Uh Oh! Another Pandemic Is Coming Our Way

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A terrifying virus has been rapidly spreading through Brazil; it’s now migrating north and appears almost certain to arrive in the US later this year. Pregnant women should take notice.

AP061116064843-0824

The Zika virus, so named because it was first identified in Uganda’s Zika Forest in the 1940s, has been wreaking havoc in Brazil. The government estimates that 1.5 million Brazilians have been infected in the last 8 months.

For most, the mosquito-borne Zika virus is not particularly dangerous. Symptoms include fevers, red rashes, and pink eye; up to 80% of people infected with the virus experience no symptoms. But the real problem is not with children or adults; it’s with the newborn babies born to infected women.

These babies have shown high rates of microcephaly, a horrible neurological disorder in which infants are born with an abnormally small brain. The condition usually results in death or cognitive impairment. In 2014, Brazil had fewer than 200 cases of microcephaly; in 2015, as the Zika virus spread, approximately 3000 cases were recorded. Several areas in Brazil have declared a state of emergency. This is the first time the condition has been linked to the virus, for which there is no vaccine.

Brazil-microcephaly-AP

Because of the apparent danger to fetuses, women in several countries are being urged to delay having children. In Colombia, Ecuador, and Jamaica, officials have cautioned women against pregnancy; and in El Salvador, the government is urging women to wait for up to two years before getting pregnant. If the advice is followed, it’s possible that population trajectories in these countries might materially differ from prior projections.

Zika virus infections have occurred across the Americas, including in Brazil, Venezuela, Colombia, Mexico, and Puerto Rico. On Monday, the World Health Organization warned that the virus would likely spread through most of  North and South America, including the United States.  Officials are increasingly concerned that the virus could spread rapidly in the US this summer, particularly in the swampy, mosquito-dense Gulf Coast region. The Zika virus would join a number of mosquito-borne diseases, including dengue, West Nile, and chikungunya, that have reached the US in recent decades.

Pronouncements guiding pregnant women away from infected areas are increasingly common. Expect more guidance to emerge. The US Center for Disease Control (CDC) has cautioned pregnant women to "consider postponing travel to any area where Zika virus transmission is ongoing.” This includes countries in the Caribbean such as the US Virgin Islands, Puerto Rico, Barbados and St. Martin. There are currently more than 20 countries identified by the CDC with Zika cases.

Why is this happening? First, there’s globalization and urbanization. Researchers recently argued in the New England Journal of Medicine that "urban crowding, constant international travel, and other human behaviors combined with human-caused micro-perturbations in ecologic balance can cause innumerable slumbering infectious agents to emerge unexpectedly.  Second, there’s climate change, which might contribute to outbreaks of viruses like Zika by allowing pathogen-bearing mosquitos to expand into newly-warmed territory. They have larger regions in which to expand for longer seasons.

As the global public health community scrambles to develop a means to address the Zika threat, let’s not forget that our actions fighting the virus today are going to have long-lasting economic ramifications. Case in point: Brazil.

Just think about the upcoming summer Olympics that begin in Rio de Janeiro this August. Scientists are already urging pregnant women to consider skipping the games. If the virus has not been contained by this summer, it could cast a dark cloud over an already-struggling Olympics and a battered Brazilian economy. As the country fights a severe recession and political chaos, a rapidly spreading pandemic of a terrifying virus is a particularly unwelcome development.

There’s also the population impact of delayed and discouraged pregnancies. Cautioning entire cohorts of women to put off childbearing for years could impact the demographic trajectories of countries, adversely affecting their economic prospects. In a region like South America, where birthrates are already plummeting, a one-off decline in birth rates could only accentuate the economic pain of such a demographic transition.

The Zika virus has the potential to impact emerging markets, demographics, and even Caribbean tourism. It’s simply too important to ignore, and for anyone seeking to navigate our increasingly uncertain future, it’s critical we constantly scan the horizon for potential needle-moving developments. Zika appears to be one. I hope I’m wrong.

