Monday, February 25, 2019

Thoughts from Madrid. Spain: 25.2.19

Spanish life is not always likeable but it is compellingly loveable.
           Christopher Howse: A Pilgrim in Spain
  • Spain is now officially the world's healthiest country. The UK ranks 19th. But I can't see the USA in the top 20. Nor Germany.
  • If you're in the pueblo purchasing business, this guide is for you.
  • As we walked down my daughter's street in Malasaña yesterday, she pointed out a small queue of people waiting to take a selfie in front of a particular shop. They were, she said, copying some social media 'influencer' who'd done this, for some reason or other. Dear god.
  • It's a common site in central Madrid, at any time of the day, to see  people trundling carry-on suitcases through the streets. Particularly at weekends, I guess.
  • Another common, though less frequent, sight is the Spanish flag draped over balcony railings. I imagine this is 'Spanish nationalism' at work, among the right-leaning residents of the city.
The EU, the UK and Brexit
  • A possible last minute scenario . . . Richard North this morning: We could be looking at an entirely new twist involving the 21-month transition period being abandoned and replaced with an Article 50 extension that takes us to the end of 2021. This idea, according the Guardian is gaining traction as the EU's default position in the event that MPs continue to reject the Withdrawal Agreement, with the extra time allowing the UK and the EU to negotiate their future relationship with the aim of making the contentious Irish backstop redundant. This, of course, would mean that the UK continued to be a full member of the European Union and would thus stay on board for the multi-annual financial framework discussions, taking part in determining the budget for the next 7 years. This would have to gain the support of all 27 Member States and the backing of Mrs May, her cabinet and the UK parliament. RN sees the latter as unlikely and that even if they did back it: there is no guarantee, or anything close, that a 21-month extension would solve the outstanding issues. Not only is there no domestic consensus over the withdrawal agreement but there is no common position on what kind of trading relationship we want with the EU. . Hey ho. Is there anyone out there good at untying Gordian knots?
  • It may already be too late to avert global recession, with dire consequences for Europe, says Ambrose Evans Pritchard in the first article below.
The Western World
  • See the second article below on how the Me-Too movement has altered the office environment for the worse. Allegedly. By the way, it's written by a woman. Not by a disgruntled male. Though maybe be she isn't of the current generation of young women, who might well differ with her. Actually, I just checked and she's 37.
Social media
  • A UK parliamentary committee which has issued its final report on 'disinformation'. This is said to make 'blistering reading'. Facebook, it says, puts profits ahead of users’ privacy, their security and the health of democracy. It uses its market dominance to crush rivals. It obstructs outside scrutiny and apologises (feebly) only when caught. Anyone still surprised at reports like this?
  • Some major companies are annoyed with YouTube for allowing their ads to appear on videos exchanged between pedophiles. It's claimed today that: To get itself out of its current predicament, YouTube will either have to take a harder line on what appears on its site, imperilling the community of video makers and viewers it relies on, or accept the loss of high-paying advertisers that are unwilling to risk being associated with many of its videos. Whatever it chooses, its days of having its cake and eating it appear to be coming to an end. Which can't be bad.
  • Word of the Day: Dividoso
Finally . . .
  • I think I mentioned I wasn't a fan of Gmail's feature of an automatic new-message box every time you log on. Well, I've finally found out how to stop this. Open this page and then put it in your Favourites or Bookmarks list. Or whatever Microsoft calls their version - https://mail.google.com/mail/u/0/?labs=0#inbox

1. It may already be too late to avert global recession, with dire consequences for Europe: Ambrose Evans-Pritchard

Global recession risk has suddenly jumped several notches.

The accumulated damage from Donald Trump’s trade wars and worldwide monetary tightening is taking its toll. We are one shock away from a contractionary vortex that would be extremely hard to control.

In America the Federal Reserve’s instant tracking gauges of GDP growth have halved since late January. They are approaching stall speed.

In China it is becoming clearer that the Communist leadership either cannot or will not engineer another brake-neck credit boom to revive an economy slipping into structural stagnation. Stimulus is trickling through but it is a pale image of past reflation cycles.

This is hard to square with the blistering asset boom over the last two months. The MSCI index of world equities has risen 15%. Wall Street’s S&P 500 is up 18%. Bears have been mauled.

Big global banks and funds bought into this relief rally on early evidence of synchronised ‘policy capitulation’ by the G2 economic superpowers: the Fed’s rhetorical retreat after its ill-judged rate rise and hawkish message in December; Beijing’s pledge to avert a hard-landing at the Central Economic Working Conference.

This had echoes of the Fed rescue in early 2016, which bought another lease of the global expansion and proved to be a bargain-basement buying moment. Yet the comparison has its limits.

The eurozone was then in the accelerating stage of a V-shaped recovery driven by quantitative easing a l’outrance and the end of austerity. Today it is in a deep industrial slump. It has tightened monetary policy into the downturn by shutting down QE.

