how economies stack up

I’m using Purchasing Power Parity calculations from the IMF.  Traditional GDP uses only the prices of traded goods in figuring the size of the output of national economies.  PPP, in contrast, tries to estimate the value of non-traded goods as well–like the price of a haircut, a movie, eating out–and adjusts output up or down accordingly.  Because of this, PPP gives a better idea of how well off the typical resident is than the conventional measure.

1980

US   #1     $2.8 trillion

Japan  #2   $1.0 trillion

China  #11    $0.3 trillion

1990

US  #1     $6.0 trillion

Japan  #2     $4.2 trillion

China  #5     $1.1 trillion

2000

US  #1     $10.3 trillion

China  #2     $3.7 trillion

Japan  #3     $3.4 trillion

2010

US  #1     $15.0 trillion

China  #2     $12.4 trillion

India  #3     $5.3 trillion

Japan  #4     $4.5 trillion

2019

China  #1     $27.4 trillion

US  #2     $21.4 trillion

India  #3     $11.4 trillion

Japan  #4     $5.7 trillion

Source:  International Monetary Fund

Note:  I haven’t included the EU as a separate entity, partly because membership hasn’t been static over the years, mostly because the UK, 10%+ of the total, will presumably leave the EU before the end of 2019.  If the current EU were a single country it would be #2 on the list, 5% – 10% bigger than the US.

China doesn’t include Taiwan, Hong Kong or Macau.  If we tossed in all three, Greater China would be maybe 5% bigger than listed.

 

On the 2019 numbers, China’s economy is 28% larger than that of the US.  China has 4.3x as many people as the US, which implies that per capita income in the US is 3+x of that in China.

American investors have historically approached China by figuring that the top 10% of the population, 140 million people or so, have incomes that are at the US median or above.  If so, the market for US consumer and luxury goods in China is probably about the same size today as the domestic market   …and it’s growing much faster.  And US-made goods have had much better acceptance in the Pacific than in Europe.  Hence, the attraction.

If the US is now in a competition with China for technological superiority, we should probably be looking at another set of metrics:  the number of scientists and engineers trained, the number employed in industry and the size of R&D budgets.  Yes, it’s certainly better to have one person who can high jump 10′ than ten who can jump 1′ each, but I don’t have any way of trying to figure where the next superstars are going to come from.  So aggregate figures will have to do.  My quick Google search indicates a surge in STEM undergraduates in China over the past ten years, which now outpaces the US in numbers.  Chinese science PhDs awarded are now roughly equal to their US counterparts.  A significant number of US PhD science students are from China (I don’t have good figures, though).  About 40% of the science PhDs now working in the US are foreign-born.  That percentage has been shrinking since the start of the Trump administration.

 

 

 

 

 

navigating through confusion

a (very) simple sketch

I can’t recall a more complex, hard to read, time in the stock market than the present.  There have certainly been more panicky times–like October 1987 or early 2000 or late 2008.  But all of these, however frightening, were about financial markets building a speculative house of cards which ultimately collapsed of its own weight.  The basic framework in which the game was played remained more or less the same:  continuously declining interest rates, the growth of multinational companies, revolutionary developments in computer technology, the shift in developed economies from laborers to knowledge workers, continuing dominance of the US economy.

what has changed?

–the Internet is here, with its attendant powerful hardware (servers, smartphones) and software (the cloud, Amazon, Facebook…  e-commerce, information, entertainment) devices

–the aging–and, ex the US, increasing lifespans–of the populations of developed economies

–ultra-low interest rates, negative in parts of Europe

–the rise of China, and to a much lesser extent, India as global economic powers

–most recently, the Huawei moment, sort of like Sputnik, when the US realizes that a Chinese company is producing more advanced/ less expensive cutting-edge telecom equipment than it can

–fracturing of belief in the invisible hand aka trickle-down economics, the (ultimately religious/Enlightenment philosophical) belief that individuals acting in their own self-interest somehow create the best possible outcome, both for the world as a whole and for each individual.  This fracturing fuels the rise of the radical right in the US and Europe, I think.

 

more tomorrow

 

 

 

the Fed’s dilemma

history

From almost my first day in the stock market, domestic macroeconomic policy has been implemented by and large by the Federal Reserve.  Two reasons:  a theoretical argument that fiscal policy is subject to long lead times–that by the time Congress acts to stimulate the economy through increased spending, circumstances will have changed enough to warrant the opposite; and ( my view), until very recently neither Democrats nor Republicans have had coherent or relevant macroeconomic platforms.

If pressed, Wall Streeters would likely say that Washington has historically represented a net drag on the country’s economic performance of, say, 1% yearly, but that it was ok with financial markets if politicians didn’t do anything crazily negative–the Smoot-Hawley tariffs of 1930, for example.