 

 

 

Can the Fed Really Fight Global Conditions?

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Last month, I suggested the Fed’s decision to embark on a course of rate hikes might have to be reversed due to forces outside its control. Recent events in the global economy are making this reversal increasingly likely.

The S&P 500 and Down Jones Industrial Average saw their worst two-week starts to a year on record, each falling by about 8 percent this year. The NASDAQ was down 10%.  These drops have come amid plunging oil prices and growing concerns about the Chinese economy.

Oil prices dropped to their lowest levels since 2003. Supply currently exceeds demand by over a million barrels a day, driven by OPEC’s refusal to curb output and continued strong American production. The introduction of Iranian oil into the world market following the removal of sanctions threatens to make the situation worse. These low oil prices are stoking fears that US oil companies may face a severe credit crunch.

Meanwhile, China is adding to global economic uncertainty, with a chaotic start to the year in their financial markets. In early January, sharp dips in Chinese stocks tripped circuit breakers, halting trading. The Shanghai market is down double-digits year to date. Earlier this week, Chinese officials announced their economy had grown 6.9% in 2015, the slowest growth rate in 25 years. The IMF predicts that this rate will slow to 6.3% in 2016 and 6.0% in 2017.

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Rising risk of political instability throughout the world has also made investors nervous.  Low oil prices have generated record budget deficits in Saudi Arabia, forcing the government to cut social spending, prompting the specter of a popular backlash. South Africa is also facing increasing risk of political instability, as low commodity prices and China’s slowdown have driven a plunge in the Rand, anemic economic growth, and high unemployment rates.

Moreover, over a million refugees entered Europe last year, generating populist pressures across the region.  Both Angel Merkel and Jean-Claude Juncker have warned publicly that a brash response to the crisis could fatally wound the European experiment.  As I've noted before, I think we will either see a United States of Europe or a disintegration of the union.  It's not sustainable as it is.

All these factors have lead to renewed fears of spreading recessions and a global economic slowdown. The IMF lowered its forecast for global growth in 2016 to 3.4%.

In the background of this fragility lies what the Financial Times’ Martin Wolf calls “chronic demand deficiency syndrome,” summarized by a condition in which "it has proved impossible to generate enough demand to absorb potential global supply” without very aggressive monetary policy and asset-price inflation. With too much supply and inadequate demand, inflation remains persistently low.  At this stage of the economic cycle, an increase of productivity could actually be quite harmful, since it offers the prospect of efficiently producing more supply, not exactly what we need in a world of too much capacity.


At this stage of the economic cycle, an increase of productivity could actually be quite harmful.


Here at home, data released since the Fed’s December rate hike aren’t too rosy. Retail sales, industrial production, and business inventories fell last month. And analysts fear that the increase in market volatility and talk of recession risk could spook consumers, contributing further to a slowdown in US growth.  Inflation, supported by falling oil prices, remains well contained.

All of this turmoil and rising pessimism follow the Fed’s December decision to raise its key interest rate to .25%, and suggest that four more hikes would follow in 2016, starting in March 2016. But just last week, the president of the Boston Fed announced publicly that weaker than expected growth in the US and abroad could alter the trajectory of rate hikes. Currently, markets do not expect the Fed to act again until June.

A lot will happen between now and March that could shift expectations in either direction. The key is to remember that the Fed faces the same radical uncertainty as everyone else, and its plans are subject to the same chaotic forces that affect us all.  But given what I see in the world today, I think the answer to the title of this article is "probably not."

I’m Playing Powerball…and Why You Should Too

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With no jackpot winners this past weekend, the Powerball jackpot recently jumped to $1.4 billion—the largest in human history—for Wednesday evening's drawing. The standing Powerball record is $590.5 million, won in 2013 by a retiree in Florida.  That record may be broken this week.

