Pew Research Center: Global Attitudes

The Pew Research Center just published the latest iteration of an ongoing survey program that reports world perception of the economic strength of countries and the quality of their leaders. Due to pandemic concerns, the current surveys were not done in face-to-face interviews, which had been the previous practice. One might argue that this makes the current results suspect, although I don’t really see why. On the other hand, changes in this year’s assessment of countries and leaders seem to me to be closely linked to views on how a given country has handled the coronavirus. So I wonder how much the emotions of the moment are at play.

In any event, the results are interesting, I think:

–the focus of the Pew report is the battering the reputation of Chinese leader Xi Jinping has taken this year, He has dropped below Vladimir Putin to second-worst in the world as a leader. Donald Trump is the only leader Xi remains ahead of

–most respondents think their own country, the World Health Organization and the EU have done good jobs dealing with the coronavirus. In contrast, 61% believe China has done poorly. This verdict compares favorably only against the US, which a whopping 84% think has done a poor job

–consistently through last year most respondents picked the US as the strongest world economic power. This year the world ranks China ahead of the US. Only South Korea strongly disagrees, with slightly above half in Japan and the US selecting the US as still #1.

Two things jump out at me from this study:

–the IMF estimates that China’s GDP will be 40% higher than that of the US in 2020. This estimate uses the Purchasing Power Parity technique, which factors in the prices of domestically produced and consumed goods in addition to the internationally traded items that form the basis for traditional GDP figures.

In a sense this is old news. China pulled ahead of the US into first place in 2016. But it is not well-understood, even now, I think. Nor is the issue that Trump’s economic incompetence and racism, plus the “raw plunder” attitude of his camp in influencing policy, have all retarded domestic growth and thus substantially increased China’s lead

–it doesn’t seem to me that US citizens realize how genuinely awful Trump’s handling of the coronavirus has been, in the way that observers outside the US have. I don’t know why. Part of this is certainly Rupert Murdoch’s longstanding placement of his media empire at the service of the Republican party in return for political favors. Part may be Mark Zuckerberg following Murdoch’s lead. I read a commentator recently who blamed it all on the French postmodernists.

A mystery, yes. On the other hand, some people still live in a world where GE and IBM are growth stocks and AMZN is a wild speculation.

Trump and federal government finances

income tax cuts

Perhaps Trump’s signature piece of legislation has been the Tax Cuts and Jobs Act, passed in 2017.

TCJA has two elements:

–a reduction in the top federal tax bracket for corporations from 35% to 21%. This brought highest-in-the-developed-world tax rate down to around average. This was necessary to stop the bleeding from full-rate taxpayers, like big pharma leaving for other countries–a move that would up their after-tax profits (and presumably the stock price) by about a quarter.

The lost tax income was supposed to be made back by elimination of sweetheart tax breaks, none of which happened.

–a big tax cut for the ultra-wealthy.

Estimates are that TCJA will add about $1.5 trillion to the national debt over its first ten years.

GDP growth suppression

Trump’s decision to severely restrict immigration into the US and his economic war with China, bizarrely framed in a way that benefits China while harming the US, have very quickly negated any short-term momentum his deficit spending might have achieved.

This suggests that federal debt projections are probably too low.

the pandemic

With Trump’s blessing, Washington passed legislation earlier this year authorizing $4 trillion in spending to combat the coronavirus. At the same time, Trump went out of his way to flaunt medical measures designed to check its spread and continuously urged his supporters to do likewise.

One consequence of this last is that deaths in the US so far are 40% higher than in the EU, despite Europe having 36% more people and being an older population than here.

A corollary is that some portion of that $4 trillion has had less effect in states that have followed Trump’s lead. $1 trillion wasted? …more?

ballooning federal debt

According to the Nation Debt Clock, the current national debt, which was about $20 trillion when Trump took office, is now just north of $27 trillion. This compares with federal tax revenue, from all sources, of about $3 trillion a year. Debt is now 128% of pre-pandemic GDP, which puts us within striking distance of Italy among the world’s most indebted countries. If Washington devoted all of its income to repaying this debt, it would take nine years to do so.

