GEOPOLITICAL STRATEGY
June 2016
Periodical
In this Issue:
I. Global Overview - Introducing: The Median Voter Theory
2
Anglo-Saxon Populism: Focus On The Median Voter 5
Brexit: Too Close To Call?
9
U.S. Election: From Underrated To Overrated?11
China: The Socialist Put And Rising Government Leverage 15
A Message From Our Indicators: Risk Is To The Upside22
Housekeeping: Early Oil Rebalance And Brexit Watch25
II. In Focus - Japan: The Emperor’s Act Of Grace
27
III.Geopolitical Calendar & Book Review
43
Editorial Board
Marko Papic
Managing Editor
David Abramson
Managing Editor
Martin Barnes
Managing Editor
Jim Mylonas
Managing Editor
Chester Ntonifor
Editor/Strategist
Santiago E. Gomez
Editor/Strategist
David Boucher
Associate Editor
Matt Gertken
Associate Editor
Jesse Anak Kuri
Research Analyst
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
1
geopolitical Strategy - June 2016
BCA Research Inc.
Discover
what you
can do
with BCA
Analytics.
I. Global Overview
Introducing: The Median Voter Theory
FF
The “median voter” in the Anglo-Saxon world is shifting to the political left;
FF
Brexit is too close to call. We think the U.K. will stay in the EU, but our conviction is low;
FF
Donald Trump faces structural challenges – an exogenous shock is his best chance of winning
the White House;
FF
China’s “Socialism Put” stimulus is under appreciated, global market risks lie to the upside;
FF
Go long front-to-back crude oil spreads; hold the GBP/NOK cross until the last day before the
Brexit vote.
Where ignorance is bliss, ‘tis folly to be wise.
Markets
have
shrugged
off the USD,
the RMB,
the U.S. jobs
report, a
hawkish Fed,
and Brexit.
What is
going on?
– Thomas Gray, 1742
S
ince our May Monthly Report, markets have shrugged off renewed USD strength, renewed RMB
weakness, a disastrous U.S. jobs report, hawkish rhetoric from the Federal Reserve, rising uncertainty of the British EU referendum outcome, and a general lack of positive news flow. This is
quite an impressive example of the adage that “ignorance is bliss.” What is going on?
Investors we meet on the road remain bearish, but several clients confided that they are
adding to risk-on positions. This is confirmed by BCA’s Composite Sentiment Index in
Chart I-1, which dipped to the lowest levels since 2009 in January 2016. Generally speaking,
investor sentiment is a contrarian indicator when it is low but bottoming, which the reading from
Chart I-1 suggests is happening. BCA’s Geopolitical Strategy own indicators – the Policy-Adjusted
Equity Risk Premium (P-ERP) and Investor Willingness to Pay For Risk Indicator (WTP) – are signaling less bearishness as well, which we discuss below.
China has decided to postpone painful structural reforms and has established a Socialist Put in the
market, as we discussed in April and May. Its renewed stimulus effort – announced at the March
National People’s Congress and reviewed in-depth below – may not be enough to spur a new commodity and Emerging Market (EM) bull market, but is likely mispriced and underappreciated by
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
2
geopolitical Strategy - June 2016
BCA Research Inc.
China’s
renewed
stimulus
effort is
underappreciated,
and the
plunge in oil
prices has
ended.
investors. In addition, the plunge in oil prices
has ended because of a combination of supply
destruction and risks in the U.S. shale patch
and a number of politically-unstable countries,
arresting concerns of massive defaults in the
energy sector.1
On the political front, first, our view on Brexit
remains the same: while we think the U.K. will
stay, our conviction level is much lower than
the conventional wisdom. Global investors and
the markets are underestimating the probability
of the U.K. exiting the EU. Ultimately, even if
we are correct and the referendum results end
up being closer than expected, the results are
binary. The U.K. will either stay in or begin
heading out of the EU on June 24. There are
no “moral victories” for the Brexit camp.
Meanwhile, risks are rising in continental Europe. Three issues remain on our radar for June:
FF
FF
The German constitutional court will give
its final ruling on the ECB Outright Monetary Transaction (OMT) program on June
21. The ruling could, but is unlikely to,
contravene a favorable opinion of the OMT
by the European Court of Justice in 2015.
Chart I-1
Has Bearish Sentiment Bottomed?
U.S.
NYSE ADVANCE/DECLINE LINE*
75000
75000
50000
50000
25000
25000
0
0
BCA COMPOSITE SENTIMENT INDEX**
55
55
50
50
45
45
40
?
