The Energy Standard - June 16 2019 EconVue Spotlight

There are two reports I always look forward to reading each June: the BP Statistical Review of World Energy, and analyst Mary Meeker’s annual report on Internet trends. For those interested in the art of investment prognostication, a stroll through the archives of Meeker’s reports since 1996 is fascinating. They chart the growth of the Internet and the disruption of global communications that have impacted nearly everything.

However, Meeker did not have a single mention of cryptoassets in her current report. Nor did the BP review. Both ignored a key development: cheap energy and cheap computing have combined to create a new type of global currency, in effect an energy standard reliant upon the existence of the Internet.

One reason I am intrigued by cryptocurrencies is that I believe that the adoption of decentralized technology will have an impact similar to the Internet. It will transform economics, finance, and geopolitics, which are already trending towards increased localization. My litmus test for economists today is knowledge of blockchain and cryptocurrencies, whether they are for or against them. Nouriel Roubini is a critic, but he has taken the time to study, engage, and debate. Too many are blithely dismissive.

Campbell Harvey, the economist whose 1986 thesis posited that inverted yield curves would lead to recession (he has been right so far) has a new paper out that is an excellent introduction to cryptocurrencies. Like them or hate them, no thoughtful person or organization interested in financial innovation can ignore them. Especially central bankers, since cryptocurrencies could someday challenge dollar dominance.

In the near term, Fed policy and China are pressing concerns. US retail sales were much stronger than anticipated, making a rate cut next week highly unlikely. Having watched the “Fed Listens” conference here in Chicago last week, my conclusion is that the Fed should not stop at eliminating dot plots. They should simply stop overcommunicating, or they risk losing perspective on what should be a data-driven approach, as well as the respect and trust of markets.

Coming on the heels of the Mexico cliffhanger, it is anybody’s guess what will happen between Xi Jinping and Donald Trump at the G20 in Osaka at the end of this month. Surely the recent unrest in Hong Kong has been a distraction for the CCP. The reaction to UBS’s report on swine flu points up the highly sensitive nature of both the leadership and food supply issues in China. Chinese exporters have been coping with a high degree of uncertainty and increasing regional competition, and would really like this era to end. Advantage US for now, but much will depend on the flexibility of politicians on both sides. Some things are impossible to forecast.

Federal Reserve chairman Jerome Powell on his way to speak at the Chicago Fed June 4, 2019

STORIES IN OUR SPOTLIGHT

Global

Statistical Review of World Energy
6/2019 BP

So, in answer to the question of why energy demand was so strong in 2018: it appears that the strength was largely due to weather- related effects – especially in the US, China and Russia – together with a further unwinding of cyclical factors in China.

Wanted: Harsh realism at the World Bank
Hilton L Root, 5/21/19 The National Interest

The new World Bank president (David Malpass) should begin his assessment with a strong dose of harsh realism. Other development organizations—like the Asian Infrastructure Investment Bank, BRICS New Development Bank, and Gates Foundation—have emerged with impressive resources, faster processing and more focused agendas. 

Global FDI down in 2018 due to government interventions, Trump, Brexit - U.N.
Tom Miles 6/12/2019 Reuters

The reasons for this fall are bigger than specific events. In spite of initiatives such as China’s Belt & Road, there is an underlying trend to focus on the local--such as Brexit--rather than the global.

$11.6T in bonds now pay negative interest rates, double the amount since last October
Lisa Abramowicz 6/7/2019 The Terminal (Bloomberg)

Communicable Disease: Information, Health, and Globalization in the Interwar Period
Heidi J. S. Tworek 6/4/2019 the American Historical Review

Fascinating article about the evolution of global health between the two World Wars, and the role of communications in communicable disease. 

Under Modi 2.0, Will India Embrace Tough Economic Reforms?
5/28/2019 Wharton Business School, University of Pennsylvania

The results of the latest election show that India’s voters are willing to shrug off the lackluster economic performance of the Modi government’s first term and give him a second chance.

The Future of the US-Australia Alliance in an Era of Great Power Competition
Dr Charles Edel and Dr John Lee 6/13/2019 the US Studies Center at the University of Sydney

The challenges China poses to the US-Australian alliance, areas of convergence and divergence, and recommendations for how Washington & Canberra can bridge the gap.

Technology and Fintech

Mary Meeker's 2019 Internet Trends Report
Mike Murphy 6/11/2019 Quartz

More than 50% of the world’s people are now connected, but for the first time, smartphone shipments are down.  Have we reached peak mobile?

