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To Slow Spread Of Coronovirus, End Iran Sanctions

To Slow Spread Of Coronovirus, End Iran Sanctions

On 3/13/20 in Foreign Policy Focus, Ariel Gold and Medea Benjamin argue that to improve the global coronavirus problem, sanctions on Iran should be lifted, quite aside from the fact they should never have been imposed in the first place as Iran was adhering to the JCPOA nuclear deal.

The effect of the sanctions has been to tank the Iranian economy, including its health care sector, much worsening the coronavirus epidemic in Iran, thus making it more likely to spread to the global pandemic. The Iranian rial has fallen by 80 percent, making it far harder to purchase medical equipment from abroad.  This has not only aggravated the coronavirus situation but also that of many other diseases as well. As of March 13, there were 11,362 reported cases and 514 deaths.

Of course this is aggravated by the Iranian regime imitating those of China (initially) and the US (until very recently) in denying the conditions in their country and being slow to act with testing and other measures. But the bad behavior of the regime does not justify the US and others acting to worsen the health crisis in Iran, which makes it more likely to spread its problems elsewhere as well.

Barkley Rosser

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Europe’s Response to Coronavirus and the Implications for the U.S.

Europe’s Response to Coronavirus and the Implications for the U.S.

As I listened to the morning news about the coronavirus crisis, I was reminded of this critique of the Eurozone:

In a recent conference, the distinguished economist Paul Krugman repeated the oft-heard critique that the eurozone is not an optimal currency area. Waltraud Schelkle disagrees with this characterisation, and argues that no country or group of countries represents an optimal currency area – one region or country always loses out from a single monetary policy. But countries can use fiscal, social and regulatory policies to overcome these difficulties. When Americans criticise the eurozone’s currency policies, she writes, they are forgetting the US dollar’s shaky start and the adjustments which had to be made to the financial system in the 19th century.

Why mention the optimal currency area debate in reference to this health crisis? This morning I heard statements like this one:

By contrast, the coronavirus crisis has started to look more like the European migration and financial crises: a symptom of globalization that can’t be held back where it started. The exploding outbreak around the Continent — officially declared a pandemic by the World Health Organization on Wednesday — highlights both the promises and limitations of the European Union: a single, largely borderless market made up of 27 countries, each with their own governments, electorates, bureaucracies, health care systems and, as has become painfully obvious, national interests. For weeks, officials in Brussels and national capitals have called for pan-European coordination. Yet even as Italy, the bloc’s third largest economy, embraces a made-in-China solution — putting the entire country under preventative lockdown — the modus operandi across the EU remains fragmented and reactive.

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Benefit-Cost Analysis and the Coronavirus

Benefit-Cost Analysis and the Coronavirus

We are in the middle of a flurry of decision-making on how to deal with COVID-19.  After much resistance, officials are now canceling public events, closing schools and discouraging other activities that put us in contact with each other.  Travel restrictions and possible shutdowns of workplaces, as we’ve seen in Italy, may be up next.

It’s interesting we haven’t heard anything about benefit-cost analysis in all this.  Nearly all economists profess to think that BCA is the single best decision method.  Almost every introductory economics textbook is built around benefit-cost thinking, and for decades federal regulations have mandated BCA for proposals with significant economic impacts.

But now we are facing immense choices—what could have a more drastic impact than shutting down most of the economy by fiat?—and BCA is nowhere to be found.

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Weekly Indicators for March 9 – 13 at Seeking Alpha

by New Deal democrat

Weekly Indicators for March 9 – 13 at Seeking Alpha

My Weekly Indicators post is up at Seeking Alpha.

There is no clear evidence yet of a drop-off in consumer spending due to the coronavirus in the series I have been tracking, although there is evidence on the producer side.

After I posted, I ran across this chart of daily reservations made at OpenTable for various metro areas:

There has clearly been a big decline that began about March 2nd.

As usual, clicking through and reading will help bring you up to date, and rewards me a little bit for my efforts.

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Trump Administration Continues to Attack the Environmental Projections First Put Into Place by the Nixon Administration

Trump Administration Continues to Attack the Environmental Projections First Put Into Place by the Nixon Administration

If you, the reader, are uncertain whether to support Trump or whoever the Democratic candidate turns out to be, I urge you to consider the devastating reduction in protections for clean air, clean water, and clean land (thus also clean air/water and food) under the Trump administration’s ‘hate anything Obama’ approach that has put industry blowhards in charge of the Environmental Protection Administration, an agency created on December 2, 1970 to ensure federal research, monitoring, standard-setting and enforcement of environmental protection.