Lottery Balls

The huge jackpot has generated quite the buzz, with just about every media outlet talking about it.  Most have highlighted the long odds: the chances of winning are one in 292 million.  But with a $2 ticket price, it would "only" cost $584 million to buy up every possible drawing for a guaranteed win. Given the jackpot is more than twice that cost, shouldn’t we go for it?  Doesn't this mean the expected value of a ticket is greater than its cost?

Unfortunately, there are confounding factors. As ever-rational PBS Commentator Paul Solman points out, we need to keep two important factors in mind.  First, the headline value of $1.4 billion (before taxes) only holds if winners take an annuity. If a jackpot winner took a lump sum, he or she would win, before taxes, $868 million. That's the present value of the jackpot's stream of annual payments.

And secondly, notes Paul, there are taxes.  Uncle Sam will take around 40%, and many states and local governments will want their share as well.  Even if you win in a tax-free state, the jackpot value falls to under the the breakeven value of $584 million.  You also have to factor in the possibility that even if you do win the jackpot, others will win it alongside you, sharing your prize.

What are the chances of someone else winning?  Well, that's based on the number of people playing, and this weekend's jackpot demonstrated that big jackpots draw big interest.  At its peak before Saturday’s drawing, 600,000 tickets worth $1.2 million were being sold every minute.  Through this frenetic activity, 75% of all possible number combinations were sold before last Saturday’s drawing.  Yet no one won.  Let's just say the math gets complex very quickly and requires data that I don't have; but it definitely reduces the expected value of your $2 ticket.  There is also a positive adjustment we need to make, namely that you can win lesser prizes, but they don't really move the needle.

Despite this data, why am I buying tickets?  Because the numbers miss a very obvious and valuable part of my decision calculus.  It's fun and exciting!  And it's a cheap thrill with limited risks.  Buying tickets generates endorphins and the anticipatory joy of possibly winning (even though I know it's very unlikely) are worth well more to me than the $2 per ticket.

If you're still not convinced, why not play along with me?  Here's a picture of the tickets I just purchased.

lottery

Here's what I ask: Note your emotional reaction when you check the winning numbers against my five tickets.  And oh, if I've won and you'd like to find me, don't bother emailing or calling.  Head to the Caribbean.  You'll find me by the ocean with a cocktail in hand.

I don’t gamble in Las Vegas to win money—I expect to lose money, viewing it as the cost of entertainment.  The same is true for me with the lottery.  So as I play  Powerball this week, I’m doing it for the rush, the minor escape from life's daily grind.  I suggest you do so as well.  You may enjoy it.  And who knows, you may actually win something!  Good luck, and have fun.

 

16 Predictions for ’16-’21

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2015 was a roller coaster of a year for analysts of global economics and politics. Terrorist tragedies from the US and France to Nigeria and Iraq shocked us, Nepal suffered a devastating earthquake, and Volkswagen’s massive fraud surfaced.  A million migrants flowed into Europe, and a nuclear deal was reached with Iran.  The US and Cuba made progress in restoring relations, and Donald Trump grabbed global headlines.  Nations reached a new set of climate accords in Paris, and the Islamic State persisted.  China’s slowdown continued, it ended its one-child policy, and energy and industrial commodity prices stayed lower than expected.  And of course, the Fed began its effort to normalize interest rates.

How can we possibly navigate the radical uncertainty presented by this chaotic tangle of events and trends? Some use a Magic 8 ball, while others turn to Ouija boards. I’m more conventional. Rather than try to predict what will happen in the coming year—to me, a fool’s errand, due to the short time-horizon—I try to look through the noise by analyzing structural signals and making predictions over a five-year window.  Last year, I made 15 Predictions for 2015-2020. But as noted by the late Yogi Berra, “The future ain’t what it used to be!” So I’ve incorporated feedback from last year into my predictions for the next five years.