Yields on 10-year German Bunds have dropped 70 basis points over the last year and are flirting with zero again. Over $11 trillion of bonds worldwide are back to negative yields. Large players are battening down the hatches for a deflationary storm.

Morgan Stanley’s Michael Wilson said it is time to dismount from the stock market rodeo. “Bulls can be dangerous animals. We struggle to see the upside from hanging on,” he said.

The danger for the world economy is that the sugar rush from Mr Trump’s $1.5 trillion fiscal package will fade before China comes close to righting the ship. This would push the defenceless eurozone over the edge and back into the ‘sovereign/bank doom-loop’ that it has conspicuously failed to resolve.

The central premise of Trumponomics has turned to dust. Cut in corporate tax rates from 35% to 21% were supposed to set off a virtuous circle of capital investment by companies. Instead they spent the money on dividends and share buybacks.

All that remains of this wasted largesse is a budget deficit near 5% GDP at the top of the cycle, and a public debt ratio rising from 106% of GDP this year to 117% by 2023 (IMF forecast) assuming nothing goes wrong.

Great expectations now ride on China’s gargantuan $690bn credit surge in in January. But Chinese double counting distorts the headline figures. Rob Subbaraman from Nomura said much of the debt is being used to refinance corporate and household liabilities that have reached 206% of GDP. China has reached credit saturation.

His ‘credit impulse’ measure has risen just 2.5 percentage points in the latest reflation mini-cycle. This compares to 13.9 points in the 2015-6. It was 18.7 points in the cycle before that, and 30.2 points in the post-Lehman blitz of 2008-2009.

Chang Liu and Mark Williams from Capital Economics estimate that fiscal stimulus from tax cuts and extra spending amounts to just 1% of GDP so far, compared to 4% after the stock market crash and currency scare in 2015-2016, and 10% a decade ago.

The global impact of the 2008-2009 episode had five times the potency (adjusting for the smaller size of the Chinese economy back then)

The People’s Bank (PBOC) has ostensibly been easing for several months. The required reserve ratio for banks has been cut five times, but this is chiefly in order to stop liquidity drying up. The PBOC has not cut the benchmark lending rate this time. It cannot risk setting off capital outflows.

The short-term repo rate has come down 100 points - half the level of cuts seen in previous rescues - but this is not feeding through to corporate lending where it is most needed.

Capital Economics said spreads on AA- bonds have jumped 150 basis points to 400 over the last year due to credit risk and rising defaults. The transmission mechanism for stimulus is partly broken. The economy may stabilize by the middle of the year at (true) growth rates near 4% but there will be no return to boom.

The new twist is how shockingly weak the US economy suddenly seems. Retail sales fell 1.2% in December, the biggest drop for nine years. The Conference Board’s leading indicator for the economy has hit an eight-year low.

The Philadelphia Fed’s manufacturing survey for February was dire. New orders fell 23.7 points in the steepest one-month drop since October 2008. The broad U6 measure of unemployment has risen from 7.4% to 8.1% since July. This has tell tale signs of late-cycle exhaustion.

The New York Fed’s Nowcast gauge of growth in the first quarter has dived to 1.2% (annualised) since late January, with a startling drops for net exports and industry. The Atlanta Fed’s GDPNow is telling much the same story.

The Fed waited too long to abandon monetary tightening, which famously operates with “long and variable lags”. Delayed damage from higher rates and bond sales of $50bn a month (reverse quantitative easing) is only now being felt.

Lakshman Achuthan from the Economic Cycle Research Institute said it is not enough for the Fed to hit the pause button. Rate cuts are needed. “The Fed may already have left it too late to avert a recession,” he said.

We can see with hindsight that a rise in 10-year ‘real’ borrowing rates to 1.15% in October was all it took to set off an episode of violent global stress.

The rising dollar was torture for an international system with $11.8 trillion of offshore dollar debt and complex linkages to the US monetary policy through derivatives. European banks have large dollar liabilities on short-term maturities that must be rolled over constantly.

When the Fed kept tightening over the course of 2018 it drained global liquidity and pushed the broad dollar index to a modern-era high of 128.88 - until the world screamed. The global fall-out from this protracted squeeze is now blowing back into the US economy with a delay.

If the US rolls over before China stabilizes, the eurozone risks a terminal crisis. It is chronically incapable of generating its own internal demand growth. The European Central Bank’s key rate is already minus 0.4%. The political bar to fresh QE is exorbitantly high.

The fiscal machinery of the eurozone makes it impossible to carry out aggressive counter-cyclical stimulus in a crisis. Public debt levels are much higher than before the Lehman crisis and European banks are sitting on €1 trillion of non-performing loans. Populist parties are on the rampage.