35
Spanish elections on June 26 remain a risk,
given that the left-wing Podemos has now
overtaken the center-left Spanish Socialist
Workers’ Party (PSOE) for second place in
the polls, behind the center-right People’s Party.
35
© BCA Research 2016
08
10
12
14
40
16
* SOURCE: BLOOMBERG.
** INCLUDES TRADERS, ADVISORS, AND INDIVIDUAL INVESTORS, SMOOTHED.
FF
The second-round of Italian municipal elections on June 19 is likely to hand the anti-establishment Five Star Movement (5SM) control over some key cities, including the capital, Rome.
This will weaken the rule of Prime Minister Matteo Renzi ahead of a critical constitutional
referendum in October.
1
Please see BCA Geopolitical Strategy Special Report, “Nifty Fifty: Where Is Oil Going From Here?,” dated May 26, 2016, available
at gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
3
BCA Research Inc.
The main
source of
potential
political
risk remains
populism in
the U.S. and
the U.K.,
not that in
Europe.
geopolitical Strategy - June 2016
It is unlikely that either Spanish or Italian politics will swing definitively to the far left. A much
more likely scenario will see both Podemos and 5SM forced to balance their ideological positions
with the realities of governance, much as Greece’s SYRIZA did in late 2015. This constellation of
European risks is only going to reinforce Fed dovishness this summer, perhaps also a short-term
bullish factor.
Populism in Mediterranean Europe is unlikely to derail global markets given that it is neither
unexpected nor underpriced by the markets. The main source of potential political risk remains
populism in the U.S. and the U.K., for which investors have no mental framework. Our clients’
views on Donald Trump, for example, range from Lawrence Summers’s level of panic to BCA’s own
Chief Global Strategist Peter Berezin’s rather sanguine view.2
The reality is that, in the short term, the election of either Hillary Clinton or Donald Trump is likely
to produce similar results. We agree with Peter that Donald Trump could significantly increase fiscal
spending and thus produce a rally in the USD. But it is not clear that “President Clinton” would
struggle to do the same.
If Clinton beats Trump, and especially if she wins in a landslide, the GOP will have plenty of soulsearching to do. First, a Clinton landslide will almost certainly be accompanied with a GOP loss of
the Senate. Second, the remaining House Republicans would take the lesson from the third consecutive Democratic presidential victory that voters want compromise from their leaders. There is
recent precedent for this, with House Republicans reversing the Bush-era tax cuts on upper-income
individuals following the November 2012 election.3
In our view, focusing on the candidates and their policies this early in the election cycle is fun, but
unlikely to produce high-conviction views. This is particularly the case in such a highly unorthodox
electoral campaign. The success of anti-establishment politicians tells us far more about voters’
preferences than about candidate capabilities and policies. Trump and Vermont Senator Bernie
Sanders are successful because they are supplying what the electorate is demanding, pure and
simple, not because of their personal qualities. Most importantly, they are successful because the
median voter in America has moved to the left. In the long term, this evolution is likely to have
far more significance for global investors than the level of fiscal thrust in 2017 or specific policy
proposals under discussion today.
We expand on this issue below and introduce the Median Voter Theory, from political science, as a
mental framework that may help our clients understand the rise of anti-establishment candidates
in the U.S. elections as well as the U.K. referendum. In addition, our Global Overview handles the
following topics this month:
2
Please see BCA Global Investment Strategy Weekly Report, “A Trump Victory Would Be Bullish For The Dollar,” dated June 3,
2016, available at gis.bcaresearch.com, and Summers, “The economic consequences of a Trump win would be severe,” dated
June 5, 2016, available at larrysummers.com.
3
“The Americans Taxpayer Relief Act” was passed on January 1, 2013 with a majority of Republicans opposing it, but a large enough
minority voting for it.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
4
geopolitical Strategy - June 2016
BCA Research Inc.
Parties and
politicians
will
approximate
the policy
choices of
the median
voter to win
elections
or stay in
power.
FF
Brexit: an update on the latest probabilities;
FF
U.S. election: a discussion of headwinds facing Donald Trump;
FF
China: government debt and the “Socialism Put;”
FF
Assessment of investor sentiment and positioning based on our quantitative indicators.
Anglo-Saxon Populism: Focus On The Median Voter
The rise of the anti-establishment in the U.S. and the U.K. has caught many by surprise. Not only
was Donald Trump underappreciated in 2015, but most “smart money” ignored Brexit because it
failed to recognize it as a broad expression of malaise against elites and globalization. In addition,
Bernie Sanders and Jeremy Corbyn, the leader of the U.K.’s Labour Party, emerged practically out
of nowhere to pull leftward on the center-left establishment parties in both countries.
