EconVue Spotlight March 1 2019

Another amazing week.  As politics got murkier however, markets surged higher.  In terms of what will be remembered decades from now, the event that shocked nearly everyone was the abrupt ending of the US-North Korea Summit.  As the next set of leadership-level meetings loom this month, surely the Chinese must be reevaluating their strategy vis-à-vis President Donald Trump. What these negotiations have in common is that in both cases the US is asking Kim Jun-un and Xi Jinping for structural changes that for different reasons each might have trouble delivering.

In order to understand the complexities behind these headline events, I highly recommend two podcasts and one video which are well worth your time. The first, with Evan Feigenbaum who is now at the Carnegie Endowment, is about the deeper divisions that are developing between China and the US, including a new digital divide, highlighted by the Huawei debacle.  The Council on Foreign Relations has an excellent discussion with their Korean experts about the complexities of what just happened in Hanoi.  And finally, in one of the underreported but highly significant developments of the last two weeks, an Al Jazeera video about the hundred year plus history behind the current conflict between India and Pakistan in Kashmir is only eight minutes. 

No one should be surprised that any of these conflicts, which have taken so long to develop, will take time to work out. I don’t think that the US, which is undoubtedly in a stronger position than either China or North Korea, will reach a political tipping point until closer to the 2020 elections. In the meantime, Scowcroft Group’s Kevin Nealer says that the chances of a no-deal summit between Trump and Xi in Florida at the end of this month are at least 20%.

Finally, I’ve included a couple of fascinating academic articles about cryptocurrencies.  Their number is growing, and this steady increase instills in me the belief that whatever their weaknesses at this stage of development, in one form or another, they are here to stay. 

STORIES IN OUR SPOTLIGHT

Asia & the World 

Analyzing the Trump-Kim Summit
Council on Foreign Relations 2/28/2019 Media Call

North Korea is seen as the next Vietnam. That is not likely. Vietnam is a "very authoritarian state, but they have pretty contested politics within the regime... Being like Vietnam would make it harder for the Kim regime to perpetuate its dynasty."

What Happened in Hanoi?
Joel S. Wit, Jenny Town 2/28/2019 38North

Cogent analysis of the Trump-Kim Summit, and how it ended.

Is the US-China Trade War Entering a Dangerous Endgame?
Nikkei Asian Review 2/28/19 Kevin G Nealer

The chances of a no-deal outcome from a Trump-Xi summit are at least 20%. Keep in mind that one baseline assumption that Trump shares with both trade hawks and doves in his administration is that China is facing the real risk of a sharp decline in growth by the middle of this year.  The odds increased since Trump walked out of the Hanoi Summit.

Where is the U.S.-China Relationship Going?
DiploPod 2/22/2019 Podcast

The most intriguing comment by Asia expert Evan Feigenbaum comes at the very end of this podcast, when he says that the technological decoupling of the US and China could be more significant and disruptive than changes in the trading relationship.

Huawei Frightens Europe's Data Protectors, America Does, Too
Helene Fouquet, Marie Mawad 2/23/2019 Bloomberg

The real digital divide is being created now, and the battle is between nations, not social classes.

China's Monetary Policy Communication: Frameworks, Impact, and Recommendations
McMahon, Michael and Schipke, Alfred and Li, Xiang, 11/2018. IMF Working Paper No. 18/244.  

The weaknesses of central bank communication can reverberate globally, especially with large economies—and not just China.

Averting a Cross-Strait Crisis
Michael S. Chase 2/26/2019 CFR

Taiwan's elections make a cross-strait crisis a growing risk in 2020.

Middle East 
The Kashmir Conflict, Explained
Al Jazeera 2/27/2019 Video

As tensions rise between India and Pakistan, well worth watching this 8-minute video about the history of the conflict in Kashmir. 20th century wars were about oil. This is an example of a 21st century conflict over water.

Iran's Foreign Minister Resigns, in an Instagram Post
Farnaz Fassihi 2/25/2019 MarketWatch

Changes afoot in Iran.

US
Trouble in the Housing Market
John Vail 2/26/2019 Forbes

Housing is stalling out and this could weigh on the US consumer in 2019.  Will the positive wealth effect of the stock market rebound be cancelled out by the dip in property markets?

Must We Settle for Credit Scores?
Karen Petrou 3/1/2019 Federal Financial Analytics

This is a question I have thought about often-do sticky credit scores increase economic inequality? Or as the author asks, "Are banks really so unable to think for themselves?"

The Higher the Degree, the More Likely You are to Hold Multiple Jobs
St. Louis Fed 2/28/2019

I would have thought the opposite.

Macro
Low Interest Rates, Market Power, and Productivity Growth
Ernest Liu, Atif R. Mian, Amir Sufi 2/4/2019 NBER Working Paper

Do falling interest rates increase market concentration and cause productivity rates to fall? A possible answer to the productivity puzzle.

Study suggests a key assumption of economic theory may be wrong
Oxford Martin School 2/20/2019

Always good to challenge our assumptions. Equilibrium is foundational, but could it be wrong?

Cryptocurrencies
Mizuho plans March launch for J-Coin with 60 Japanese Banks
Ledger Insights 2/2019

Friendly reminder that digital currencies controlled by banks are not cryptocurrencies.

Bitcoin Fluctuations and The Frequency of Price Overreactions
Caporale, Guglielmo Maria and Plastun, Oleksiy and Oliinyk, Viktor 2018 CESifo Working Paper No. 7280

This paper investigates the role of the frequency of price overreactions in the cryptocurrency market in the case of Bitcoin over the period 2013-2018 On the whole, the results suggest that it can provide useful information to predict price dynamics in the cryptocurrency market and for designing trading strategies (H1 cannot be rejected), whilst there is no evidence of seasonality (H2 is rejected).

Monetary Policy in a World of Cryptocurrencies
Benigno, Pierpaolo, February 2019. CEPR Discussion Paper No. DP13517.  

Can currency competition including cryptocurrencies destabilize central banks' control of interest rates and prices? Yes, it can.