On stagnation in Italy, GE’s dividend, the weak yuan, and a rudderless Germany

I want to start today’s daily with the markets and the real economy before I branch out into more political economy including Germany.

European economic numbers

And since I mentioned Germany, let me start there. A slew of economic data came out in Europe this morning on GDP, retail sales, employment and inflation. The composite picture is one of a still healthy economy, with inflation, if anything, slightly higher than desired. To me this means that the ECB will continue to signal a wind down of stimulus.

In Germany, we got unemployment in line with expectations but the CPI running ahead of expectations at 2.5%. 2.3% was expected. Elsewhere, Spanish CPI inflation came in bang on expectations at 2.3% as well. Again showing that inflation above the 2% is alive and well in the eurozone. Eurozone GDP came in light though, at 1.7% year-on-year. And that was below expectations for 2.2%. On the whole, though, I look at all of the data as a push for policymakers, meaning it will have no big impact on decisions.

The big worry, of course, is Italy. GDP showed no growth quarter-on-quarter. And the numbers are only up 0.8% on the year. That’s weak. And it’s what’s behind the Italian government’s desire to add stimulus to their budget. Today, Italy got off a 5-year BTP debt offering at 2.58%. That compares unfavourably to the previous 2.03%. The 10-year BTP deal came in at 3.36%, up from the last deal at 2.90%. So, while these rates are lower than the recent peak. It shows you that Italy is still a problem child for the eurozone, both in terms of growth and in terms of market perception of credit risk.

The US markets and numbers

I would concentrate on the markets in the US because the price action shows dissipating volatility. All equity markets are up as are Treasury yields, as the flight to safety gets unwound. The yield curve does continue to flatten though. And that’s a bear flattening to 26 basis points between the 2- and the 10-year. I think this is the main trend – predicated on weakening growth – which has reasserted itself now that the bout of volatility seems to be mostly over. I would also point out the fall in WTI, Brent and Gasoline prices as a signpost of potential weakening demand.

The second issue I would flag here is housing. According to the S&P CoreLogic Case-Shiller National Home Price Index, annual house price gains fell below 6% for the first time in a year in August. This is a lagged survey. So the data for September and October are likely worse given more recent data we have seen. Overall, Case-Shiller says the slowdown in housing market is widespread and will persist in the months ahead. Expect this to have a negative impact on consumer spending due to the lack of a housing ATM, which had asserted itself as house price gains were buoyant.

Interestingly, I saw that US consumer confidence rose in October to an 18-year high of 137.9 according to the conference board. I see this as bad news actually because levels this high are contrarian indicators. The numbers could go higher, just as jobless claims have persistently diminished to record lows. But initial claims today aren’t comparable to yesteryear due to different requirements regarding who can file. I assume the Conference Board data doesn’t suffer from those same data anomalies. And that means we should anticipate mean reversion.

Watch out for dividend stocks

I also wanted to flag GE separately here because they cut their dividend massively. The dividend is now a token 1 cent amount. And GE said federal regulators had opened a criminal probe of its accounting practices. Clearly, they are in big trouble.

One way to look at GE is as a special case with longstanding problems specific to GE. But the broader point that GE demonstrates has to do with the safety of dividends. When the market fall, dividend yields will go up. At the same time, a flight to safety will make Treasury yields go down.

The temptation then would be to look at the dividend yields as making equities a better bet than bonds. But companies can cut their dividends. And so, you will need to be clear as to how safe those dividends really are. I reckon Apple’s dividend is safe. And perhaps Chevron’s is too. But what about bank stocks, utilities, REITs, master limited partnerships? Are their payouts safe? You will need to go through their accounts and take it on a case by case basis when this economy turns down.

China Sets Official Yuan Rate at Weakest in a Decade

China guided the yuan to its weakest official level in a decade on Tuesday—a move that could fuel expectations of a further, self-reinforcing slide.