We first raised the idea that Trump, Sanders, Corbyn, and Brexit are all signs that the median
voter is moving to the left in the U.S. and the U.K. in our April Special Report, “The End Of The
Anglo-Saxon Economy.”4 This is a controversial view and most of our clients do not agree with it.
The conventional wisdom is that the laissez-faire economic model of the U.S. and the U.K. is, for
the most part, safe.
A good framework for understanding our concern is the Medium Voter Theory (MVT). Developed in
the 1950s, the MVT framework is one of the few genuine theories of political science.5 It posits
that parties and politicians will approximate the policy choices of the median voter in order to win
an election or stay in power. Empirical work since the 1950s has both confirmed and challenged
the theory, but the fact that every U.S. presidential election concludes with a mad dash to the
“center” (meaning the most popularly appealing positions, not some unchanging centrist policy)
proves that it has merit.
Median voter theory asks us to make three assumptions:
1. That voters’ preferences are “single-peaked” – that voters prefer one policy outcome over all
other potential outcomes;
2. That politicians want to win above everything else;
3. That preferences are considered over a single policy dimension.
4
Please see BCA Geopolitical Strategy Special Report, “The End Of The Anglo-Saxon Economy?,” dated April 13, 2016, available
at gps.bcaresearch.com.
5
The Median Voter Theory was in fact first posited by economist Harold Hotelling in his 1929 article “Stability in Competition.” His
en passant comment in an article otherwise focused on business decision-making remains prescient today. Please see “Stability in
Competition,” Economic Journal 39 (1929), pp. 41-57. For subsequent treatments of the concept in political science, please see
Duncan Black, “On the Rationale of Group Decision-Making,” Journal of Political Economy 56 (1948), pp. 23-34 and Anthony
Downs, An Economic Theory of Democracy (New York: Harper Collins, 1957).
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
5
BCA Research Inc.
Both Trump
and Clinton
are shifting
leftward on
economic
policy to
capture the
median
voter.
geopolitical Strategy - June 2016
As with any other theory, MVT is a simplification of reality. The last assumption – that voter preferences are arranged over a single policy dimension – is rarely the case in an election. Most voters
take several issues into consideration when voting, from the candidate’s stance on the economy to
his or her stance on foreign policy and cultural issues.
Nonetheless, we find the theory useful as a framework to explain the current political developments in the U.S., particularly when it comes to the economic policy dimension. Donald Trump
won the GOP primary in part because he firmly stood to the left of his rivals on both free trade and
government spending. Even his anti-immigration appeal is mostly based on economic reasoning –
i.e. jobs – rather than cultural, normative, or security factors. Since winning the GOP nomination,
Trump has moved further to the left on economic policy by suggesting that minimum wages and
taxes on the wealthy will have to go up. It almost appears as if he is trying to outflank Clinton – the
presumptive nominee of America’s left – by moving to the left of her economic policies. There has
been relatively little from Trump on the usual conservative economic policy issues of cutting taxes
and government spending since announcing a fairly standard GOP fiscal plan on September 28,
2015, and he has since signaled he may moderate some of his stances in it.
On the Democratic side, Bernie Sanders’ success has forced Hillary Clinton to distance herself from
free trade. We suspect that she will continue to swerve to the left in order to ensure that a large
majority of Sanders supporters vote in the election, including by potentially eschewing centrist
choices for vice president.
Thus both Trump and Clinton are shifting leftward on economic policy to capture the median voter.
We doubt that they will shift back to the center after the election because it is the median voter
who is now left-of-center. Tactical decisions by Trump, Sanders, and Clinton, therefore, merely
reflect a reality that has already happened. America’s voters are simply more left-leaning in 2016.
Diagram I-1 shows our thinking. The first panel illustrates the precepts of the MVT. Candidates from
the left and right will move to the middle to capture the median voter.
The second panel shows what we suspect happened in the 1990s. The success of Ronald Reagan’s
and Margaret Thatcher’s supply-side policies discredited the demand-side policies of the 1970s.
This led to rising popular support for, or at least tolerance of, right-of-center policies like deregulation, privatization, free trade, low taxes, and balanced budgets. The collapse of the Soviet Union
further supported this evolution, since it discredited socialist ideas internationally.
