Friday, September 23, 2016

The view from Argentina

We're in Argentina this week and next, visiting friends and relatives and looking forward to a big wedding this weekend that will be attended by 500+ people. Spring has just arrived, and the people and food are fantastic as always. Food, wine, lodging and taxis are delightfully cheap for American visitors, and now you can easily pay for things with credit cards or withdraw pesos from an ATM (last year both methods were subject to an unfavorable exchange rate), since money is freely exchangeable at a single rate (currently about 15 pesos to the dollar).

There have been many welcome improvements since Macri took over the reins of government from Christina Kirchner late last year. Unfortunately, there are still many head-scratchers: Argentina has uniquely refused to allow Uber to operate within its borders (hint: the taxi cartel is very powerful); it's impossible for Argentines to buy books from Amazon (because customs officials must check each book mailed into the country to make sure there is not too much lead in the ink, and they have no budget to do that, thus "protecting" the domestic publishing industry but intellectually impoverishing everyone in the process); Apple can't sell iPhones in Argentina (because they aren't made in South America, which means that scads of tourists entering the country and Argentines returning to the country carry at least one new iPhone for a friend or for resale); and the great majority of Argentines refuse to acknowledge that the Falkland Islands are British (even though they have been a British Protectorate for over 100 years and unanimously voted to remain one not too long ago). Macri—a successful businessman, an advocate of free markets, and a decent person of the sort I wish Trump were—isn't a miracle worker, but he has accomplished more than most would have hoped for so far and he hasn't given up. He knows that Argentina must regain the trust of the world, the rule of law must be the law of the land, and inflation must be brought under control if capital is to return and businesses are to invest and the economy is to grow.

I've been following the markets throughout the past week, but can't come up with any new or informed observations about what's happening. However, there's nothing wrong with a recap of how I see the economy and the markets, so here goes:

The economy is likely continuing to grow at a disappointingly slow pace, but we might see some modestly stronger GDP numbers in the second half as compared to the first half of the year. There are several reasons for sluggish growth, but monetary policy is not one of them. Tax and regulatory burdens are excessively high; confidence is still lacking; and business investment is weak despite strong corporate profitsRisk aversion, a lack of confidence, and weak investment have sapped the economy's productivity. More recently, the tremendous uncertainty surrounding the November elections—which could give us even higher tax and regulatory burdens and four more years of sluggish growth under a Clinton presidency, or reduced tax and regulatory burdens and four years of stronger growth under a Trump presidency—is most likely convincing risk-takers that it is better to wait until next year before deciding to undertake new investments, and that in turn is contributing to keep growth weak, especially this year.

The Fed has not been "stimulative;" rather, the Fed has been accommodating the world's almost insatiable desire for money and safe assets with its Quantitative Easing program. Short-term interest rates are not artificially low, and thus they are not artificially inflating the prices of risk assets and/or bonds. Interest rates are low because the economy is sluggish, inflation is low, and the market holds out very little hope for improvement in the years ahead. Rates are low because the world's demand for safe assets is very strong. In particular, the very low level of real yields on TIPS, combined with relatively low implied inflation, strongly suggests that the market is very pessimistic about the long-run outlook for economic growth. The Fed is not too tight, because real yields are very low and the yield curve is positively sloped. Deflation exists primarily in the durable goods sector, and China has been one of the driving factors behind ever-cheaper prices for the electronics that have boosted our standard of living—there is nothing wrong with that.

Stocks are no longer cheap, but neither are they obviously expensive. The current PE ratio of the S&P 500 (~20) is above its long-term average, but not excessively high considering how low interest rates are on notes and bonds. Key indicators of systemic risk (particularly swap spreads) are relatively low and stable, and this—combined with the absence of tight money—suggests that the risk of recession is low for the foreseeable future. The unusually wide spread between the yield on cash and the yield on risk assets is a compelling reason to stay invested.

The dollar is reasonably valued against most other currencies, according to the Fed's Real Broad Dollar Index, and my analysis of the dollar's PPP value against other major currencies is largely in agreement with this. Raw industrial commodity prices are neither very high nor very low, but they have been trending higher this year and this suggests some firming in the global economic outlook—which, like that of the U.S., has been unimpressive of late, if not a bit troubling.

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In the meantime, Trump's chances are improving daily and I think the election will soon be his to lose. On Monday I'll be scrambling to find a TV down here that will let me watch the first debate, or, failing that, an internet connection fast enough to live-stream the action.


Andrew said...


Thanks again for the insight.

However, I do wonder who these risk takers are that you refer to?
Also, what would any President to for them considering congress has it's say.

From what I can tell, most developers are shopping for tax breaks and incentives from the State and municipal governments. There is actually a moderate amount of competition between States trying to land that next big factory. Perhaps, this is one strength of the US system.

Scott Grannis said...

Andrew: I should think that reducing the corporate income tax rate from its present 35% to 15% would attract the attention of just about anyone who manages a corporation's risk. I think the odds of a corporate tax reduction of this nature are quite high if Trump wins and the Republicans manage to hold on to Congress. Even many Democrats can see the wisdom of such a tax cut. Trump would also want to cut the capital gains tax, and Congress would be likely to concur. The combination of those tax cuts would surely change the entire culture of corporations and almost certainly result in a significant boost to investment. And savings. Taxes matter, and cutting taxes boosts the after-tax return to investment, work, and risk-taking. When you tax something less, as Art Laffer always say, you should expect to get more of it. It's quite simple, really. Nothing wrong with the States engaging in a little tax competition either.