During the Volcker years (1979-87), money policy was severely restrictive because the country was struggling to control runaway inflation spawned by misguided policy decisions of the 1970s (Mr. Nixon pressuring the Fed to keep policy too loose).  Since then, the stock market has operated under the belief that the Fed’s mandate also includes mitigating stock market losses by loosening policy, the so-called Greenspan, Bernanke and Yellen “puts.”

recent past

We’ve learned that monetary policy is not the miracle cure-all that we once thought.  We could have figured this out from Japan’s experience in the 1980s.  But the message came home in spectacular fashion domestically during the financial crisis last decade.  As rates go lower and policy loosens, lots of “extra” money starts sloshing around.   Fixed income managers gravitate toward increasingly arcane and illiquid markets.  In their eagerness to not be left out of the latest fad product, they begin to take on risks they really don’t understand as  well as to forego standard protective covenants.

We could almost hear the sigh of relief from the Fed as the tax bill of 2017, which reduced payments for the ultra-rich and brought the corporate tax rate down to about the world average, passed.  Because the bill was so stimulative, it gave the Fed the chance to raise rates as an offset, meaning it could tamp down the speculative fires.

today

Enter the Trump tariffs.

Two preliminaries:

–tariffs are taxes.  Strictly speaking, importers, not foreign suppliers (as the president maintains (could it be he actually believes this?)) pay them to customs officials.  But the importer tries to ease his pain by asking for price reductions from suppliers and for selling price increases from customers.  How this all settles out depends on who has market power.  In this case,it looks like virtually all the cost will be borne by domestic parties.  Domestic economic growth will slow.  The relevant stock market question is how much of the pain consumers will bear and how much will be concentrated in a reduction of import business profits.

–I think Mr. Trump is correct that the US subsidy of NATO is excessive.  It represents the situation at the end of WWII, when the US left standing–or at best the time when the USSR began to disintegrate into today’s Russia (whose GDP = Pennsylvania + Ohio, or California/2).  I also think that China, with a population five times ours and an economy 1.25x as big as the US (using PPP), is a more serious economic rival than we have seen in decades.  It doesn’t have the post-WWII sense of obligation to us that we have seen elsewhere.  So we have to rethink our relationship.

Having written that, I don’t see that Mr. Trump has even the vaguest clue about how the country should proceed, given these insights.

To my mind, tariffs + retaliation mean both domestic and foreign companies will be reluctant to locate new operations in the US.  Tariffs on Chinese handicrafts may bring industries of the past back to the US, at the same time they force China to increase emphasis on industries of the future.  I don’t get how either of these moves should be a US strategic goal….

the dilemma

The question for the Fed:  should it enable the president’s spate of shoot-yourself-in-the-foot tariff policies by lowering rates?  …or should it let the economy slide into recession, hoping this will jar Congress into action?

 

what to do on a rebound day

It doesn’t appear to me that the economic or political situation in the US has changed in any significant way overnight.  Yet stocks of most stripes are rising sharply.

What to do?   …or if you prefer, what am I doing?

Watching and analyzing.

A day like today contains lots of information, both about the tone of the market and about every portfolio’s holdings.  Over the past month, through 2:30 pm est today, the S&P is down by 4.8%.  The small-cap Russell 2000 has lost 7.7%, NASDAQ 7.8%.   All three important indices are up significantly so far today—NASDAQ +2.2%, Russell 2000 +1.9%, S&P 500 +1.8%.  So this is a general advance.  Everything is up by more or less the same amount, meaning investors aren’t homing in on size or foreign/domestic as indicators for their trading.

What we should all be looking for, I think, is what issues that should be going up–either because they’re high beta or have been beaten up recently–are shooting through the roof and which are lagging.  (“Lagging” means underperforming other similar companies or underperforming the overall market.)  The first category are probably keepers.  The poor price action for the latter says they should be subjects for further analysis to figure out why the market doesn’t appreciate their merits.  Maybe there aren’t any.  

We should also note defensive stocks that are at least keeping up with the S&P.  That’s better than they should be doing.  They may well be true defensives, meaning they stay with the market (more or less) on the way up and outperform on the way down.  This is a rare, and valuable, breed in today’s world, in my view, and can be a way to hedge downside risk.

 

 

Another topic:  Over the past few days, I’ve been in rural Pennsylvania filming my art school thesis project–yes, I’ve gone from stills to video–so I haven’t kept up with the news.  I’m surprised to see that the UK, which still remembers the enormous price it paid a generation ago resisting fascism, has done an abrupt about-face and allowed Mr. Trump to make a state visit.  The anticipated consequences of Brexit must be far more dire than the consensus expects.