Across the political spectrum, a number of left-leaning parties adopted center-right economic policies throughout the late 1980s and 1990s: Bill Clinton’s Democratic Party in the U.S., Tony Blair’s
Labour Party in the U.K., Gerhard Schröder’s Social Democratic Party in Germany, Paul Keating’s
Labour Party in Australia, Jean Chrétien’s Liberal Party in Canada, and Romano Prodi’s Democratic
Party in Italy. Even in the emerging markets, a move towards laissez faire economics and orthodox
fiscal and monetary policy followed the ideological consensus of the 1990s, with India’s liberalization in 1991 and Deng Xiaoping’s 1992 “Southern Tour” solidifying China’s pro-market reforms.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
6
geopolitical Strategy - June 2016
BCA Research Inc.
We doubt
that Trump
or Clinton
will shift
back to the
center after
the election
because it is
the median
voter who is
now left-ofcenter.
Diagram I-1
Median Voter Theorem
M
L
R
1990 “Third Wave”
Politics
MV
L
R
2010’s Left Wave?
© BCA Research 2016
L
MV
R
Today, in the global context of low growth and deflation, the pendulum is swinging to the left.
While this has been expected on the European continent, and largely priced in by markets, it
has been surprising in the U.S. and the U.K. The third panel of Diagram I-1 illustrates what we
think happened in the U.S. and the U.K. The deterioration of the middle class in both countries
(Chart I-2), combined with the end of the Debt Supercycle, which had allowed households to supplement their stagnant incomes with credit, has shifted voters to the left.
If this view is correct, then two immediate conclusions follow:
FF
The recent successes of Donald Trump, Bernie Sanders, and Jeremy Corbyn are not a reflection
of candidate rhetoric or abilities, but rather the preferences of the electorate.
FF
Centrist policymakers will either shift towards the median voter themselves, or risk losing power.
The latter is critical. It suggests that no matter who wins power in the U.S. in November, or whatever
happens with Brexit in June, the shift toward the left on economic policy has already begun. For
now, this view is merely a hypothesis. Polls remain inconclusive on what voters actually want. But we
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
7
geopolitical Strategy - June 2016
BCA Research Inc.
No matter
what
happens
with Brexit
in June, or
the White
House in
November,
the shift
toward
the left on
economic
policy has
already
begun.
suspect that the changing demographic and
economic climate – particularly the relative
income and wealth levels of the Millennial
Generation – is pushing the electorate in the
Anglo-Saxon world towards more government
involvement in economic policy.
Chart I-2
70
%
The Middle Class Has
Shrunk In Anglo-Saxon World
SIZE OF MIDDLE CLASS
(AS % OF POPULATION)
65
U.K.
Bottom Line: Charts I-3 and I-4 are politically
unsustainable. Given our view that political
risks in continental Europe are largely priced
in and that the structural shift to the left in
the Anglo-Saxon economies is not, investors
should overweight euro area equities relative
to the U.S. on a multi-year investment horizon. In the near term, however, both the U.S.
election and a pro-market outcome in the
U.K. EU referendum could provide catalysts
for relief rallies.
U.S.
60
56.8%
55
51.1%
50
45
© BCA Research 2016
1971 1976 1981 1986 1991 1996 2001 2006 2011
SOURCE: Steven Pressman, “Defining And Measuring The Middle
Class,” American Institute For Economic Research,
Working Paper 7 (2015).
Chart I-3
%
Chart I-4
Tax Rates Bottoming, Profits Peaking?
U.S.
15
%
EFFECTIVE CORPORATE TAX RATE*
(Inverted, LS)
NONFINANCIAL CORPORATE EBITDA
MARGINS (RS)
% Of
GDP
34
20
32
Wages Bottoming, Post-Wage Income Peaking?
% Of
GDP
U.S. CORPORATE SECTOR
EMPLOYEE COMPENSATION
64
64
60
60
56
56
25
30
30
% Of
GDP
28
35
% Of
GDP
GROSS OPERATING SURPLUS
34
34
30
30
26
40
45
24
© BCA Research 2016
55
60
65
70
75
80
85
90
95 2000 05
10
15
26
© BCA Research 2016
55
60
65
70
75
80
85
90
95 2000 05
10
26
15
* BASED ON FEDERAL GOVERNMENT TAX RECEIPTS ON
CORPORATE INCOME AND CORPORATE PROFITS AFTER TAX.
SOURCE: FEDERAL RESERVE.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
8
geopolitical Strategy - June 2016
BCA Research Inc.
