Relevant and even prescient commentary on news, politics and the economy.

Ukraine Corruption and Transfer Pricing

Ukraine Corruption and Transfer Pricing

As I listened to the testimony of Bill Taylor and George Kent, I was also reading up on some South African transfer pricing case involving iron ore:

Kumba Iron Ore will pay less than half of the tax bill it received from the SA Revenue Service (Sars) last year following audits of its export marketing practices during the commodities boom. The settlement of R2.5bn significantly overshot the R1.5bn Kumba had set aside as a contingent liability. It is, however, a fraction of the taxes, penalties and interest payments Sars was pursuing the country’s dominant iron ore producer for. The existence of a potential tax liability was first reported to shareholders in June 2014, but Kumba could only put a number on it early last year when it received a tax assessment of R5 billion for the years 2006 to 2010.

If this account sounds like a lot of accounting gibberish, one might check with other accounts including whatever BDO wrote but these other accounts were even less informative. To paraphrase one commercial “people who know” avoid BDO. I think what happened is that the South African tax authority objected to what it saw as a lowball transfer pricing paid to the South African mining affiliate by a tax haven marketing affiliate and decided to completely disallow any commission income for the tax haven affiliate. This account at least notes that Kumba Iron Ore eventually told its shareholders that there might be some transfer pricing risk and that the issue was eventually resolved with a more modest commission rate booked by the marketing affiliate. So what does this have to do with Ukraine?

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Real average and aggregate wages declined in October

Real average and aggregate wages declined in October

October’s consumer inflation reading came in at a surprisingly high +0.4%, which as shown in red in the graph below, was one of the 3 highest in the past two years. Meanwhile average hourly earnings increased less than +0.2% – the second lowest reading in the past two years, shown in blue:


As a result, real average hourly earnings decreased -0.2% last month, the worst reading since late 2017:

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How economists blew the analysis of the manufacturing jobs shock

How economists blew the analysis of the manufacturing jobs shock

I came across this article yesterday, posted by – to his credit – Brad DeLong, whose argument it eviscerates. Entitled “The Epic MIstake about Manufacturing That’s Cost Americans Millions of Jobs,” it deserves widespread attention. So I am summarizing it here. But by all means go and read the entire piece.

Just to give you the frame of reference, here is the historical graph of manufacturing jobs in the US for the past 50 years:

After peaking in 1979, the number more or less gradually declined in the 1980s, and then stabilized in the 1990s, before plummeting right after 2000.

 

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Scenes from the October employment report: leading sectors remain poor

Scenes from the October employment report: leading sectors remain poor

Yesterday I discussed unemployment and labor force participation from last week’s jobs report, which with the significant exception that better wage growth would probably lead to more people deciding that they’d like a job, remains very positive. Today let’s look at the bad news, which is the same as last month’s: leading indicators for employment are weak to negative.

To begin with, in the last 9 months, per the more reliable establishment report, 1,358,000 jobs have been added, an average of 151,000 per month, including census hiring, a distinct slowdown from 2018’s pace of 205,000:


Next, let’s update the three leading sectors of employment that I have been tracking: temporary help (blue in the graph below), manufacturing (gold), and residential construction (red). Here’s what they look like compared with 2018, showing the slowdown this year (Note: the big decline in manufacturing last month was the GM strike, which will presumably be reversed in November):

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Weekly Indicators for November 4 – 8 at Seeking Alpha

by New Deal democrat

Weekly Indicators for November 4 – 8 at Seeking Alpha

 My Weekly Indicators post is up at Seeking Alpha.
The biggest story of the week was the move higher in long term interest rates. This means that the “yield curve inversion” you’ve read so much about in the past year is over. At the same time, long term interest rates (e.g., for mortgages) haven’t moved back high enough to pose a danger to the housing market. In other words, they’re at a “sweet spot.”
A note on the political implications: my specialty is telling you what the economy is likely to look like a year from now. And one year from now is the 2020 Presidential election. That all of the recent news in the long leading indicators has been improvement means that the economy is very likely to be doing better on Election Day than it is now. Which means that the incumbent candidate’s approval is likely to be higher then than it is now. That doesn’t necessarily mean that Trump wins, but it is fair to say that it does mean that if the Democratic candidate wins, it will be by a lower margin than the present polling suggests. (I owe you this in a much more detailed post, but I wanted to give you the Cliff’s Note version now.)
Anyway, as usual, clicking over and reading my post at Seeking Alpha should be educational for you, and reward me a little bit for my efforts.

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GDP, Manufacturing employment

David Zetland….”For years, I have complained that “nobody wakes up in the morning, looks at GDP statistics, and changes their plans for the day.” Listen to this podcast on mis-measuring productivity and manufacturing statistics, which may have given populists excuses to “fix” problems that never existed. (My impression is that many more people would be happier if they looked at their quality of life instead of a [random? inaccurate?] reference point that supposedly tells them how well they are doing compared to peers.”