Tom L said...

Safe travels and enjoy.

steve said...

I do not for the life of me see how you can conclude that it is DT's election to lose. Quite the opposite as I see it. Been following politics for 40 yrs and never wrong about a POTUS election yet! I expect Clinton to win rather easily. The electoral college just doesn't add up well for DT. That said, I will be the first to stand corrected if wrong-something virtually ALL pols never do.

I don't say this enough but your blog is the gold standard as far as I'm concerned.

Scott Grannis said...

I note today's WSJ article about how Macri is having a tough time turning things around in Argentina, and is facing growing unrest. In the 5 days we have been here I have not seen any outward signs of problems. In fact, conditions appear to be quite normal. We're in Tucuman right now, where agriculture plays a dominant role in the economy. The tax cuts are having a big impact on the mood here, which is quite upbeat. Harvests have been good, and farmers are able to keep a much bigger share of their output. A farmer friend tells me everyone he knows is planting more. Most people understand the transition will be difficult, but those with their hands on the levers of capital are at least cautiously optimistic the country is on the right track.

Unknown said...

I continue to have a tough time reconciling Scott's support for Trump with the great work he provides on this site. Do you merely believe Trump's nativist, protectionist trade platform is merely hot air he is using to patronize his disaffected base? If so, how can you believe anything he says?

He is presenting an endless series of trade wars with the countries that you say have "been one of the driving factors behind ever-cheaper prices for the electronics that have boosted our standard of living — there is nothing wrong with that."

After watching Monday's debate it is clear Trump has very few coherent thoughts. I know a few third graders that routinely speak more eloquently and string together more complex sentences. One's ability (or inability) to verbally articulate oneself us usually correlated with intellect. He does not seem a very intelligent person. He is a gruff, crude, rude, arrogant, inarticulate, unethical, bigoted, misogynist who is vastly underqualified for office. I am not even sure he really wants the job considering how obviously unprepared he was for Monday's debate.

I really don't understand the support for him at this wonderful site. I can see his allure to the uninformed masses, but this is an intelligent crowd. Yes, Clinton is truly a terrible choose as well. But Trump could actually be the worst candidate one can contemplate for President (I mean that without hyperbole). We would be better off having any random citizen chosen as President as they would likely be so humbled and overwhelmed by the position that they would defer to competent people around them. Trump's narcissism has me believing he truly thinks his ideas are The Best, Most Fantastic, Greatest ideas, and he would never take counsel from those more informed and qualified.

I am a moderate, independent Californian who historically votes Republican. I can't find one molecule in my body that could vote for Trump. I respect all our differences but Trump's personally favorable views on taxation and regulation should not outweigh how horrible his views are on most other topics. Finally he is just a pile of crap as a human being. I have a tough time reconciling how an informed person of high moral character can even consider him as logical Presidential choice.

Scott Grannis said...

Unknown: Paul Johnson, the eminent British historian agrees with you on Trump, whom he calls "vulgar, abusive, nasty, rude, boorish and outrageous.” He then goes on to say that “Trump is a man of excess–and today a man of excess is what’s needed." I highly recommend the whole article, which you can find here:

I too am disturbed by Trump's boorish behavior, among other unpleasant and offensive characteristics of his. But then I thought Bill Clinton was morally despicable, yet I recognize that his was a good presidency, during which time the economy flourished. I think it's possible for Trump to do good things, as Johnson notes, things which are desperately needed in this time of rampant political correctness.

I am also greatly encouraged by his economic program, which he laid out clearly in the first part of the debate. He wants to help the private sector create jobs by reducing tax and regulatory burdens, whereas Hillary wants more taxes, more regulations, and more giveaways to the middle class. Trump understands how the economy works because he has worked in the economy. The Clintons have never worked for a salary, never run a business. Hillary's proposals couldn't possible stimulate the economy, since they only double down on Obama's policies.

And let's not forget the long list of Hillary's scandals: her failed healthcare reform, awful people choices (Zoe Baird, Kimba Wood, Janet Reno, Lani Guinier, Web Hubbell, William Kennedy), Travelgate, Filegate, Whitewater, Vince Foster's apparent suicide, Benghazi, email scandals, and the corrupt Clinton Foundation. Her Supreme Court picks would almost certainly move the country to the left for generations. With Hillary you know you are getting hard-left policies, hard-left people, more scandals, higher taxes, economic weakness, etc. With Trump we may get lucky and enjoy a strong economy with lower taxes and a less intrusive government. I'll take my chances with Trump. I can't bear another 4 years of Clinton lies and scandals and hard-left policies.

Bill said...

Blah, blah, blah.
Your claim that Trump's chances are improving is dated news.
More importantly, your claim that he can, despite his (disqualifying) flaws, can still do good things, is false...unless you're part of the .1 of 1% who can play the amoral "pay no taxes game" with impunity.
Shame, shame, shame on you for peddling such nonsense.