We expected
polls to
narrow
ahead of
the June
23 Brexit
referendum.
Brexit: Too Close To Call?
Chart I-5
Brexit: A Poll Of Polls
The last three polls out of the U.K. show that
the Brexit camp is in the lead versus the “Bremain” option:
%
FF
A YouGov poll had the Brexit camp in
45%/41% lead over Bremain;
50
50
FF
A TNS poll had the Brexit camp in a
43%/41% lead;
45
45
FF
And an ICM poll had the Brexit camp leading 48%/43%.
40
40
35
35
The results are not surprising to us given that
we have expected polls to continue to narrow
ahead of the June 23 referendum (Chart I-5).6
Our reasoning was based on the view that
Brexit is not merely a vote against the U.K.’s
membership in the EU, but also an expression
of general angst against the economic elites,
unchecked European immigration, and globalization.
%
U.K. EU REFERENDUM*
RESPONDENTS WHO ANSWERED:
STAY
LEAVE
© BCA Research 2016
JAN
JUL
2013
JAN
JUL
2014
JAN
JUL
2015
JAN
JUL
2016
* SOURCE: DATA AGGREGATED FROM YOUGOV, TNS, COMRES, SURVATION,
LORD ASHCROFT POLLS, PEW RESEARCH, AND POPULUS.
Still, several factors support our view that despite this narrowing in polls, the U.K. will ultimately
vote to remain in the EU:
FF
Telephone vs. Online Polls: Telephone polls, which were far more accurate in predicting the
2015 U.K. general election, continue to show a lead for the Bremain camp (Chart I-6). However,
the broad trend is narrowing in favor of a closer-than-expected referendum. The most recent
Brexit-leaning polls were all conducted online.
FF
Undecideds: The undecideds continue to average approximately 10% of the electorate in the
major polls, a sizeable figure. Presumably, the undecided voters will vote with their pocketbooks
and the status quo rather than with their “entirely-English heart” and an uncertain economic
future. The Scottish referendum saw the undecided voters break in favor of leaving the U.K.
with only weeks to go, but not enough to surpass the larger, more stable “No” vote, which saw
a flurry of support in the final days (Chart I-7).
6
Please see BCA Geopolitical Strategy and European Investment Strategy Special Report, “With Or Without You: The U.K. And The
EU,” dated March 17, 2016, available at gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
9
geopolitical Strategy - June 2016
BCA Research Inc.
%
60
Chart I-6
Chart I-7
Brexit:
Phone Surveys Say “Remain”
Scottish Independence
Hung On Last Minute Decisions
%
%
U.K. EU REFERENDUM*
RESPONDENTS WHO ANSWERED:
STAY (PHONE SURVEYS)
LEAVE (PHONE SURVEYS)
%
SCOTLAND REFERENDUM OPINION POLLS*:
YES
NO
UNDECIDED
60
55%
50
55
50
45%
55
50
50
45
45
40
40
35
35
40
40
30
30
20
20
10
10
© BCA Research 2016
2015
JAN
APR
2016
JAN
JUL
2016
Tory Undecideds: Our latest modeling of
Conservative Party voters suggests that
43.4% of the undecided Tories – our
“marginal voter”– need to break in favor
of Bremain for the U.K. to remain in the
EU (Chart I-8). This is largely aligned with
the polls, which see the breakdown of all
Tory voters at 43% favoring to stay, 45% to
leave, and 12% who do not know. While this
still suggests uncertainty, our March model
implied that 64.1% of the undecided Tories
needed to choose Bremain, a considerably
higher figure.
We still remain cautious. First, telephone polls
may have been more accurate in the general
elections, but there is no guarantee that voter
turnout will favor the Bremain camp. Brexit
supporters could prove to be the more passionate, suggesting that the online polls may not
be far from the truth.
JUL
2013
OCT
JAN
APR
JUL
2014
OCT
* AGGREGATE OF VARIOUS POLLS.
* SOURCE: WHATUKTHINKS.ORG.
FF
APR
Chart I-8
%
53%
How Many Undecided Tories
Will It Take For Britain To Stay In The EU?
52
52%
51
51%
June:
43.4%
50%
50
49%
49
48%
48
47
47%
46%
© BCA Research 2016
%
10
20
30
40
50
60
70
80
90
100
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
OCT
© BCA Research 2016
REFERENDUM VOTE TO STAY IN THE EU
43.4% of
undecided
Tories need
to break
in favor of
Bremain for
the U.K. to
remain in
the EU, down
from 64.1%
in March.