This is a political and economic construction that cannot withstand a major shock, which is why a no-deal Brexit would be courting fate for the EU. “Europe is a sitting duck in the next global downturn,” says Ian Kearns, director of the European Leadership Network.

It does not require a catalyst to set off global recession. Claudio Borio from the Bank for International Settlements says asset markets can “fall under their weight” from exhaustion and then take the economy down with them. This is what happened in the dotcom bust of 2001 and the Great Recession of 2008.

“Rapid increases in credit drive up property and asset prices, which in turn increase collateral values and thus the amount of credit the private sector can obtain until, at some point, the process goes into reverse,” writes Mr Borio in his seminal work, The Financial Cycle and Recession Risk.

Donald Trump may keep this asset rally going through the Spring if he pulls back from trade wars with China and Europe, and a Brexit deal ices the cake. But deeper economic forces are at work in the world’s debt-stretched system. We may already be uncomfortably close to Mr Borio’s tipping point.

2. Am I the only one mourning the death of the office romance? Zoe Strimpel.

I began my first job at a national newspaper a few months after graduating from university. It was deeply exciting, finding myself in London, the youngest person on the paper, surrounded by grown-ups.

One of the most exciting things about my new workplace, truth be told, was the office gossip – by which I mean, of course, office romance, of which there was boatloads: above board, below board, and all the boards in between. I remember that both men and women were routinely inappropriate, frequently forward with each other and – not unrelatedly – very often drunk, too. There were affairs and love stories aplenty. It was enthralling.

From the vantage of a post-MeToo era, whereby all but the creepiest men have been well and truly scared off so much as uttering a compliment about their female colleague’s winning summer dress, those days now seem as wondrous and zestful as they are far gone.

They’re certainly distant: a new study by sociologists at Stanford and the University of New Mexico examining the decline of ‘traditional’ ways of meeting people in the digital age has found that the numbers finding love at work have sunk quite dramatically in the past 20 or so years. In the Nineties, nearly one in five US couples met at work; that figure has dropped to one in 10.

The death of workplace romance is a great shame – but not a surprise. The authors of the study stress the march of online dating rather than strangulation by fraught sexual politics, but in my view it’s the latter that’s largely to blame.

Since MeToo, the landscape in which the sexes engage with each other has become febrile and offence-prone. With all encounters now subject to intense scrutiny, the office, with its inherent powerplays, hierarchies, and competetiveness, was particularly destined to become a minefield.

Trying it on in the lift these days is not only frowned upon, it’s dangerous: armed with smartphones in their back pockets, the object of your lust can and very well may seek instant and global revenge by telling the world what you’ve done via social media.

That’s if you don’t get zapped by your boss first. Since MeToo, employers have begun puritanically policing the libidinousness of their staff to make office liaisons as difficult as possible. At Netflix, workers are prohibited from asking each other out more than once, warned that ‘if you stare at someone for more than five seconds, it’s creepy and inappropriate’.

The advertising agency FCB Worldwide advised its employees of the difference between ‘responsible fun’ and ‘stupid fun’ at office parties in a companywide memo in 2017.

Meanwhile in Britain, nearly 80 per cent of firms have tightened or reviewed their policies on workplace relationships since the dawn of MeToo, according to a survey by Direct Line insurance, with one in 20 banning workplace romance.

In a grim but predictable development in higher education, an insider informed me that last week a major London university has introduced a policy forbidding not just romance but all socialising between lecturers and students.

It’s hard to think of a drearier, more bureaucratically sexless world than this, with everyone cowed into keeping well away from each other by threats of being branded a predator, of public humiliation, denouncements, and of course sacking.

In fact, all the beady-eyed watching out for rule-breakers, knee-strokers, bum-grabbers, off-colour-compliment-givers rather puts me in mind of a repressive Communist state.

Maybe in becoming illicit and dangerous, office romance will become even more heady, and thrive under the radar. But I doubt it. This is because it has become increasingly clear that the internet, now our main dating exchange (40 per cent of couples meet online), has done more than compete with traditional dating mechanisms: it has actually expunged the energy from them.

Even in bars, where you’re (still) free to meet and pick up people, that’s happening less and less. This is partly because online life has robbed many people of the ability to flirt with actual spoken words rather than emojis. But it’s also because the internet has created and enshrined Designated Dating Zones.

Offline settings, including workplaces, are now seen as unbounded, messy, ambiguous and... hard work. I’ve actually heard people of both sexes say they can’t be bothered to meet people IRL (in real life) because, well, that’s what Tinder’s for – a tagline a new advert for Three Mobile has adopted, too.

I can see why many prefer to keep their dating life digital, where everything and everyone can be stopped, blocked, or unmatched, and where you can rig your settings and filters up so well that nobody can ever discomfit you.

You can stop the inappropriate before it even begins. Life in the flesh is much harder to control, but offers so much more; both bad and good.

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