America’s economic health depends on sustained, long-term investment to support our families and communities and to reinvigorate the economic engine that creates jobs and prosperity. There is no viable model under which either business or government can or should shoulder the responsibility for long-term investment alone; both are required. ... The time is right for a national conversation about long-term investment in infrastructure, basic science, education and training for workers who feel the brunt of globalization and technology. We need to focus on the critical levers for economic growth along with sources of revenue to help pay for it, as well as ways to overcome the short-term thinking currently baked into government policy and business protocols. … The ideas offered here have been developed under the auspices of the Aspen Institute in consultation with a non-partisan working group of experts in public policy formation, tax and regulation, business, and corporate law and governance. While these ideas enjoy support across party lines, breaking the log jam and taking action will require a coalition of leaders across the private and public sectors who are committed to the health of the commons and America’s prosperity.
As you may recall from previous years, the January letter is always about the mine field laid out in front of us. What could cause 2017 to be a year to remember? What could possibly go horribly wrong? At this point in time, I see many potential problems. I have some concerns about the US. I see dark clouds gathering over Europe, and I see very slippery conditions in many emerging markets (‘EM’). In other words, lots of markets around the world appear to be accident prone but for very different reasons ... The secret to being a good investor is to focus on risk management and to be well prepared for bad news. ... Stagnating economic growth and low – or even negative – real wage growth has created a deep level of dissatisfaction that the electorate chose to use politically ... EM non-financial corporates have continued to accumulate debt as if there is no tomorrow ... USD 890 billion of EM bonds and syndicated loans (an all-time high) are coming due in 2017 with almost 30% of that denominated in US dollars ... I usually focus on the negative aspects when investing; hence my writing also has a negative bias. That is not the same as saying that I am always bearish, and I am most definitely not particularly bearish going into 2017.
Global Trends and Key Implications Through 2035
- The rich are aging, the poor are not.
- The global economy is shifting.
- Technology is accelerating progress but causing discontinuities.
- Ideas and Identities are driving a wave of exclusion.
- Governing is getting harder.
- The nature of conflict is changing.
- Climate change, environment, and health issues will demand attention.
These trends will converge at an unprecedented pace to make governing and cooperation harder and to change the nature of power—fundamentally altering the global landscape. Economic, technological and security trends, especially, will expand the number of states, organizations, and individuals able to act in consequential ways. Within states, political order will remain elusive and tensions high until societies and governments renegotiate their expectations of one another. Between states, the post-Cold War, unipolar moment has passed and the post-1945 rules based international order may be fading too. Some major powers and regional aggressors will seek to assert interests through force but will find results fleeting as they discover traditional, material forms of power less able to secure and sustain outcomes in a context of proliferating veto players.
Statistics were designed to give an understanding of a population in its entirety, rather than simply to pinpoint strategically valuable sources of power and wealth. In the early days, this didn’t always involve producing numbers. In Germany, for example (from where we get the term Statistik) the challenge was to map disparate customs, institutions and laws across an empire of hundreds of micro-states. What characterised this knowledge as statistical was its holistic nature: it aimed to produce a picture of the nation as a whole. Statistics would do for populations what cartography did for territory. ... the aspiration to depict a society in its entirety, and to do so in an objective fashion, has meant that various progressive ideals have been attached to statistics. The image of statistics as a dispassionate science of society is only one part of the story. The other part is about how powerful political ideals became invested in these techniques: ideals of “evidence-based policy”, rationality, progress and nationhood grounded in facts, rather than in romanticised stories.
For decades, poultry had been volatile in a frustratingly predictable way: When times started getting good, companies flooded the market with chicken, causing prices to crash. ... At first the transformation puzzled industry watchers. Some speculated that a merger spree during the 1980s and 1990s was responsible—with fewer decision-makers in charge and fewer competitors, the remaining companies could more easily survey and predict the landscape. But Sanderson’s conference call suggested another source for the shift: Agri Stats, a private service that gathers data from poultry processors, produces confidential weekly reports, and disseminates them back to companies that pay for subscriptions. ... Many industries, such as health care and retail, make use of information-sharing services, but Agri Stats provides chicken producers with a rare level of detail, in uncommonly timely fashion. ... Agri Stats has for years maintained that its reports don’t violate antitrust laws, in part because the information provided is historical. A typical report doesn’t say how much a company plans to charge for a cut of meat, only what it charged last month or last week. ... In 2013, according to SEC filings, Eli Lilly purchased Agri Stats for an undisclosed sum and folded it into its farm animal drug division. ... Illegal collusion occurs when companies plan with one another to cut production ahead of time with the specific intent of raising prices.
