cuts would pay for themselves with higher growth. And Reagan’s rearmament at least won the Cold War. His fifteen aircraft carrier battle groups had a high strategic return on investment.

The obvious problem with cranking up stimulus today when unemployment is at a half-century low and capacity constraints abound is that the Federal Reserve must fight back with monetary tightening or let the inflation genie out of the bottle. The equilibrium interest rate - R* in central bank argot - is jumping higher.

The loose fiscal/tight money mix has widened the differential in global interest rates and pushed up the Fed’s trade-weighted dollar index by 10% since January to 128. It is just a whisker of shy of a 30-year high.

This is torment for a global financial system has never been so dependent on US dollar borrowing, with $26 trillion of offshore lending in bank loans, bonds, and equivalent derivatives (BIS estimates), and with a collective debt ratio some 40 percentage points higher than the pre-Lehman peak.

Much of the emerging market nexus is already in the grip of a credit crunch as a result. This may get worse until ‘blowback’ into the US economy finally causes the Fed to retreat.

The mechanical consequence of a US consumption boom and a soaring dollar is to suck in imports, painting the current account deficit in Gothic colours. The IMF forecasts a chasm of $652bn or 3% of GDP next year. The non-oil component is already hitting the 4% peak seen in the deficit scare twelve years ago.

Mr Posen’s fear is that the White House will hunt for scapegoats, lurching further into protectionism and tariff warfare. It is the culminating logic of Trumpism.

The Fed is now unwinding QE with bond sales of $50bn a month, both draining global dollar liquidity and adding to the supply of debt that US markets must digest. This is making life even harder for the US Treasury as it tries to cover Mr Trump’s $1 trillion deficits. Hence the jump in real 10-year Treasury yields (TIPS) to 1.23% from 0.46% in January.

Debt markets are tightening. The average borrowing cost for BBB-rated companies in the US has jumped 120 basis this year to 4.71%.  Michael Pearce from Capital Economics says US yields have already risen more for household and firms in this cycle than they did during the last four tightening cycles going back to the 1980s. This paves the way for trouble next year as fiscal largesse fades.

Trump has sucked all the short-term advantage that exists by manipulating the macro-economic levers. Henceforth it will be harder. Lakshman Achuthan from the Economic Cycle Research Institute calls its the Red Queen effect from Alice in Wonderland. “It takes all the running you can do, to keep in the same place. If you want to go somewhere else, you must run twice as fast.”

If Trump is lucky, the Fed will calibrate its tightening perfectly - a feat rarely achieved - and pull back just in time to keep an ageing and by then enfeebled expansion going into 2020.

It is just as likely that the US will slip to stall speed and tip into recession in late 2019. Either way he will face his next election in far more hostile circumstances. 


Sierra said...

Speed limits - their information on the current limits seems to be wrong. According to the following website, it is 100 kph on secondary roads with a minimum 1.5m hard shoulder and 90 kph on ones without. That seems to coincide with the changes in signs that were introduced on roads in Lugo late last year:

The hard shoulder exemption appears to be finishing next year:

Maria said...

Possibly the noisiness of Spaniards in public is a way of asserting their love of life. When my husband and I visited France, he complained that the French were too quiet and serious, and that they didn't seem to know how to enjoy life. I, however, felt I had returned to a land of polite people.

Trump will be a dangerous animal until the new Congress gets going. He's fired Jeff Sessions and Rod Rosenstein (the last one overseeing Mueller's investigation) and replaced them with someone who has in the past wanted to curtail investigation into Trump. He has incited more hatred of the press by revoking CNN's Jim Acosta's press clearance, and berating him at the press conference yesterday. Let's see what happens now.

Colin Davies said...

@Maria. A popular Spanish misconception/mistaken correlation.