GP: Donald Trump digs coal lUS-POLITICS-TRUMP 1

(Image of Trump at West Virginia campaign rally in August 2017, from CNBC article on Trump rollbacks of regulation, cited below)

Under Trump, we have instead a complete disregard for the environment, a view that harks back to the times when rich owners of factories, mines, or corporate farms exploited and polluted land, waters, and people in their greed for profits. For example, in July 15, 2019, the New York Times reported that the Government Accountability Office found that the administration “did not consistently ensure” that its appointees to EPA panels satisfied federal requirements.  This was during 2017, when the Trump administration dismissed academic scientists from EPA advisory boards in order to replace them with industry-connected appointees.  Panels that had in the past included a very high percentage (more than 80%) of academic scientists were reduced precipitously under Scott Pruitt, Trump’s first EPA head.  Pruitt, of course, resigned in scandal (as so many in the Trump adminsitration have done) in 2018 after loading EPA advisory panels with industry hacks .  See, e.g.,  E.P.A. Broke Rules in Shake-Up of Science Panels, Federal Watchdog Says, NY Times, July 15, 2019; Removing Academic Scientists from Science Advisory Panels, Harvard Environmental & Energy Law Program, Feb. 26, 2018 (noting replacement of scientists with industry insiders and consultants, including a climate change skeptic, following Scott Pruitt’s October 31, 2017 directive).  Scientists removed from the panels refused often to be silent.  For example, some formed their own air pollution panel after Andrew Wheeler, Trump’s next EPA administrator, disbanded the Particulate Matter Review Panel in October 2018.  It had “some of the nation’s top scientists, who were tasked with reviewing how soot and other microscopic air pollutants impact human health.”  Rebecca Beitsch, Scientists booted from EPA panel form their own group, The Hill (Sept 26, 2019).

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Walter Bagehot Explains to the Fed What They Should Have Done on Thursday

The day before yesterday, the Fed made a somewhat unusual announcement of $500,000,000,000 of REPO offers a day for three days in a row. The idea was to let banks unload risky assets before they panicked nipping a financial crisis in the bud.

This move was controversial. Unfortunately many critics act as if the Fed was giving away $ 1,500,000,000,000 rather than buying assets with it. I hazard a guess that the Fed will profit from the operation (their efforts to save the financial system in 2009 generated the largest profits recorded in human history as an unintended side effect). However, it is also clear that the transaction amounts to a subsidy to banks. The Fed will pay a higher price than would have cleared the market. $ 1.5 Trillion will do that. Back in 2009 the Fed bought mortgage backed securities at the market rate when they were the only buyer in the market. This means that the open market operation was a massive subsidy (which also generated record profits).

The fact that the Fed pays much more than the market would without their intervention is pleasant for banks. Driving up the price of risky assets is part of the point of the operation. However it is also very irritating.

Fortunately someone figured out what they should have done. Walter Bagehot explained it clearly in 1873. The idea is that the central bank should lend freely accepting as collateral assets which would be accepted by private agents in normal times but not during the crisis. But Bagehot did not advise lending at the rate which prevailed before the crisis. Rather the maxim is lend freely at a penalty rate

 

First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who did not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.

 

Another way of putting it is that the Fed should buy risky assets at a price markedly lower than the pre.crisis price and contract to sell them back to banks at normal prices after the crisis is expected to be over. This is the REPO is the same as a collateralized loan irritating finance terminology issue (also there is no O in repurchase so why the hell is it called a REPO).

Another way of putting it is that we don’t want solvent firms to go bankrupt and be liquidated. In plain English this means if one can save a firm with a loan, then one should. The idea is that the firm should still exist when the crisis is over. In other words, the shares of the firm will still have positive value and won’t be worthless pieces of paper.

Bagehot’s point is that we also want that positive value to be low. Firms (which must be depositary institutions according to the Federal Reserve Act) should still exist even if they have to borrow from the lender of last resort. But to make sure it is the lender of very last resort, they shouldn’t be worth much.

Any value of a firm which needed the lender of last resort is basically a gift to owners who messed up and a moral hazard.

To combine this with the need for equity capital, it is possible to TARP, that is make the penalty rate loan junior to other debt as preferred shares not bonds.

Another point is that sometimes obtaining annual profits of only $97,700,000,000 is not satisfactory performance.

The main point is that if the Fed can make $97,700,000,000 while also granting a massive subsidy, then the previous arrangement was not efficient. The problem is that entities with deep but not infinitely deep pockets can’t always bear risk. The solution is for the government to be the residual claimant. That’s called socialism and the market says it works.

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This is what exponential growth looks like

This is what exponential growth looks like

I’ve placed an added emphasis on high frequency indicators, as they will be the first to show the impact of coronavirus on the economy.

This morning chain store sales for last week were reported. They were:

– Redbook +6.0% YoY
– Retail Economist unchanged w/w, +0.9% YoY

Needless to say, there was no impact at all on the Redbook number. While the Retail Economist number was definitely weak, there have been other, similar weak weeks earlier this year, so that number is equivocal. I suspect that this situation will change in no more than two weeks.

