It is almost a year since Donald Trump became President. And whilst he has not followed through on many of his promises, he has indeed introduced the major policy changes that I began to discuss in September 2015, when I first suggested he could win the election and that the Republicans could control Congress:
“In the USA, the establishment candidacies of Hillary Clinton for the Democrats and Jeb Bush for the Republicans are being upstaged by the two populist candidates – Bernie Sanders and Donald Trump….Companies and investors have had little experience of how such debates can impact them in recent decades. They now need to move quickly up the learning curve. Political risk is becoming a major issue, as it was before the 1990s.”
Many people have therefore had to go up a steep learning curve over the past year, given that their starting point was essentially disbelief, as one commentator noted when my analysis first appeared:
“I have a very, very, very difficult time imagining that populist movements could have significant traction in the U.S. Congress in passing legislation that would seriously affect companies and investors.”
Yet this, of course, is exactly what has happened.
It is true that many of the promises in candidate Trump’s Contract with America have been ignored:
- Of his 174 promises, 13 have been achieved, 18 are in process, 37 have been broken, 3 have been partially achieved and 103 have not started
- His top priority of a Constitutional amendment on term limits for members of Congress has not moved forward
Yet on areas that impact companies and investors, such as trade and corporate tax, the President has moved forward:
- On trade, he has not (yet?) labelled China a currency manipulator or moved forward to fix water and environmental infrastructure
- But he has announced the renegotiation of NAFTA, the withdrawal from the Trans-Pacific Partnership, his intention to withdraw from the UN Climate Change programme and lifted restrictions on fossil fuel production
These are complete game-changers in terms of America’s position in the world and its trading relationships.
Over the decades following World War 2, Republican and Democrat Presidents alike saw trade as the key to avoiding further wars by building global prosperity. Presidents Reagan, Bush and Clinton all actively supported the growth of global trade and the creation of the World Trade Organisation (WTO).
The US also led the world in environmental protection following publication of Rachel Carson’s ‘Silent Spring‘ in 1962, with its attack on the over-use of pesticides.
Clearly, today, these priorities no longer matter to President Trump. And already, US companies are starting to lose out as politics, rather than economics, once again begins to dominate global trade. We are returning to the trading models that operated before WTO:
- Until the 1990s, trade largely took place within trading blocs rather than globally – in Europe, for example, the West was organised in the Common Market and the East operated within the Soviet Union
- It is therefore very significant that one of the President’s first attacks has been on the WTO, where he has disrupted its work by blocking the appointment of new judges
Trump’s policy is instead based on the idea of bilateral trade agreements with individual countries, with the US dominating the relationship. Understandably, many countries dislike this prospect and are instead preferring to work with China’s Belt & Road Initiative (BRI, formerly known as One Belt, One Road).
US POLYETHYLENE PRODUCERS WILL BE A CASE STUDY FOR THE IMPACT OF THE NEW POLICIES
US polyethylene (PE) producers are likely to provide a case study of the problems created by the new policies.
They are now bringing online around 6 million tonnes of new shale gas-based production. It had been assumed a large part of this volume could be exported to China. But the chart above suggests this now looks unlikely:
- China’s PE market has indeed seen major growth since 2015, up 18% on a January – November basis. Part of this is one-off demand growth, as China moved to ban imports of scrap product in 2017. Its own production has also grown in line with total demand at 17%
- But at the same time, its net imports rose by 1.8 million tonnes, 19%, with the main surge in 2017. This was a perfect opportunity for US producers to increase their exports as their new capacity began to come online
- Yet, actual US exports only rose 194kt – within NAFTA, Mexico actually outperformed with its exports up 197kt
- The big winner was the Middle East, a key part of the BRI, which saw its volume jump 29% by 1.36 million tonnes
Sadly, it seems likely that 2018 will see further development of such trading blocs:
- The President’s comments last week, when he reportedly called Africa and Haiti “shitholes” will clearly make it more difficult to build long-term relationships based on trust with these countries
- They also caused anguish in traditionally pro-American countries such as the UK – adding to concerns that he has lost his early interest in the promised post-Brexit “very big and exciting” trade deal.
