Happy New Year! This year I managed to read more books. In honor of the season and my new blog, I’ve selected a few (non-fiction books) books among the 80+ I read/listened to in 2017 that stayed with me through the year and provoked further thought or discussion.
It was tough to pick. The list is heavily skewed by my attempt to find tools to better understand the evolving policy agenda of Trump’s America and which public and private institutions might provide a source of resilience. I also read a lot ahead of and during my trips to Australia, Italy (Puglia) and Romania, though only one book made the cut.
Honorable mentions to Judith Flanders' Christmas: A Biography, which highlights how Christmas almost always was more a secular than religious holiday and one where commercial interests were quick to define tradition. Dani Rodrik’s Straight Talk on Trade, and Ray Hartley's Ramaphosa: the Man who Would be King, which were part of my unfinished holiday reading. They respectively are key guides to assess upcoming trade negotiations and reviews that will punctuate 2018 and useful background for the continued fight over South Africa’s leadership and institutions. But those are a matter for 2018.
In no particular order:
A Most Enterprising Country: North Korea in the Global Economy Justin V Hastings (2016).
This was the most distinctive of the materials I turned to when I sought to get up to speed quickly on North Korea’s economy, its trade with China, Russia and others and the impact of sanctions. Hastings deconstructs internal and cross border trade including the development of hybrid (public and private) shell companies used across the DPRK-China border. A good read to understand the varied interests in China as sanctions are set to deepen.
The Gatekeepers: How the White House Chiefs of Staff Define Every Presidency (2017) by Chris Whipple.
With 2017 being a year of much tumult in the White House and general understaffing in the federal government, Whipple’s book one of two on chiefs of staff was a useful guide. He combs through a half century of U.S. political history to talk about the evolution of the chief of staff role and how administrations floundered when the gatekeeper role was weakened o circumvented. The discussions bringing together reflections of past chiefs to inform their successors were particularly strong – and welcome in today’s partisan air.
Ideas Industry: How Pessimists, Partisans and Plutocrats are Transforming the Marketplace of Ideas Daniel Drezner (2017)
Dan Drezner deconstructs many key institutions in “think tank land”, a complicated set of policy bodies, mostly in the U.S of which he (and increasingly I, am a part. These bodies are one of several providing institutional memory in the U.S. policy arena – all the more so given understaffing in key departments. Given the challenges of funding and mandates, the book is a key read and highlights some areas of caution.
Capitalism Without Capital : The Rise of the Intangible Economy Johnathan Haskell and Stian Westlake (2017)
Over the last few years we economists have spent a lot of ink assessing why fixed investment has been so weak, intangible investment (in branding, internal processes and R&D have been a regular explanation. Haskell and Westlake pull together extensive academic and policy work on intangible investment. It’s a rare economic book that very clearly describes economic theory for non-economists. Worth a read for anyone trying to understand providing some explanations for low productivity, My homework for next year will include trying to extend some of its charts to countries in the emerging world.
The Imagineers of War: The Untold Story of DARPA, the Pentagon Agency that Changed the World Sharon Weinberger (2017)
This book filled key gaps in my understanding of DARPA (long one of the Pentagon’s Research bodies) – which I knew only as an institution I was only vaguely - because of its role in sponsoring the projects that developed the internet, drones and other military equipment, as well as attempts to seed similar institutions in energy and intelligence (ARPA-E and IARPA). This book rectifies this neglect. Weinberger’s book suggests that some of the successes reflect benign neglect of key research priorities, alignment with key foreign policy goals (rather than narrow technical ones) and highlights the cases of over-reach (use of counter-insurgency techniques, especially in South Asia) At heart this is a story of evolving institutions, and highlight the challenges of changing mandates.
Curry: A Tale of cooks and Conquerors. Lizzie Collingham This book uses food to tell Indian history, especially interactions with the Colonial European powers. An interesting if external take on South Asian history. Don’t read while hungry.
Latinos of Asia: How Filipino Americans Break the rules of Race Anthony Christian Ocampo (2017). Ocampo’s book takes as its subject Filipino immigrants and their sympathies with Latino communities they have often intermingled with – with Catholicism, and family networks. A good Input into the diversity of Asian immigrant communities. The book could have benefited from a bit more editing to summarize some of the academic claims.
Out of the Flames: The Remarkable Story of a Fearless Scholar, a Fatal Heresy, and one of the Rarest books in the World (2002) Nancy and Lawrence Goldstone
My pilgrimage to Romania gave me the push to finally read this book which had long been languishing on to read list and it was well worth the wait. The book is required reading ahead of a Transylvanian pilgrimage, but also an amazing account of reformation history across central Europe. Beyond its tale of continual pushing of religious boundaries, it also details some early breakthoughs in biology. The tale of the book’s creation, the religious and political challenges it provoked and its eventual reappearance is a great read of literary detective work.
Saudi Arabia released its 2018 budget with great fanfare today, including a meaningful increase in spending directly and via off-balance sheet funds such the public investment fund (PIF). With the oil sector no longer a drag and the non-oil sector benefiting from government pump-priming, economic growth should accelerate, from near-recessionary levels, part of a broader trend among oil producing nations. Still, private sector contribution is likely to lag as credit demand struggles, government funds dominate and questions remain about the rules of the game after the anti-corruption crackdown. Changes to energy policy are unlikely.