Meanwhile, here is a graph of the number of coronavirus cases in a number of countries including the US, compared with Italy, the epicenter of the outbreak in Europe (via Mark Handley, a Professor of Networked Systems in the UK):

Notice that the graph is in log scale, where exponential growth is shown as a straight line. South Korea and Japan, both of which have taken very aggressive testing and quarantine measures, show a slow spread, and in South Korea the number of *new* cases has actually declined in the past few days, leading to the total number shown above to level out. The US, by contrast, is on track to have the same number of cases Italy has now in about a week and a half.

This is what exponential growth looks like. The spread of the disease looks manageable, until all of a sudden it very much is not. This is why, even if the disease abates with warmer weather, exactly *how* warm the weather has to be makes an important idfference between a contained and a calamitous  outbreak<.

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Is a Zero Growth Economy Viable?

The present pandemic demonstrates that the global economy is closely tied to consumer spending. Suppose the pandemic is merely a foretaste of the effects of climate change and ecological destruction. Can we fashion a world base on Zero Growth, a Steady State Economy?

Zero growth might well entail the following:

1. A fixed and renewal body of resources.
2. A demographic balance, i.e., a fixed population size.

Can such an economy enable all of humanity to prosper and grow? If so, what must be do to enable us to grow and prosper?

Can we have an economy where consumption is stable, i.e., does not grow?

Or, to put it another way, where the amount of capital spent on consumption is constant, fixed.

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S&P 500 PE

As of the market close on 11 March 2020 the S&P 500 PE had fallen to 18.2. This makes the market cheap in my valuation model as it has fallen below my fair value band.

Moreover, with interest rates still falling to new record lows the fair value band is also rising.  In the chart the fair value band is based on February data while the last PE observation is based on the 11 March 2020 close. But with yields approaching the zero lower band it becomes questionable whether or not even lower rates can generate a significant rebound in the market PE and the market.  On the other hand the PE has room to move significantly higher just by rebounding to the top, or above, the existing  fair value band.

On Wall Street the consensus still is forecasting a significant rebound in 2020 earnings.  But if the Coronavirus  does have a significant economic impact, 2020 earnings are more likely to fall rather than rise.  That appears to be what this market correction is starting to discount even though company managements are not yet revising their guidance.  Consequently, bottoms up analysts are also probably still too optimistic.  With the market now cheap, it has room for falling earnings to drive the PE on trailing earnings back up to within or above the fair value band.  Thus, we could see the market having a very muted reaction to further easing by the Fed but rebound nicely when company managements and analysts cut their 2020 earnings estimates.

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Whatever will I write about on a no-data Monday? I won- WTF?????

Whatever will I write about on a no-data Monday? I won- WTF?????

Yesterday I was wondering what I might write about today, as there is absolutely *no* data being released. And then I woke up and turned on the intertoobs . . . .

OK. Deep breaths. For those of you who wonder what the h#/! Is going on, here’s my take.

1. Until resolute government action is taken, the coronavirus situation is going to continue to worsen. As of yesterday, we passed 500 known cases. There were probably about 5000 other people walking around the US last week infecting others. As I wrote yesterday, as a working model I expect all metrics to double roughly each week – or, add a digit before the decimal point about once every 25 days.

China and now South Korea have shown that intensive testing, treatment, and mandatory social distancing can beat back the virus. We have Trump. Based on that, if you were trying to measure what might happen to business sales and profits over the next 3 months, how would you act as every day passes without the necessary action?

2. Putin – ever cold-bloodedly shrewd – has chosen this moment when he senses his adversaries have enhanced vulnerability to make a power play in the oil market. His targets are (1) the Saudis, who he wants to see invest $$$ in Russia, and bend to Russia’s Middle East ambitions, and (2) the US fracking industry, that he would like to weaken and maybe have his oligarchs take a big stake in.

As in 2016, this will benefit US consumers in the aggregate even as it delivers pain to the Oil Patch. If it continues, paradoxically it will help defeat Trump, for the same reason that the weak economy helped him in 2016.

Because the oil move is a contest between two actors – Putin and Muhammad bin Salman – its outcome, and the timing of that outcome, depends on how they behave. They could make peace tomorrow. Or next week. Or next month. Or next year. Or not at all.

3. Even in the worst case scenarios, both of the two issues above are temporary moves. How temporary, and how bad it gets in the meantime, it is impossible to say.  As I’ve been writing for the past few weeks, I expect the news to outrun the data. Every rational scenario strongly indicates we are probably heading into a recession right now. But the data does not show that yet.

That being said, the move in stocks and bonds is obviously very emotional, and could reverse at any time. Emotional moves like this tend to be close to a bottom. It is driven by short term traders rather than long term investors. People whose investment horizons are longer than a couple of years should not panic.

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