It should be emphasised that Europe’s success was not the result of any inherent superiority of European (much less Christian) culture. It was rather what is known as a classical emergent property, a complex and unintended outcome of simpler interactions on the whole. The modern European economic miracle was the result of contingent institutional outcomes. It was neither designed nor planned. But it happened, and once it began, it generated a self-reinforcing dynamic of economic progress that made knowledge-driven growth both possible and sustainable. ... In brief, Europe’s political fragmentation spurred productive competition. It meant that European rulers found themselves competing for the best and most productive intellectuals and artisans. ... A possible objection to this view is that political fragmentation was not enough. The Indian subcontinent and the Middle East were fragmented for much of their history, and Africa even more so, yet they did not experience a Great Enrichment. Clearly, more was needed. ... Political fragmentation existed alongside a remarkable intellectual and cultural unity. ... If Europe’s intellectuals moved with unprecedented frequency and ease, their ideas travelled even faster. Through the printing press and the much-improved postal system, written knowledge circulated rapidly.
To the uninitiated, the figures are nothing if not staggering: 155 million Americans play video games, more than the number who voted in November’s presidential election. And they play them a lot: According to a variety of recent studies, more than 40 percent of Americans play at least three hours a week, 34 million play on average 22 hours each week, 5 million hit 40 hours, and the average young American will now spend as many hours (roughly 10,000) playing by the time he or she turns 21 as that person spent in middle- and high-school classrooms combined. Which means that a niche activity confined a few decades ago to preadolescents and adolescents has become, increasingly, a cultural juggernaut for all races, genders, and ages. How had video games, over that time, ascended within American and world culture to a scale rivaling sports, film, and television? Like those other entertainments, video games offered an escape, of course. But what kind? ... Technology, through automation, had reduced the employment rate of these men by reducing demand for what Hurst referred to as “lower-skilled” labor. He proposed that by creating more vivid and engrossing gaming experiences, technology also increased the subjective value of leisure relative to labor. ... As with all sports, digital or analog, there are ground rules that determine success (rules that, unlike those in society, are clear to all). The purpose of a game, within it, unlike in society, is directly recognized and never discounted.
De Beers, the world’s biggest diamond company, marked the opening of its Gahcho Kué mine in September. ... the aim of extracting more than 12,000 carats (2.4kg) of diamonds each day. Gahcho Kué is an astonishing endeavour, the biggest new mine in the world in over a decade. De Beers has no plans for another. ... The diamond business gained its sparkle around 1866, when a farmer’s son picked up a glistening pebble on the bank of the Orange river in South Africa. For most of the next 150 years, De Beers would dominate the global market. Success depended on manipulated supply and skilfully cultivated demand. ... Much has changed since then. De Beers can no longer control the market. Though it is the biggest producer by value, it accounts for only a third of global sales, down from 45% in 2007. It faces many uncertainties, from synthetic diamonds to changing relationships with polishers and cutters. Its loosening grip is reflected in increased volatility: its sales fell 34% in 2015, before bouncing back by 30% last year. Meanwhile the source of the demand that drives sales—the link between diamonds and love—looks weaker than it used to. ... But one forecast seems solid: there will be fewer new diamonds. ... diamonds’ principal value has nothing to do with science. ... They are a “Veblen good”, as items that gain their value solely from their ability to signal status are named, after Thorstein Veblen, an economist who wrote about the spending of the rich.
Here are the facts: there were 5,400 properties on the market at the end of February, half of last year’s figure. That amounted to just one month of inventory—the time it would take to sell all available properties—compared with 5.6 months in Manhattan. Supply isn’t keeping up with demand. ... While Canada’s west coast city of Vancouver has grabbed international attention for its soaring prices in recent years, Toronto is now in the eye of the country’s housing hurricane. The price of an average house in Toronto and its suburbs rose 28 percent in February to C$875,983 from the prior year, the sixth straight month of above-20 percent growth. ... “Nothing is more bubbly right now than the Toronto housing market,” David Rosenberg
During the 2003–15 commodity supercycle, spending on resources including oil, natural gas, thermal coal, iron ore, and copper rose above 6 percent of global GDP for only the second time in a century before abruptly reversing course. Less noticed than these price gyrations have been fundamental changes in supply and demand for resources brought about by expected macroeconomic trends and less predictable technological innovation. Our analysis shows that these developments will have major effects on resource production and consumption over the next two decades, potentially delivering significant benefits to the global economy and bringing change to the resource sector.