2016-2021 Predictions

  1. China posts a GDP growth rate below 5% before a consumption boom re-accelerates the economy. Animal protein demand skyrockets. In the meantime, saber rattling in the South China Sea and towards Taiwan and Japan aim to distract popular attention away from domestic economic matters, but rising unrest and economic insecurity call the long-term viability of the Chinese Communist Party’s rule into question.
  2. In Australia, low prices for industrial commodities drive budget deficits, generating additional volatility in economic growth and the Australian dollar. Exports ultimately rebound thanks to growing Chinese demand for consumer goods and services, but housing prices in Melbourne and Sydney correct amidst slower inbound immigration.
  3. Low oil prices spur a transition to consumption-led growth in many emerging nations.  Formerly hedged North American producers find themselves losing money and (temporarily) shut down. OPEC eventually curtails production, and tensions escalate in the Arctic over seemingly large resources. Coal markets suffer but don’t disappear. Oil ultimately rebounds as rising Middle Eastern instability combines with aggressive investment cutbacks. Fusion emerges as a viable long-term alternative energy source.
  4. In Canada, the combination of high household debt, high home prices, and anemic job growth due to low oil prices leads to stubbornly persistent economic stagnation.  An emerging market consumer boom eventually drives Saskatchewan real estate prices as potash prices rise dramatically.
  5. In Africa, a growing middle class booms, boosting consumption and driving higher food prices worldwide.  Low oil prices force Nigeria’s economy to diversify away from commodities and towards services. High unemployment and domestic unrest continue in South Africa, leading the once dominant ANC to lose ground, power, and legitimacy. Ethiopia’s Grand Renaissance Dam spurs a water war.
  6. The current technology bubble deflates even as a few champions of the sharing economy enter the Fortune 500.  The biggest casualty proves to be employees of naked unicorns as venture capitalists and institutional investors utilize ratchets to limit their losses.  The Internet of Things takes off, generating concerns from privacy and security experts alike. Calico becomes the world’s hottest company.
  7. A Robolution in Manufacturing massively increases productivity and also decreases employment. Robots prove deflationary as the labor component of goods drops and the fall in aggregate workers’ income reduces demand for the very goods the robots make.  The markets for drones, driverless vehicles, and industrial robots boom.
  8. Saudi Arabia faces rising domestic unrest and regime-threatening instability. Regional tensions escalate, distracting the regime from addressing domestic concerns. Due to oil price pressures, the government cuts budgets for social services, giving momentum to demands for increased freedoms.
  9. Despite initial success, Prime Minister Modi’s “Make in India” campaign proves ill-timed, as productivity gains in automated manufacturing make the Chinese development model obsolete. Speculation arises that India may never emerge as the economic powerhouse it was once generally assumed it would become. Leaders discuss the possibility of demographic controls.
  10. Cyber risks continue to rise as a top concern for global boardrooms. Financial regulators begin mandating independent information audits comparable to today’s financial audits. National governments create military-like cyber teams to hunt down and bring cyber-terrorists to justice, but they are not able to avert a destabilizing attack on critical infrastructure.  Ted Koppel’s Lights Out proves prophetic.
  11. Japan acknowledges its demographic problem and opens the doors to immigrants. It begins allowing Southeast Asian healthcare workers (nurses from the Philippines?) to care for the elderly. Economists come to understand that the older Japanese population, living on fixed incomes, actually prefers deflation.
  12. The United States of Europe fails to congeal as expected. The refugee crisis hastens the disintegration of the attempt at political and monetary union. Even as some countries see refugees as demographic saviors, nationalism rises in others. Separate currencies emerge.
  13. Central bankers struggle to unwind quantitative easing without generating massive instability. Equities suffer, credit markets tremble, and gold surges as investors lose confidence in responsible central banking. Martin Wolf’s “chronic demand deficiency syndrome” worsens leading economists to question the usefulness of productivity. The Fed finds it can’t raise rates as much as it has planned and eventually reverses course.
  14. In the wake of 2014’s successful containment of the Ebola virus, a new epidemic (MERS?) rears its ugly head. The global public health community again scrambles (and again succeeds) to avert a disaster that might have threatened millions of lives. Despite more health-conscious border control efforts, healthcare continues to globalizeCuba’s economy accelerates on the back of strong medical tourism from the United States.
  15. The Pacific Alliance, a trading bloc centered on Colombia, Chile, Mexico, and Peru, grows its profile and emerges as Asia’s preferred economic entry point into Latin America.  Mexico tries to deal with its corruption problem and makes progress towards establishing rule of law. The Colombia peace talks are ultimately successful, resulting in the end of the 50+ year civil war.
  16. Whoever wins the 2016 US presidential election, the American people are sorely disappointed and vote with their feet in the 2018 midterm elections, resulting in a rapid and unexpected swing of control in Congress.