The yuan’s depreciation puts pressure on Chinese policy makers, who want to give investors a bigger say in determining the currency’s value but appear uncomfortable with letting the yuan fall beyond a symbolic seven to the dollar. The recent slide has reignited speculation about whether further weakness could spark capital flight, which would in turn exacerbate the currency’s swoon.

On Tuesday, the central bank set the dollar’s reference rate at 6.9574 yuan, putting the Chinese currency at its weakest since May 2008. The yuan slid to a decade low once mainland trading started 15 minutes later, with one dollar buying as many as 6.9724 yuan, according to Wind.


The weakness of the Chinese currency continues to be a concern. 7 yuan to the dollar is the magic number. When we hit that level, which I believe we eventually will, let’s see what the market and political reaction is.

Big tech will soon be in regulatory and tax hell

The U.K. said it will move ahead with plans to introduce a first-of-its-kind tax on locally generated revenue by large technology firms—the most concrete attempt yet by an industrialized nation to rewrite the world’s tax code for the digital era.

The new tax comes as dozens of other countries are contemplating similar levies on digital services sold by companies such as Alphabet Inc.’s, Google and Facebook Inc. These governments are hoping to capture more revenue from such services as economic activity increasingly shifts online.

At issue is how governments collect taxes from the handful of tech firms, many based in the U.S., that have morphed into global, digital consumer-services giants. As they have grown, governments outside their home jurisdictions have struggled with the digital nature of their wares in coming up with an appropriate level of local tax to levy.

Big American tech firms have been criticized for reporting relatively little of their profit in local jurisdictions, opening them up to scrutiny. An international effort among rich nations to help standardize how and where to tax these digital services has been progressing slowly. The U.K. on Monday said it could no longer wait. As part of its annual budget, it said it was moving ahead with a plan to begin a digital tax for large tech firms by 2020.

The government of Spain proposed a similar digital-services tax this month, but that measure requires parliamentary approval.

The new U.K. tax puts pressure on big countries, including the U.S., to speed up the global effort. The Organization for Economic Cooperation and Development, a forum of wealthy countries, has been leading the international digital-tax talks.


This is a huge threat to the income these companies earn and report. Multinational lobbyists have held these efforts at bay for a long time. But the tech giants make a great target for revenue-starved governments looking to give their electorates something that shows they are being fair in taxing corporates.

Trump wants to terminate birthright citizenship

President Trump plans to sign an executive order that would remove the right to citizenship for babies of non-citizens and unauthorized immigrants born on U.S. soil, he said yesterday in an exclusive interview for “Axios on HBO,” a new four-part documentary news series debuting on HBO this Sunday at 6:30 p.m. ET/PT.

Why it matters: This would be the most dramatic move yet in Trump’s hardline immigration campaign, this time targeting “anchor babies” and “chain migration.” And it will set off another stand-off with the courts, as Trump’s power to do this through executive action is debatable to say the least.


My take: Some 25 years ago, I was co-head of the US visa section in Bonn, Germany. Most applicants were non-Germans going on holiday because Frankfurt handled immigration. One day, I interviewed a German woman who wanted a non-immigrant (tourist) visa (NIV) so she could have a child in the US and confer US citizenship on the child. We were counseled in training that all applicants for NIVs should be considered potential immigrants under paragraph 214(b) of the US Immigration and Nationality Act (INA) of that time – unless they could show evidence that they did not wish to immigrate to the US.

As I recall it, this woman showed me her bank account information, a note from her employer giving her time off to have the baby in the states and a guaranteed position when she returned and a bunch of other evidence that made clear that her only reason for going was to have the child and leave. She also had insurance so that she would not become a burden on US taxpayers. I issued her the visa. Under law, she qualified for it.

Personally, I think birthright citizenship for US citizens and legal residents of the US is the right approach. But, I had a strongly negative reaction to this German woman’s desire to use America’s birthright citizenship for anyone, including tourists or non-residents, to make her child an American citizen. Should the laws change to stop that? If so, we need a constitutional amendment. This executive order stuff gives the executive too much power and must be curtailed.