-Rapid advances in automation technologies such as artificial intelligence, robotics, analytics, and the Internet of Things are beginning to transform the way resources are produced and consumed.
-Scenarios we modeled show that adoption of these technologies could unlock cost savings of between $900 billion and $1.6 trillion in 2035, equivalent to the GDP of Indonesia or, at the upper end, Canada. Total primary energy demand growth will slow or peak by 2035, despite growing GDP, according to our analysis.
-The price correlation that was evident during the supercycle is unraveling, and a divergence in prospects between growth commodities and declining ones may become more significant.
-Policy makers could capture the productivity benefits of this resource revolution by embracing technological change and allowing a nation’s energy mix to shift freely, even as they address the disruptive effects of the transition on employment and demand.
-For resource companies, particularly incumbents, navigating a future with more uncertainty and fewer sources of growth will require a focus on agility.
Many in the art world are worried about bubbles. The market, they say, is becoming too fast, and too short term. They have reason to fret. The price swings for these artists – rises and falls of 500% or more in less than two years – make this market more volatile than even the most turbulent financial ones. Mini-crashes are becoming more common. They risk doing both financial and creative damage to the art world – financial, because it could put off serious, long-term investors; creative, because artists burn out before they really get started. ... The blame for this is directed at a new breed of art dealer, known as “flippers”. In contrast to a traditional dealer, who may stay with an artist for a lifetime and keeps tight control over who buys his work, flippers buy low and sell high to anybody who will buy. They treat art as though it were a financial instrument. ... His plan is based on his second big influence, the notion of “creative destruction” set out in Joseph Schumpeter’s book “Capitalism, Socialism and Democracy”. ... Simchowitz dislikes the art-world hierarchy, which he thinks excludes people from buying art; he would like to dislodge it and make art easier to see and buy.
Financial markets accommodate both prudent insurers and reckless gamblers. They provide investors with an opportunity to diversify their portfolios, and allow gamblers to bet on future movements in interest rates. The coexistence of the two can allow speculators to make profits by stabilising prices—buying when markets are fearful, and selling when they are greedy. But when the gambling motive overwhelms the insurance motive, speculation becomes destabilising and then risk, far from being minimised by careful management, becomes concentrated in the hands of those who understand least what they are doing. And when regulators perceive insurance when they should see wagering, their actions magnify a crisis rather than minimise it. Such destabilising speculation, mischaracterised by regulatory authorities as prudent risk assessment, is what caused the global financial crisis of 2008. ... The coexistence of insurance and gambling goes back to the earliest days of markets in risk, and the interaction of the two has been central to financial history. But it was four developments in the second half of the 17th century that combined to frame the way we think about risk, and the institutions we have for dealing with it, through to the present day.
The Mexico–U.S. border is long, but the history of close cooperation across it is short. As recently as the 1980s, the countries barely contained their feelings of mutual contempt. Mexico didn’t care for the United States’ anticommunist policy in Central America, especially its support of Nicaraguan rebels. In 1983, President Miguel de la Madrid obliquely warned the Reagan administration against “shows of force which threaten to touch off a conflagration.” Relations further unraveled following the murder of the DEA agent Enrique “Kiki” Camarena in 1985. Former Mexican police officers aided drug traffickers who kidnapped and mercilessly tortured Camarena, drilling a hole in his skull and leaving his corpse in the Michoacán countryside. The Reagan administration reacted with fury at what it perceived as Mexican indifference to Camarena’s disappearance, all but shutting down the border for about a week. The episode seemed a return to the fraught days of the 1920s, when Calvin Coolidge’s administration derided “Soviet Mexico” and Hearst newspapers ginned up pretexts for a U.S. invasion. ... The grandiose promise of trade is that it binds countries together, breeding peace and cooperation. This is a risible overstatement when applied generally to the world. But in the case of the countries separated by the Rio Grande, it has proved wondrously true. A generation after the signing of the North American Free Trade Agreement, the United States and Mexico couldn’t be more interdependent. Anti-Americanism, once a staple of Mexican politics, has largely faded. The flow of migrants from Mexico to the U.S. has, more or less, abated. ... But the Trump administration has come dangerously close to trashing the relationship—and, in the process, unleashing a terrifying new reality.