US companies were already facing an uphill task in selling all their new shale gas-based PE output. The President’s new trade policies will make this task even more difficult, given that most of it will have to be exported.
The post US PE exports on front line as Trump changes trade policies appeared first on Chemicals & The Economy.
G7 Summits began in the crisis years of the mid-1970s, bringing Western leaders together to tackle the big issues of the day – oil price crises, the Cold War with the Soviet Union and many others. Then, as stability returned in the 1980s with the BabyBoomer-led economic SuperCycle, they became forward-looking. The agenda moved to boosting trade and globalisation, supporting the rise of China and India, and the IT revolution.
This weekend’s 43rd Summit in Italy suggested we may be going back to earlier days. As the picture confirms, the leaders did all meet in the Italian city of Taormina in Sicily. But they clearly found it difficult to meet the challenge set by their hosts of “Building the Foundations of Renewed Trust”. One very worrying sign was that both the USA and the UK seem to have become semi-detached from the process. :
□ UK premier Theresa May left early, to “hold urgent talks with her election campaign chiefs” after new polls showed her lead dropping to single figure levels
□ President Trump refused to endorse the Paris Agreement, causing German Chancellor, Angela Merkel, to comment:
“The entire discussion about climate was very difficult, if not to say very dissatisfying. There are no indications whether the United States will stay in the Paris Agreement or not.”
There was some good news, with a compromise seemingly being agreed with US President Trump over his desire to dismantle the world’s open trading system, as the final statement noted:
“We reiterate our commitment to keep our markets open and to fight protectionism, while standing firm against all unfair trade practices. At the same time, we acknowledge trade has not always worked to the benefit of everyone.”
But it was a relatively weak statement, and nothing was said about the President’s withdrawal from the Trans-Pacific Partnership, or his decision to demand a formal review of the North American Free Trade Agreement. The change is even clearer by contrast with last year’s Summit in Japan, when the leaders committed:
“To fight all forms of protectionism ….(and) encourage trade liberalization efforts through regional trade agreements including the Trans-Pacific Partnership, the Japan-EU Economic Partnership Agreement, the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement.”
Sadly, the same lack of unity had been seen just before the Summit, when President Trump failed to endorse Article 5 (the fundamental principle of the NATO Alliance), which declares that an attack on one member state is an attack on all, and requires a mutual response. As the Financial Times noted:
“This was particularly galling given that he was attending a memorial for the September 11 terror attacks — the only time Article 5 has been triggered. It remains unclear why he equivocated.”
Even the Summit dinner saw a lack of unity, with US National Economic Council director Gary Cohn suggesting:
“There was a lot of what I would call pushing and prodding.”
This lack of a common purpose amongst Western leaders is deeply worrying. Of course, they were able to agree on strong words about terrorism and the role of social media. But their key role is to be pro-active, not reactive.
Collectively, their countries are responsible for nearly two-thirds of the global economy. Individually, none of them – not even the USA – can hope to successfully tackle today’s challenges. This was the rationale for the formation of the G7 in 1975, and it has since played a critical role in helping to spread peace and prosperity around the world.
Today’s G7 leaders seem to be in danger of forgetting their core purpose. They need to re-open their history books and focus on the lesson of the 1930′s, when “beggar-my neighbour” trade policies led directly to World War II.
First, the good news. It has long been recognised that the UK economy is over-dependent on financial services, and that its housing market – particularly in London – is wildly over-priced in relation to earnings. The Brexit vote should ensure that both these problems are solved:
- Many banks and financial institutions are already planning to move out of the UK to other locations within the EU, so they can continue to operate inside the Single Market
- There is no reason for those which are foreign-owned to stay in the country, now the UK is leaving the EU
- This will also undermine the London housing market by removing the support provided by these high-earners
- In addition, thousands of Asians, Arabs, Russians and others will now start selling the homes they bought when the UK was seen as a “safe haven”
This is probably not the result that most Leave voters expected when they voted on Thursday. These voters will also soon find out that Thursday was not the Independence Day they were promised. It is already obvious that Leave campaigners have no clear idea of what to do next. They are even divided about whether to immediately trigger the 2-year departure period under Article 50 of the Lisbon Treaty.