The budget included the largest planned spending (figure 1) of any budget, 978 billion riyal ($260 billion) and an additional 150 billion riyal in spending from various development funds. It comes close to the actual spending peaks of the early 2010s boom years. Given the spending increase in Q4, and a tendency to overspend budgets, actual spending in 2018 may again outstretch plans and in the longer 5 year plan. Adding in the spending from the PIF, there's likely to top that. This will reinforce the bounceback in growth after several years of moderate recession and austerity. It may be less effective in generating private sector activity, which is likely to lag consumption and government investment.
Figure 1: Actual and Government Spending (USD billion)
Source: Saudi Arabian Ministry of finance, Author's Calculations
The more expansive stance is not unique to Saudi Arabia. Most of its GCC and energy producing peers will also have more expansive or at least less austere budgets in 2018, helped by stronger oil and gas prices and still relatively easy global credit conditions that make it easier to issue debt. In Nigeria and Russia as well as Bahrain and Oman, less austerity is likely rather than stimulus. Still these decisions reinforce several trends for 2018 including a belated recovery for many commodity producing nations (catching up to the broader expansion seen in 2017), a bottoming out/improvement in EM investment and some pickup in inflation. All of these generally support EM and local equity over bonds.
I wrote earlier about some elements of the consensus macro view and some risks to those views (and my own). A key part of tracking consensus (and identifying out of the consensus views), is keeping track of the questions investors and others are asking each other. I'll plan to gather some of these on an ongoing basis through the year to track the evolution of concerns and identify what consensus might be missing.
Key dilemmas remain mostly focused on policy choices and whether any policies might upend the macro resilience and market performance. Could this resilience fade? What would be the trigger? As typical queries are most prevalent on U.S. and Chinese policy, geostrategic issues, especially in the Middle East and North East Asia.
Global growth: is this the best we can get? What does that mean for asset returns? Will this pace of global growth be sufficient to create enough jobs in populous EM/Frontier countries o will it exacerbate political stresses and reinforce price pressures?
Impact of US fiscal policy: questions include the impact of the policies on U.S. and global demand, including the relative performance across sectors, across regions (especially in areas like New York, New Jersey and California) most vulnerable to the non-deductability of state tax, the impact on external balance and U.S. capital account? When would we worry about US debt finance ability?
Monetary policy transition (in terms of leaders and policy stance): Will the Fed/others overtighten to compensate? What credits are most vulnerable? Will the new board members shift policy? Many countries want to lag the Fed and would appreciate the weaker currency that may result, will they be able to do or will limitations of macro prudential measures call for a different trend?
Trade trends: Will any of the many trade agreements set in motion changes in supply chains? Are countries like Brazil finally opening up? Will measures increase the costs of compliance with different regulations (digital trade, localization , cybersecurity). Other policies (fiscal and monetary) are likely to have more effect but could the questions on the rules defer/front-load investment? Is there a new round of investment protection coming?
Valuation: Are US equities really expensive or are there drivers/buyback trends that justify valuations ? What about knock-on effects? is the credit downgrade cycle over in commodity producers?
China's policy space: Chinese authorities have plenty of tools to use but will doing so cap growth and undermine asset performance? Will Chinese corporate, government and quasi government bonds find buyers at a reasonable price? What will be the drivers of growth beyond 2018? Will Chinese export growth further undermine transpacific trade?
Europe risks? is Brexit irrelevant aside from the UK? Are the European banking systems and sovereigns solid enough? Has there been enough deleveraging? How concerning are signs of overheating in Eastern/Central Europe? Is the convergence story back on? Will Europe shift over to more domestic demand?
What’s going on in Saudi Arabia/the Middle East? Lots of questions about the Aramco IPO, the divergence between economic reforms and political approach. What is the strategy from the Saudi/Abu Dhabi nexus? What is the U.S. strategy in the region? Will the market absorb the planned bond and equity issuance (the latter is likely to increase significantly in 2018)? Will any pegs break in the next two years (watch Oman). Is the GCC completely irrelevant as a body? Will regional SWFs continue to turn inward? What are the new investment rules in the wake of the Saudi anti-corruption measures? Will the Qatar blockade just fade away as the country adjusts (and recent data suggests its a vey slow bleed) and other countries continue to trade with the country (see UK and French economic and military coordination).
Like many people I’ve spent a lot of time over the last week at “2018” Outlook events, reading and writing outlooks. At the risk of adding to the deluge, its worth a few reflections about the status of consensus and where triggers might diverge.
Almost everyone I've spoken to over the last few months is upbeat and sees a continuation of the “synchronized global expansion,"* benign liquidity conditions and pricey valuations getting even more pricey after gains. Some countries and sectors look less resilient, but the general view is quiet positive.
Some are a little worried about 2019 or H2 2018 or Q4 2018 when the effects of balance sheet adjustment might begin to be more priced and when questions escalated on what might be the new drivers of growth. In this context, regulatory uncertainty especially around trade and investment policy might reinforce recent investment trends, as some corporations and households hold off on spending.
Rachel's musings on macroeconomic issues, policy and more.