In short, the burgeoning debt is a potential mess. This is not all Trump’s doing. Bipartisan bungling that led to the 2008 financial crisis played a big role. He’s made things a lot worse, though, both by reducing revenue through TCJA and his general incompetence at running any sort of enterprise.

why this is a problem: general

–at some point, bond buyers begin to worry that the debtor nation is going to be unable to repay existing borrowings. So they become hesitant to add to their holdings, and at some point even to roll over their existing exposure. This happened in the US during the Carter administration.

–the debtor nation may begin to signal that it is unwilling to repay borrowings in full. It does so by creating domestic inflation in order to reduce the real (meaning adjusted for inflation) value of outstanding obligations.

–a byproduct of either is typically devaluation of the local currency. This can be either involuntary or a deliberate political strategy to wriggle out from under debt whose repayment in full would require fiscal austerity/higher taxes for a long time.

why this is a problem: here and now

The Republicans started out as the party of Lincoln, “dedicated to the proposition that all men are created equal.” and the party of financial responsibility. Under Trump they don’t appear to stand for either. And that is presumably eroding their traditional base of support.

The worst hit by devaluation would be the ultra-wealthy, the powerful political donors for whom the TCJA was tailor-made. I presume these donors and their financial concerns are behind the Senate’s opposition to further pandemic aid.

Also, it’s hard to know whether their opposition is a matter of principle or a worry that an increasingly erratic Trump would fritter a large part of any new money away, too.

For most countries, the main result of profligate spending and a subsequent devaluation is a deep loss of national wealth. For the US, there would be the additional negatives of damage to the leading positions of US banks in the world financial system as well as of the US$ as the de facto world currency. Both would be reasons to look to China for new leadership.

a reply to two recent comments

The first is from Russ, who has an important investment point. His suggestion is to take a long view rather than compete directly with the herds of Wall Streeters trying to beat the S&P, and invest in areas of secular significance that are not yet at the center of professionals’ attention. His examples are clean energy and infrastructure (I’d add fintech and genomics to that).

Two possible approaches: one would be to have, say, 85% of total equity exposure in S&P funds/etfs (or at least in index-ish things), aimed at delivering the index return +/-, say, 2%, and the rest in longer-term/higher risk/reward areas. The second would be to make the latter the centerpiece of the portfolio, with passive products adding a little ballast. The difference between the two, as I see it, is that deviations from market returns from using the second approach, both positive and negative, could be large. So this is only for someone with a high tolerance for risk.

The second comment is a question about the election. I have no informed idea about the outcome.

There are two narratives around the lack of accuracy in the political polls from 2016. One is that voting for Trump seemed so socially unacceptable that his supporters were reluctant to reveal their intentions. The second is that in reweighting responses gathered in order to get them to mirror the structure of the overall voting population pollsters mistakenly gave too little weight to respondents without college degrees. That error has supposedly been fixed in current polling.

As regular readers will know, I think the harm caused by Washington’s long and severe neglect of the parts of the country hurt most by the decline of heavy industry over the past half-century is at the basis of Trump’s appeal. He says he cares. Unfortunately, Trump is showing the same form he exhibited in his unsuccessful real estate career–his supporters are bearing the brunt of the economic damage harm he is doing. As president, there’s health damage as well. My sense, from seeing the small size of Trump boat/car parades in eastern Pennsylvania, is that at least some people are figuring out that they’ve been duped. But how they will vote? …again, I have no clue.

Economically, how a Biden administration would play out is unclear. A second Trump term would presumably be a copy of the first–GDP stagnation at best, and a continuing reorientation away from cutting-edge science and industries of the future (where the US has a comparative advantage) toward Third World-competing ones where we do not. Likely consequences would ultimately be a blowout in federal debt, capital flight and currency deprecation. To the degree that the initial stage of flight would be through buying stocks with intellectual property and/or international exposure, the NASDAQ might continue to boom while the Russell 2000 lags badly.

trying to rotate (iv)

If I were still working as a professional money manager, my thought process would be very clear. I’ve had very strong outperformance of the benchmark my customers measure my performance by. I’ve probably long since maxed out the bonus payments I’d receive for my work . Therefore, the most sensible course of action, based on the instructions and the incentives my employers have laid out for me, is to make my portfolio look much more like the index I’m measured by. I wouldn’t gain any more performance. But I wouldn’t lose any of the relative gains I’ve made already. In addition, if I generate too much good performance (yes, there is such a thing in the institutional world), clients may begin to think that I’m taking on too much risk.