Leave voters have more shocks ahead of them, of course:
- Most believed that the UK would immediately be able to “take control of its borders” and dramatically reduce immigration. But as I noted during the campaign, the majority of immigration has always been from outside the EU – and could already have been stopped, had the current or previous governments chosen to do this
- Nor will the National Health Service suddenly benefit from the promised £350m/week ($475m) by stopping UK contributions to the EU. For a start, more than half of this money already came back to the UK from the EU, and so can’t be spent a second time
- Even more importantly, nothing is going to happen for at least 2 years whilst the Leave negotiations take place
This, of course, is where the bad news starts. What will be the reaction of Leave voters as they discover they have been fed half-truths on these and other critical issues? And what will happen as house prices begin to fall, and jobs in financial services – as well as manufacturing – begin to disappear as companies relocate elsewhere within the EU?
BREXIT VOTE WILL HIT EUROPE AND THE GLOBAL ECONOMY
The bad news is, unfortunately, not restricted to the UK. Already, alarm has begun to spread across the rest of the EU. There are strong calls for referendums to take place in 3 of the EU’s 6 founding members – France, Italy and The Netherlands. It is hard to see how the EU could survive if even one of these votes resulted in a Leave decision.
In turn, of course, this is bound to draw attention once more to the unsolved Eurozone debt crisis. Can anyone now really continue to believe the European Central Bank’s 2012 promise to do “whatever it takes” to preserve the euro, as set out by its President, Mario Draghi?
The simple fact is that the Brexit vote is the canary in the coalmine. It is the equivalent of the “Bear Stearns collapse” in March 2008, ahead of the financial crisis. And as I have argued for some time, the global economy is in far worse shape today than in 2008, due to the debt created by the world’s major central banks.
THE BREXIT VOTE, LIKE THE 2008 CRISIS, WAS NOT A ‘BLACK SWAN’ EVENT
I am used, by now, to my forecasts being ignored by conventional wisdom. The Brexit vote saw a repeat of the complacency that greeted my warnings in the Financial Times and here before the 2008 financial crisis. Thus my March warning was again mostly ignored, namely that:
“A UK vote to leave the European Union is becoming more likely”.
Instead, like the 2008 crisis, the Brexit vote is already being described as a ‘black swan’ event – impossible to forecast. This attitude merely supports the status quo, as it means consensus wisdom does not have to challenge its core assumptions. Instead, it takes comfort in the view that “nobody could have foreseen this happening”.
Critically, this means that the failure of the post-2008 stimulus programmes is still widely ignored. Yet these have caused global debt levels to climb to more than 3x total GDP, according to McKinsey. As the map above shows, they have created a debt-fuelled ‘ring of fire’, which now threatens to collapse the entire global economy:
- China’s reversal of stimulus policies has led to major downturns in the economies of all its commodity suppliers
- Latin America, Africa, Russia and the Middle East can no longer rely on exports to China to support their growth
- Japan’s unwise efforts at stimulus via Abenomics have also proved a complete failure
- Now Brexit will almost inevitably cause a major collapse in London house prices
- And it will focus attention on the vast debts created by the Eurozone debt crisis
- It will also unsettle US investors, who have taken margin debt to record levels in the belief that the US Federal Reserve will never let stock market prices fall
TIME FOR STRAIGHT TALKING ON THE IMPACT OF AGEING POPULATIONS ON ECONOMIC GROWTH
It is therefore vital that policymakers now make a new start, whilst there is still time to avoid total financial collapse. Once people begin to realise that all this debt can never be repaid, then interest rates will soar and many currencies collapse. This is not being alarmist – this is just stating obvious facts.