WWF Report Reveals Staggering Extent of Human Impact on Planet

  • Populations of mammals, birds, fish, reptiles, and amphibians have, on average, declined in size by 60 percent in just over 40 years.
  • The biggest drivers of current biodiversity loss are overexploitation and agriculture, both linked to continually increasing human consumption.
  • Given the interconnectivity between the health of nature, the well-being of people and the future of our planet, World Wildlife Fund (WWF) urges the global community to unite for a global deal for nature and people to reverse the trend of biodiversity loss.

Humanity and the way we feed, fuel and finance our societies and economies is pushing nature and the services that power and sustain us to the brink, according to WWF’s Living Planet Report 2018. The report presents a sobering picture of the impact of human activity on the world’s wildlife, forests, oceans, rivers and climate, underlining the rapidly closing window for action and the urgent need for the global community to collectively rethink and redefine how we value, protect and restore nature.

World Wildlife Fund

On to politics:

Merkel’s Out. Now What?

I watched and read German news media yesterday regarding Angela Merkel’s decision to stand down as party leader and to not seek re-election as Chancellor. The long and short of it is that Merkel’s decision puts her in the same untenable position Gerhard Schröder was in when he did the same in 2004 as Chancellor and head of the SPD.

Merkel said at the time that it was the “beginning of the end” of his Chancellorship. And indeed he was forced out after a general election in 2005, which saw Merkel become Chancellor of Germany. I think we should say the same about Merkel here as well, that this is the beginning of the end of her Chancellorship. And what that essentially means is that her position as Chancellor is weakened. Her ability to act as a leader is weakened. I think it is likely that she won’t make it to 2021.

Now, the New York got a list of the likely successors to Merkel as Party Chair from the German media. And one of those people is likely to take over in December. So, from December onward, Merkel will be Chancellor, but not Chairwoman of her party. But, none of the names on that list have any resonance outside of Germany. And none of them is really a household name within Germany. None. The closest is Friedrich Merz, a former Member of the European Parliament, a former member of the Bundestag, and a former chairman of CDU/CSU parliamentary group. Merz was last in the Bundestag in 2009.

Conclusion: Germany is in for some tough sledding. There will definitely be turmoil if we have an election anytime soon because no one is ready to lead after Merkel. And the SPD realize that their position in a Grand Coalition with Merkel is untenable if they want to hold onto voters. Once they get their platform ironed out, they will want to force an election sooner than later.

Last one. On politics also

Again, nowhere in the advanced Western world outside of the US do you see the kind of voter suppression you see in the US. The concept that you pay for your crime by going is universal. And in many countries, prison is seen as a chance for rehabilitation. But in the US, prison is mostly seen as punishment. And, in some states like Florida, even after you go to jail that punishment doesn’t end. You get stripped of your most basic right as a free citizen, the right to vote and decide who represents you in government.

That’s voter suppression, plain and simple. But if that suppression ends in Florida, it could flip the state to the Democrats permanently. So, this issue is a very big deal.

Florida to Gain 1.4 Million Voters if Felon Measure Passes

Florida voters will decide Nov. 6 whether to restore voting rights for an estimated 1.4 million people with felony records, and supporters of the measure are already mobilizing ahead of the 2020 presidential election to urge this group to vote.

The Florida ballot question could mark the largest expansion of voting rights since the 26th Amendment lowered the voting age to 18 in 1971.

The Florida Amendment 4 initiative would grant rights back to people who have completed their prison term, parole and probation, except those with murder or felony sexual-assault convictions.

Fewer than 20% of people with felony records tend to vote, said Marc Meredith, an associate political-science professor at the University of Pennsylvania, citing estimates found in published work. About 56% of the overall voting-age population voted in the last presidential election.

With two September polls showing the Florida measure stands a chance of garnering the 60% of votes needed to pass, groups are already organizing to make sure people with restored rights actually vote in this crucial battleground state.


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