(Dan here….I found the podcast hard to follow.   Go here for a cogent argument, start arround 17 minutes in to hear Susan Houseman explain:   I’LL QUICKLY REVIEW SOME OF THE RESEARCH. SO THIS CHART SHOWS MANUFACTURING SHARE OF PRIVATE INDUSTRY EMPLOYMENT AND GDP. AGAINST SINCE LATE ’40s. AND WHAT YOU CAN SEE THAT’S BEEN RATHER DECLINING RATHER STEADILY. AND MANUFACTURING’S OUTPUT SHARE IN THE PRIVATE SECTOR HAS BEEN TRENDING DOWNWARD PRETTY MUCH ALONG WITH EMPLOYMENT…)

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Scenes from the October employment report: full employment?

Scenes from the October employment report: full employment?

Last Friday the household jobs report – the one that tells us about unemployment, underemployment, and labor force participation – has been particularly strong in the past three months. This has driven some impressive gains in labor force participation and the unemployment rate.

To begin with, gains in employment as measured by the household survey (red in the graphs below), as opposed to the larger (and, yes, more reliable) payrolls survey (blue), have totaled 1,222,000 in the last three months:

One month ago this gave us the lowest unemployment rate in the past 50 years, and the U6 underemployment rate is also at its lowest level, save for one month, since the series began in 1994. Each ticked up by +0.1% in October. In the below graph, both metrics are normed to zero at their lowest levels:

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S&P 500 BY PRESIDENTIAL TERMS

With the presidential election still a year away, Wall Street is starting its normal analysis that if a democrat is elected it will cause a devastating stock market crash.  One would think that after all these years of such claims being proven dead wrong that the street would finally give up on it. In the post WWII era from Truman to Obama it is 70 years and each party has had bad candidates in office for half that time.  Truman was only President for seven years and five months so the Democrats only had 35.4 years in office while the Republicans had 36 years in office.  Over these years the average annual S&P 500 gains was 15.9% for Democrats and 6.6% for Republicans. If you look at the actual returns, you would think if anything; Wall Street analyst would be warning about the dangers of a Republican President for the stock market.

Because the chart is already so cluttered I left Truman and Ike off.  But it seem so obvious that the record shows that it is Republican Presidents that investors should fear.  Just to clearly show that stock market gains have been more that double under Democrats versus Republicans I’ve also presented the data in a table.

 

 

 

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The Changing Nature of FDI

by Joseph Joyce

The Changing Nature of FDI

The OECD has published its data on flows of foreign direct investment (FDI) for the first half of 2019. They reveal how multinational firms are responding to the slowdown in global trade and the U.S.-Chinese tariffs. They may also reflect longer-term trends in FDI as multinationals reconfigure the scope of their activities.

Overall global FDI flows fell by 20% in the first half of the year as compared to the previous half-year. Much of the decrease was due to lower investments in the OECD economies, including the U.S., the United Kingdom, and the Netherlands, and disinvestments in Belgium and Ireland. FDI inflows to the non-OECD members for the Group of 20 countries, on the other hand, increased, with higher investments recorded in Russia, China and India.

Some of the decline can be linked to the slowdown in international trade. The World Trade Organization forecasts growth in trade this year of 1.2%, the weakest since 2009, and lower than the IMF’s expected global economic growth of 3%. But the disinvestment in Belgium and other countries may also be due to the decline in the use of Special Purpose Entities for routing FDI through low-tax jurisdictions before reaching their ultimate destination. The OECD has sought to limit the spread of Base Erosion and Profits Shifting (BEPS) activities.

The OECD also reported a large drop in Chinese FDI in the U.S., from a peak of $14 billion in the second half of 2016 to less than $1.2 billion. The decline shows the impact of the tariffs imposed by the U.S. and Chinese governments, as well as the overall uncertainty of relations between the two countries. Moreover, the Chinese government has cracked down on outward FDI while the U.S. government scrutinizes Chinese acquisitions more carefully.

The changes in the allocation of FDI may also reflect longer-run factors in the development of global supply (or value) chains. Multinational firms used information and communications technology in the 1990s and 2000s to organize production on a worldwide bases, linking together suppliers and assembly plants in many countries. The OECD has estimated that about 70% of global trade now involves such chains.

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The ARAMCO IPO Stumbles Out The Door

The ARAMCO IPO Stumbles Out The Door

Finally after numerous delays, the potentially largest Initial Public Offering (IPO) of stock has finally become for fully state-owned ARAMCO in the Kingdom of Saudi Arabia (KSA).  MOst of the delays had involved an unwillingness by the Saudi royal family to publicize financial and other factual details about the company, although issuing an IPO for 5 percent of the company was a part of the Vision 2030 plan of Crown Prince Mohammed bin Salman (MbS).

As it is, for the time being the IPO is only available to Saudi nationals through the Riyadh stock exchange.  It is unclear how long or even if it will open up to foreigners.  Reportedly the Saudis are hoping for it to value  the company at $2 trillion, which would put it well ahead of Apple and Microsoft, both of which are around $1 trillion.  But some observers think this is overly optimistic on the part of the Saudis for a variety of reasons.

Along with that, the US has this past month for the first time since 1978 recorded a trade surplus in petroleum products.  This will continue to put  downward pressure on global oil prices, and also depress the prospects for how much money this IPO will raise in the end.

Barkley Rosser

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