 

As I mentioned in last year’s predictions, it’s worth recalling the prescient words of John Kenneth Galbraith: “There are two types of forecasters: those who don’t know and those who don’t know they don’t know.” I’ll let you decide which I am, but I do hope these 16 ideas provoke thought!

Please feel free to forward the following link to colleagues, friends, or anyone you know who may have an interest in these ideas!  https://www.linkedin.com/pulse/16-predictions-16-21-vikram-mansharamani

 

16 Predictions for ’16-’21

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internet-2025

2015 was a roller coaster of a year for analysts of global economics and politics. Terrorist tragedies from the US and France to Nigeria and Iraq shocked us, Nepal suffered a devastating earthquake, and Volkswagen’s massive fraud surfaced.  A million migrants flowed into Europe, and a nuclear deal was reached with Iran.  The US and Cuba made progress in restoring relations, and Donald Trump grabbed global headlines.  Nations reached a new set of climate accords in Paris, and the Islamic State persisted.  China’s slowdown continued, it ended its one-child policy, and energy and industrial commodity prices stayed lower than expected.  And of course, the Fed began its effort to normalize interest rates.

How can we possibly navigate the radical uncertainty presented by this chaotic tangle of events and trends? Some use a Magic 8 ball, while others turn to Ouija boards. I’m more conventional. Rather than try to predict what will happen in the coming year—to me, a fool’s errand, due to the short time-horizon—I try to look through the noise by analyzing structural signals and making predictions over a five-year window.  Last year, I made 15 Predictions for 2015-2020. But as noted by the late Yogi Berra, “The future ain’t what it used to be!” So I’ve incorporated feedback from last year into my predictions for the next five years.