I’m only working for myself, however, so I’m not going to do that.

Implicitly, I’m betting that the current economic situation–the pandemic and its aftereffects–will persist for a longer time than most other stock market participants expect. That’s ok with me, since I think that’s what’s going to happen.

I’m also finding it hard to imagine what ordinary life post-pandemic will look like.

In this regard, I’ve already written about the easy part–what’s not going to work. By underweighting the clunker sectors and making my portfolio look like the rest of the market, I stand to gain performance against my benchmark. This is not nothing. Over the 25+ years I’ve worked for others, this high-level portfolio layout has accounted for about half the outperformance I’ve achieved. Individual stock selection, which is much more time-consuming and all about detailed accounting statement analysis and projection, makes up the other half.

Conceptually, I’m trying to divide Consumer Discretionary stocks according to how interesting they might be as investments:

–direct beneficiaries of the pandemic whose appeal will likely endure, like food delivery services, online gaming, entertainment streaming, suburban real estate, outdoor dining, drive-throughs. Amazon, Microsoft. Peleton (?) Etsy (??)

–beneficiaries of the pandemic, but with limited appeal as/when life returns to normal. sellers of sports/ exercise equipment, like bicycles, kayaks, backyard swingsets…

–losers today with unclear potential for recovery. high-rise offices and apartment complexes, densely packed city areas, department stores, big malls, restaurant chains, supermarkets, movie theaters (?). hotels, cruise ships. Traditional value investors will live here

–already big companies that are adapting quickly to new circumstances. Target, Nike, dollar stores Walmart (?)

Feel free to share your ideas

trying to rotate (iii)

Well, it’s longer than two days. Sorry.

I’m really puzzled, though, about the current state of the stock market, and how to transition away from this year’s winners by broadening out into the Consumer Discretionary sector.

For one thing, I think the election matters a lot. We can see in detail from Trump’s leaked tax returns what everyone in New York already knew–that although he excelled at playing the role on TV of a stereotypical heartless businessman, he was a genuinely terrible real estate investor who lost his shirt during a raging bull market. He has brought this “talent” to bear as president: reducing real domestic economic growth to zero, damaging business relations with the rest of the world and refashioning the image of the US from the land of the free to a white supremacist police state (not a look to inspire purchases of US goods by foreign consumers (to me, this is an important reason LVMH wants to wriggle out of its commitment to buy Tiffany, which has a huge Asian business)). If Americans sign up for four more years of this, Consumer Discretionary will look a lot less attractive, particularly high-end goods and services.

(An aside: the financial press doesn’t see things this way. To some degree this may be a result of the Rupert Murdoch strategy of trading highly partisan media coverage in return for political favors. But for whatever reason, commentators seem stuck in a pre-Reagan world where Republicans represent big business and Democrats organized labor. Also, a key facet of Trump operations also seems to have escaped his supporters’ notice (ex farmers)–that invariably the people who believe in and trust him are the worst-hurt victims of his actions. think: his limo ride yesterday or his NJ golf club meet-and-greet with fundraisers, knowing he was infected.)

In an unclear situation like this, where the areas to overweight aren’t evident, the first step, I think, is to identify areas to avoid.

I divide the areas to avoid into three types: left-behinds from structural change, accelerated by Trump’s coronavirus mishandling, like department stores, autos, cable TV, fossil fuels, financials (because they do best when interest rates are rising)…; coronavirus victims, like restaurants (and their suppliers), high-rise urban real estate; and casualties of the loony-tunes way Trump is waging his trade wars, like farmers and farm equipment.

The second step is to look at what’s left and comb through that for positive ideas to invest in. More about this tomorrow.