Shopping involves scrolling through an intoxicating admixture of goods: Commodity necessities appear next to fast fashion and knockoff apparel; extraordinarily cheap but on-trend electronics mingle with what I can only describe as global manufacturing overspill. ... These shipments were made in accordance with a bilateral trade agreement between the United States and China that originated in 2010, meant to address the rising tide of cross-border e-commerce. Items up to 4.4 pounds — more than the weight of, for example, a violin and bow — can be shipped as ePackets, at extremely low rates with tracking numbers and delivery confirmation. ... This obscure trade deal has become the quiet conduit for an explosion in a new and underexamined American consumer behavior: buying things directly from their countries of manufacture. ... Because of ePacket, and the decades-old international postal agreements that serve as its foundation, lightweight product shipments from China are heavily subsidized by the U.S.P.S. ... Wish certainly illuminates the peculiarities of international shipping, but it casts a much brighter light on the state of globalized manufacturing and commerce. In fact, it offers a somewhat convincing vision of what they might become in the near future. ... Wish wastes no such effort on concealing its international character. Its product selection feels like a churning, infinite cascade; its lack of any sort of organizing principle is part of the reason it’s so hard to stop scrolling.
Sand covers so much of the earth’s surface that shipping it across borders—even uncontested ones—seems extreme. But sand isn’t just sand, it turns out. In the industrial world, it’s “aggregate,” a category that includes gravel, crushed stone, and various recycled materials. Natural aggregate is the world’s second most heavily exploited natural resource, after water, and for many uses the right kind is scarce or inaccessible. In 2014, the United Nations Environment Programme published a report titled “Sand, Rarer Than One Thinks,” which concluded that the mining of sand and gravel “greatly exceeds natural renewal rates” and that “the amount being mined is increasing exponentially, mainly as a result of rapid economic growth in Asia.” ... Geologists define sand not by composition but by size, as grains between 0.0625 and two millimetres across. Just below sand on the size scale is silt; just above it is gravel. Most sand consists chiefly of quartz, the commonest form of silica, but there are other kinds. Sand on ocean beaches usually includes a high proportion of shell pieces and, increasingly, bits of decomposing plastic trash ... Sand is also classified by shape, in configurations that range from oblong and sharply angular to nearly spherical and smooth. Desert sand is almost always highly rounded, because strong winds knock the grains together so forcefully that protrusions and sharp edges break off. River sand is more angular. ... Aggregate is the main constituent of concrete (eighty per cent) and asphalt (ninety-four per cent), and it’s also the primary base material that concrete and asphalt are placed on during the building of roads, buildings, parking lots, runways, and many other structures. A report published in 2004 by the American Geological Institute said that a typical American house requires more than a hundred tons of sand, gravel, and crushed stone for the foundation, basement, garage, and driveway, and more than two hundred tons if you include its share of the street that runs in front of it. A mile-long section of a single lane of an American interstate highway requires thirty-eight thousand tons.
In the mid-to-late nineteen-sixties, as gold’s role in the international monetary system was about to implode, a handful of top Johnson Administration officials, a few sympathetic members of Congress, and hundreds of government-paid scientists set off on a nuclear-age alchemical quest. Barr gave it the code name Operation Goldfinger. The government would end up looking for gold in the oddest places: seawater, meteorites, plants, even deer antlers. In an era during which people wanted badly to believe in the peaceful use of subatomic energy, plans were drawn up to use nuclear explosives to extract gold from deep inside the Earth, and even to use particle accelerators to try to change base metals into gold. ... Operation Goldfinger represented the logical culmination of a government obsession with not having enough gold. The post-war global economy was expanding much faster than the gold supply that propped it up. Dollars freely convertible to gold were the underpinning of the world’s monetary system, and President John F. Kennedy—and many others—feared that if holders of dollars and other U.S. securities were to cash in their paper for gold, there wouldn’t be enough gold to exchange, and a global crisis could ensue.
This is not a joke, but neither should you worry if you are long oil, as the price will most likely hit (at least) $100 long before it heads south, and that is due to a rising deficit between oil production and new oil discoveries ... I should have said fossil fuels, not oil, in the headline above, but there wasn’t enough room for all those extra characters! In other words, what I meant to say is that fossil fuel (oil, gas and coal) prices will most likely approach $0 over the very long term. ... Just to complicate matters even further, strictly speaking, not even that is correct. What will happen to fossil fuel prices in the future is anybody’s guess, but what almost certainly will happen at some point is that demand for fossil fuels will approach zero. ... The problem in a nutshell is the geological depletion of existing fields and the growth of higher cost, geologically less attractive, fields. ... Tying up so much capital in one industry has become a significant drain on productivity in other parts of the economy. ... This will eventually have a major, and overwhelmingly negative, impact on GDP growth, all other things being equal.