The critical need is to recognise that demographics, not monetary policy, drive economies. A world with lots of young BabyBoomers in the Wealth Creating 25-54 age group will inevitably see strong growth. And if more and more women return to the workforce after childbirth, this will turbo-charge an economic SuperCycle.
This is what happened between 1983 – 2007, when the world saw almost constant growth. The US recorded just 16 months of recession in 25 years. But last year saw global GDP decline by a record amount in current dollars, more than in 2009 – a clear warning sign of major trouble ahead.
The issue is very simple. Common sense tells us that the combination of a 50% increase in global life expectancy since 1950, and a 50% fall in fertility rates, means that the world has now reached the “demographic cliff“:
- 1bn ageing Boomers are joining the low-spending, low-earning New Old 55+ generation for the first time in history
- They will be more than 1 in 5 of the global population by 2030, twice the percentage in 1950
This is good news, not bad. Who amongst us, after all, would not choose to have 20 years of life expectancy at age 65 instead of dying? That is today’s position in the Western world. And people in the emerging economies are catching up fast. They can already now expect to live another 15 years at age 65.
The trade-off is lower, or negative growth. People in this New Old 55+ age group already own most of what they need, and their incomes decline dramatically as they approach retirement.
But this simple fact of life has never been explained to voters. Instead they have been told since 2008 that policymakers are confident of returning the economy to SuperCycle levels of growth. No wonder they are growing restless, and starting to mistrust everything they are being told by the supposed experts.
CONCLUSION – TIME TO RESTORE TRUST WITH PLAIN SPEAKING
Policymakers and the media now have a grave responsibility, as do do all of us.
It is critically important that policymakers now recognise they must immediately reverse course on stimulus policies, and come clean with voters about the real economic situation.
Of course this will result in very painful conversations. But the alternative, of ignoring the warning provided by the Brexit vote, is simply too awful to contemplate.
The UK economy appears to be recovering well from the financial crisis. But appearances can be deceptive.
Certainly employment has risen for both men and women since 2009, and the jobless rate has fallen. But new data yesterday from the Office for National Statistics highlights how, despite these achievements, total incomes have been falling in real terms since 2009, as the chart shows:
- Male employment has risen by 900k (blue shading) and female employment by 700k (red)
- Male and female employment have also hit all-time highs of 16.8m and 14.1m respectively
- But total male and female earnings have continued to decline in real terms as £2015 (black line)
- They peaked in 2009 at £1.1tn ($1.67tn), but have since fallen 9% to £1tn today
The reason, of course, is the factor that governments prefer to ignore, namely demographics. The UK is an ageing society, and earnings peak by the age of 50 as the second chart highlights (again based on ONS data):
- There were 5.8m people working in the 30-39 age group, with median earnings of £490/week ($750/week)
- 6.4m were working in the 40 – 49 cohort, with median earnings of £493/week
- But increasing life expectancy meant there were 5.4m working in the 50-59 cohort at £458/week, and 1.9m working in the 60+ cohort at £339/week
- Whilst falling fertility rates meant there were only 4.4m working in the 22-20 cohort for £383/week, and just 1.2m in the 18-21 cohort for £201/week
Of course, governments prefer to focus on achievements when they talk about employment. And with major spending cuts due to be announced next week, no doubt ONS felt it was better not to highlight the issue in their summary report. As far as I can tell from a Google search, none of the major media has mentioned this key fact in their reports.
However, it is clearly critical for both companies and investors. Consumption is around 2/3rds of the UK economy, and it is the 5th largest economy in the world. The data clearly highlights the fact that, like other major economies, the UK faces a future where there will be a declining number of people in the peak earning and spending Wealth Creator 25 – 50 age group, and a rising number of people in the lower-income and spending 50+ age group.
Companies can’t expect to sell products and services to people who can’t afford them. There is therefore an increasingly urgent need for them to develop new business models focused on providing low-cost essentials to the growth area of the over-50s.