2016-2021 Predictions

  1. China posts a GDP growth rate below 5% before a consumption boom re-accelerates the economy. Animal protein demand skyrockets. In the meantime, saber rattling in the South China Sea and towards Taiwan and Japan aim to distract popular attention away from domestic economic matters, but rising unrest and economic insecurity call the long-term viability of the Chinese Communist Party’s rule into question.
  2. In Australia, low prices for industrial commodities drive budget deficits, generating additional volatility in economic growth and the Australian dollar. Exports ultimately rebound thanks to growing Chinese demand for consumer goods and services, but housing prices in Melbourne and Sydney correct amidst slower inbound immigration.
  3. Low oil prices spur a transition to consumption-led growth in many emerging nations.  Formerly hedged North American producers find themselves losing money and (temporarily) shut down. OPEC eventually curtails production, and tensions escalate in the Arctic over seemingly large resources. Coal markets suffer but don’t disappear. Oil ultimately rebounds as rising Middle Eastern instability combines with aggressive investment cutbacks. Fusion emerges as a viable long-term alternative energy source.
  4. In Canada, the combination of high household debt, high home prices, and anemic job growth due to low oil prices leads to stubbornly persistent economic stagnation.  An emerging market consumer boom eventually drives Saskatchewan real estate prices as potash prices rise dramatically.
  5. In Africa, a growing middle class booms, boosting consumption and driving higher food prices worldwide.  Low oil prices force Nigeria’s economy to diversify away from commodities and towards services. High unemployment and domestic unrest continue in South Africa, leading the once dominant ANC to lose ground, power, and legitimacy. Ethiopia’s Grand Renaissance Dam spurs a water war.
  6. The current technology bubble deflates even as a few champions of the sharing economy enter the Fortune 500.  The biggest casualty proves to be employees of naked unicorns as venture capitalists and institutional investors utilize ratchets to limit their losses.  The Internet of Things takes off, generating concerns from privacy and security experts alike. Calico becomes the world’s hottest company.
  7. A Robolution in Manufacturing massively increases productivity and also decreases employment. Robots prove deflationary as the labor component of goods drops and the fall in aggregate workers’ income reduces demand for the very goods the robots make.  The markets for drones, driverless vehicles, and industrial robots boom.
  8. Saudi Arabia faces rising domestic unrest and regime-threatening instability. Regional tensions escalate, distracting the regime from addressing domestic concerns. Due to oil price pressures, the government cuts budgets for social services, giving momentum to demands for increased freedoms.
  9. Despite initial success, Prime Minister Modi’s “Make in India” campaign proves ill-timed, as productivity gains in automated manufacturing make the Chinese development model obsolete. Speculation arises that India may never emerge as the economic powerhouse it was once generally assumed it would become. Leaders discuss the possibility of demographic controls.
  10. Cyber risks continue to rise as a top concern for global boardrooms. Financial regulators begin mandating independent information audits comparable to today’s financial audits. National governments create military-like cyber teams to hunt down and bring cyber-terrorists to justice, but they are not able to avert a destabilizing attack on critical infrastructure.  Ted Koppel’s Lights Out proves prophetic.
  11. Japan acknowledges its demographic problem and opens the doors to immigrants. It begins allowing Southeast Asian healthcare workers (nurses from the Philippines?) to care for the elderly. Economists come to understand that the older Japanese population, living on fixed incomes, actually prefers deflation.
  12. The United States of Europe fails to congeal as expected. The refugee crisis hastens the disintegration of the attempt at political and monetary union. Even as some countries see refugees as demographic saviors, nationalism rises in others. Separate currencies emerge.
  13. Central bankers struggle to unwind quantitative easing without generating massive instability. Equities suffer, credit markets tremble, and gold surges as investors lose confidence in responsible central banking. Martin Wolf’s “chronic demand deficiency syndrome” worsens leading economists to question the usefulness of productivity. The Fed finds it can’t raise rates as much as it has planned and eventually reverses course.
  14. In the wake of 2014’s successful containment of the Ebola virus, a new epidemic (MERS?) rears its ugly head. The global public health community again scrambles (and again succeeds) to avert a disaster that might have threatened millions of lives. Despite more health-conscious border control efforts, healthcare continues to globalize.       Cuba’s economy accelerates on the back of strong medical tourism from the United States.
  15. The Pacific Alliance, a trading bloc centered on Colombia, Chile, Mexico, and Peru, grows its profile and emerges as Asia’s preferred economic entry point into Latin America.  Mexico tries to deal with its corruption problem and makes progress towards establishing rule of law. The Colombia peace talks are ultimately successful, resulting in the end of the 50+ year civil war.
  16. Whoever wins the 2016 US presidential election, the American people are sorely disappointed and vote with their feet in the 2018 midterm elections, resulting in a rapid and unexpected swing of control in Congress.

As I mentioned in last year’s predictions, it’s worth recalling the prescient words of John Kenneth Galbraith: “There are two types of forecasters: those who don’t know and those who don’t know they don’t know.” I’ll let you decide which I am, but I do hope these 16 ideas provoke thought!

 

Vikram Mansharamani is a Lecturer at Yale University in the Program on Ethics, Politics, & Economics. He is the author of BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst (Wiley, 2011). Visit his website for more information or to subscribe to his mailing list.  He can also be followed on Twitter or by liking his Page on Facebook.

 

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