Understanding Cryptocurrencies
Härdle, Wolfgang K. and Harvey, Campbell R. and Reule, Raphael C. G., (March 26, 2019).

Litecoin Is Suddenly Rocketing, Boosting Bitcoin, Ethereum And EOS--Here's Why
Billy Bambrough 5/24/2019 Forbes

You might not buy a pizza with bitcoin. You might with Litecoin.

Jack Dorsey says now is our chance to build a currency for the Internet
John Detrixhe 6/14/19 Quartz

The founder of Twitter and Square thinks that Bitcoin will be the global currency of the Internet.

U.S.

Forecasts of Economic Growth from the Stock and bond Markets
Harvey, Campbell R. Financial Analysts Journal 45, no. 5 (1989): 38-45.  

Foundational research on the relationship of inverted yield curves as predictors of recession. Bonds, not stocks, are indicative.

Powell Will ‘Open Door’ to a Rate Cut But Won’t Step Thru ($)
Michael Lewis 6/14/2019 Freemarket

Following today’s strong May retail sales results, including substantial upward revisions to April, remaining speculation that the FOMC will cut rates at next week’s meeting has all but vanished. However, most analysts and the Fed futures market are expecting Powell and Co. to “open the door” to a rate cut in July followed by some further ease(s) in coming months.

Why Universal Basic Income Is a Bad Idea
Daron Acemoglu 6/7/2019 Project Syndicate

In the US a UBI of just $1,000 per month would cost around $4 trillion per year--close to the entire federal budget in 2018.

Crop Prices and Flooding: Will 2019 Be a Repeat of 1993?
Kevin Kliesen, 6/6/2019 St. Louis Fed

Dallas Fed President Wants to See if Trade Tensions Ease Before Considering Rate Cut
Nick Timiraos  6/4/2019 Wall Street Journal

Inflation in food prices and energy could come roaring back, due to weather and geopolitical events that could drag down supplies.

Does Employment-Based Insurance Make the US Medical Care System Unfair and Inefficient?
5/9/2019 JAMA

60% of Americans have employment-based health insurance and the "contribution made by employers to the premium is exempt from the employees’ taxable income. This exemption cost the US Treasury an estimated $300 billion in 2018.”

Warren Calls for ‘Actively Managing’ Dollar Value to Boost Jobs
Sahil Kapur and Saleha Mohsin 6/4/2019 Bloomberg

One question: Managed how? 

The U.S. labor market in 2050: Supply, demand and policies to improve outcomes
Harry J. Holzer 5/31/2019 Brookings Institute

Likely winners and losers in the job market over the next 30 years. Basic finding: education at all stages of life matters. 

China

China has an unemployment problem
Martin Hart-Landsberg 3/14/2019 MR Online

There are lots of articles and commentary about the Chinese economy, especially recently with attention focused on China’s declining rate of growth. But have you noticed that there is rarely any mention of China’s unemployment rate?

China's headline inflation rose to 2.7% in May, the highest since February 2018, as food prices spike 7.7%
Jeroen Blokland 6/11/2019 Twitter post

Inflation rises as unemployment climbs.  Food is a much larger percentage of household spending in China than in the US.

After Swine Fever, China’s Farmers Battle Corn-Devouring Pest
Matthew Walsh 6/5/2019 Sixth Tone

China Has Lots of Policy Room If Trade War Worsens, PBOC Chief Says
6/6/2019 Bloomberg

“For the Yuan, no number is more important than any other.”  But if tariffs continue, the temptation or necessity to devalue will increase.

The Belt and Road Is Overhyped, Commercially
Derek Scissors, AEI. 6/12/19 Testimony: US Senate Finance Committee

China's BRI presently depends on American consumers buying Chinese products and can be paralyzed for an extended period just by making those products more expensive.

China warns of growing difficulties facing students in US
Lucy Hornby and Archie Zhang 6/3/2019 Financial Times

China warns of growing issues facing students visiting US. This will have a major impact on the US education industry. 

Scientists caught in U.S. crackdown on China
Jon Cohen & David Malakoff 5/31/2019 Science Magazine

Three more senior scientists have been caught up in the crackdown on researchers who receive U.S. government funds and allegedly fail to disclose ties to China. 

WeChat Is Watching
Barclay Bram 6/13/2019 Nautilus

Living in China with the app that knows everything about me. 

Back to energy in all of its forms. Today, as tens of millions are without electricity in Latin America, candles are burning into the night in Hong Kong. Record crowds (two million) demand the resignation of Chief Executive Carrie Lam, which now seems inevitable.