Since I’ve written so many cautionary memos, you might conclude that I’m just a born worrier who eventually is made to be right by the operation of the cycle, as is inevitable given enough time. I absolutely cannot disprove that interpretation. But my response would be that it’s essential to take note when sentiment (and thus market behavior) crosses into too-bullish territory, even though we know rising trends may well roll on for some time, and thus that such warnings are often premature. I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses. ... Since I’m convinced “they” are at it again – engaging in willing risk-taking, funding risky deals and creating risky market conditions – it’s time for yet another cautionary memo. Too soon? I hope so; we’d rather make money for our clients in the next year or two than see the kind of bust that gives rise to bargains. (We all want there to be bargains, but no one’s eager to endure the price declines that create them.) Since we never know when risky behavior will bring on a market correction, I’m going to issue a warning today rather than wait until one is upon us.
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The rate of productivity growth – the major determinant of long run economic growth – has slowed sharply since the start of the century. The so called ‘productivity puzzle’ is one of the most pertinent macroeconomic questions of our time. Are fast rates of economic growth, the hallmark of the 20th century, a thing of the past? Or is it just another ‘bad attack of economic pessimism’ as economist John Maynard Keynes wrote nearly a century ago? ... Our chart below shows two distinct ‘super-cycles’ in UK productivity growth since the First Industrial Revolution. The first cycle brought about an acceleration in productivity growth over an approximate 70-year period that peaked in around 1870 before a 30-year deceleration thereafter. It ended at the turn of the 20th century during the middle of the Second Industrial Revolution. The cycle of the 20th century followed a similar pattern to the 19th, but with much, much bigger gains in productivity and well being. ... Comparing the western world’s current struggle for productivity gains against the ongoing fast rates of discovery in energy, artificial intelligence and robotics, to name but a few, suggests that we may be back at stage one and could be heading for stage two with rapid productivity advances in a while. ... Once we fully exploit the potential of the current wave of new technologies, the risks to the future seem skewed to the upside.
The principal sources of inequality have changed over time. Whereas feudal lords exploited downtrodden peasants by force and fiat, the entrepreneurs of early modern Europe relied on capital investment and market exchange to reap profits from commerce and finance. Yet overall outcomes remained the same: from Pharaonic Egypt to the Industrial Revolution, both state power and economic development generally served to widen the gap between rich and poor: both archaic forms of predation and coercion and modern market economies yielded unequal gains. ... Does this mean that history has always moved in the same direction, that inequality has been going up continuously since the dawn of civilisation? A cursory look around us makes it clear that this cannot possibly be true, otherwise there would be no broad middle class or thriving consumer culture, and everything worth having might now be owned by a handful of trillionaires. ... From time to time, it turns out, history has pushed a reset button, driving down inequality in marked, if only temporary fashion. ... every time the gap between rich and poor shrank substantially, it did so because of traumatic, often extremely violent shocks to the established order.
In an investing and economic world in which almost everything seems to have changed in the last 20 years, one thing has remained constant: human nature. And, we can more or less prove it. At least in the case of the stock market. ... Our model does not attempt to justify the P/E levels as logical or deserved, nor does it attempt to predict future prices. It just shows what has tended to be the market’s typical response over the years to major market factors. By far, the two most important of these are pro t margins, the higher the better, and inflation, where stable and lower is better, except not too low. ... A third behavioral factor, which we first modeled 16 years ago and still has explanatory power, although much less than the first two, is the volatility of GDP growth. Notice that this is absolutely not the growth rate of GDP. ... we added two new factors, which we believe provide a little further value. The first addition was an on-off switch, which causes P/Es to be a bit lower after a down quarter. Again, not a very scientific reflex in a mean-reverting world, but understandable. The second was to add the US 10-year bond rate, where higher rates are negative, modestly improving the model even after the inflation component had done the heavy lifting for nominal interest rates. ... The market, however, appears not to care at all about the past or to learn much from it. This model for sure seems to say that for 92 years, at least, the market has with remarkable consistency been a coincident indicator of superficially appealing variables that in a strict economic sense have been inappropriate, and that have caused spectacular and unnecessary market volatility. The model is apparently a reflection of human nature and, of all factors influencing the market, human nature, as economically inefficient and unsophisticated it may be, seems the least likely to change.
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