Demographics is destiny, after all,
UK economic policy is now coming under discussion, as May’s Gemeral Election approaches. The Financial Times has kindly printed my letter below, highlighting the economic impact of the demographic changes now underway.
April 1, 2015 9:34 pm
Sir, Your editorial “Zero significance in the UK inflation milestone”, (March 27) ignores the impact of two critical variables. As a result, its conclusion misses the real importance of the UK’s move into deflation.
The first key variable is the collapse in fertility rates since the end of the postwar baby boom. These reduced from the 1960s peak of 2.8 babies/woman to just 1.7 babies/woman 40 years later. The second is the major increase in life expectancy over the same period. This has risen by almost two-thirds at age 65, to 23 years.
Consumption is around 60 per cent of gross domestic product. Thus the boomers created an economic supercycle as they moved into the 25-50 age group, when spending and incomes typically peak. But now the pendulum is swinging the other way. The ageing of the boomers means the majority of UK households have been headed by someone aged over 50 since 2002. These older households already own most of what they need, and their incomes are declining as they head into retirement. At the same time, lower fertility rates mean there are fewer households in the highest-spending 30-49 age group. Thus average household expenditure has been in steady decline since 2006 in real terms.
This is creating a paradigm shift of historic proportions. But instead of tackling the core issue, policy makers have chosen to use monetary policy to treat its symptoms, via the creation of temporary wealth effects in housing and financial markets. The end-result has been to build up further headwinds for future spending by younger households. These will now have to repay the debt created by quantitative easing and jumbo mortgages.
Contrary to your view, therefore, today’s zero inflation rate has enormous significance for the UK economy. Deflation, slowing growth and debt are likely to prove a toxic combination for economic policy after May’s general election.
Chairman, International eChem
Nobody can guess the outcome of the UK’s general election on 7 May. This is astonishing, as it is only 4 months away.
Currently, it seems most unlikely that either of the main parties, Conservative or Labour, will be able to form a government on their own. Indeed, 7 different outcomes have been identified as possible by the civil servants preparing for a new government to take power.
Equally astonishing, given the 2-party history of British politics, is that the combined vote of the minor parties is now more than either the Conservative or Labour vote, as the Financial Times chart shows.
Opinion polls are not elections, of course. But so far they suggest that it will take a 3-party coalition to form a government – normally something only seen in wartime. In turn, this means it is quite possible that key policies could be dictated by minority parties as their price for votes.
The position of the Liberal Democrats position highlights the uncertainty. They are currently the minority party in the Coalition government, but are likely to lose at least half of their seats – and could lose many more. And so they would be most unlikely to support the Conservatives again, and would probably support Labour.
Instead, the Conservatives might well have to look for support from the UK Independence Party. Their main policy, as the name suggests, is for the UK to leave the European Union. They would drive a hard bargain for their votes, and a referendum on the subject would become almost inevitable.
Another remarkable development is underway in Scotland, long a Labour heartland. Polls suggest the Scottish National Party will win a majority of seats, despite having lost the independence referendum. They are unlikely to support the Conservatives, and might well demand a second referendum as their price for supporting Labour.
Other minority parties may also be critical to forming a government. The Democratic Unionists from N Ireland might support the Conservatives, whilst the Greens might support Labour if it accepted their key policies.
The problem is simple to explain. Voters no longer believe that the major parties are listening to their concerns, and are instead merely exchanging meaningless sound-bites. Thus Labour’s leader, Ed Milliband, famously forgot to talk about the UK’s problems with the budget deficit and immigration in his keynote Party Conference speech last year.
Unsurprisingly, therefore, alienation is rising amongst the electorate. As a result, populist rhetoric and narrow single-interest policies start to appear more attractive. And instead of returning to the centre ground, the major parties are increasingly focusing on these minority concerns, fearing the loss of votes, and so losing even more credibility.
Thus nobody knows how the voting will go in May or what policies might be pursued by a new government. Horse-trading for coalition votes could easily lead to outcomes that today seem most unlikely. And some seasoned observers even suggest it may prove impossible to form a stable government, leading to new elections later in the year.