PERCENTAGE OF UNDECIDED CONSERVATIVES
VOTING TO STAY IN THE EU
SOURCE: HOUSE OF COMMONS LIBRARY, YOUGOV.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
10
geopolitical Strategy - June 2016
BCA Research Inc.
Our call
remains that
Bremain will
win with
between
50-55% of
the vote.
Second, the Scottish referendum is a poor model for the U.K. EU referendum, as is the Quebec
independence referendum. The risks and uncertainties of Scotland leaving the U.K. or Quebec leaving Canada were much greater than those of the U.K. leaving the EU. The U.K. is the fifth largest
economy in the world, a military power, a net contributor to the EU budget, and a sovereign nation
that can negotiate access to the EU common market following Brexit. As such, we doubt that the
undecideds will swing as decisively towards the status quo as in other referendums.
Our call therefore remains the same as in March: Bremain will win with between 50-55% of the
vote, but our conviction is low and the risks of Brexit remain high. We expect limited upside from our
short GBP/NOK from here on out and will close it right before the referendum. For further hedging
strategies in the equity and bond markets, please refer to our May Monthly Report.7
What does a tight vote for Bremain mean? First, it suggests that the malaise in the U.K. towards
the economic status quo is serious. Second, it could lead to a civil war within the Conservative
Party. Third, it opens the possibility for a Labour-Scottish National Party (SNP) government led by
Jeremy Corbyn in the future.
Much discussion of Brexit focuses on what the referendum means for the EU. We suspect that the
referendum will reaffirm our view that European integration is a function of powerful geopolitical
imperatives.8 If the U.K. – the country with the lowest economic, geopolitical, and cultural threshold among EU countries for “going it alone” – choses to remain in the EU, then it will reaffirm that
forecasts of the bloc’s demise are quite premature.
And if the U.K. leaves, the immediate concerns about EU disintegration will likely fail to appreciate that the rest of the EU’s member states have higher thresholds for going it alone, i.e. greater
economic and geopolitical constraints to exiting.
The main focus instead should be on why the U.K. held a referendum on EU membership in the
first place and what a tight vote may mean for future British politics. Our suspicion is that it is
another sign of a coming leftward pendulum swing in economic policy.
Bottom Line: The U.K. will remain in the EU, but only just. The relevance of the referendum is
much greater for the U.K. itself than for the EU.
U.S. Election: From Underrated To Overrated?
Trump’s bounce in popular opinion after effectively sealing the GOP nomination has proven yet
again that he is a viable candidate – one who thrives on defying naysayers and conventional wisdom,
and thus one not to be underestimated. After briefly surpassing Clinton in recent poll averages,
he remains only 1.5% behind her (Chart I-9). The Republican Party is sheepishly rallying behind
7
Please see BCA Geopolitical Strategy Monthly Report, “The Socialism Put – Brexit Update,” dated May 11, 2016, available at
gps.bcaresearch.com.
8
Please see BCA’s The Bank Credit Analyst, “Europe’s Geopolitical Gambit: Relevance Through Integration,” dated October 19,
2011, available at bca.bcaresearch.com
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
11
geopolitical Strategy - June 2016
BCA Research Inc.
Chart I-10
Chart I-9
%
U.S. Election: Two Ugly Ducklings
GENERAL ELECTION POLLING DATA*:
TRUMP
CLINTON
55
%
Th.
200
55
How Many White Voters Will It
Take For Swing States To Elect Trump?
COLORADO
150
150
100
100
50
50
50
50
+ 1.70%
00
45
-50
-50
45
-100
-100
WHITE HYPE SCENARIO
HISPANIC ANGST SCENARIO
-150
-150
40
40
35
35
© BCA Research 2016
JUL
15
AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
2015
2016
16
* SHOWN SMOOTHED. SOURCE: REALCLEAR POLITICS AND
BCA CALCULATIONS.
him – most recently with House Speaker Paul
Ryan – while Hillary has only just finished her
struggle with Sanders, which has prevented her
from turning to the general electorate until now.
As we argued in our Special Report, “The Great
White Hype,” Trump does have a path to victory in the 2016 election by maximizing white
support in swing states.9 It is simply fraught
with obstacles. His ability to steamroll his opponents will suffer from structural challenges
in the general election that he did not face in
the GOP primaries. In this non-ideal world for
Trump, he needs to improve his appeal among
Hispanics, millennials, and women.
Hispanics are a sleeping giant in American
elections. Their population has grown by 17%
since 2012 (much faster than whites), and
9
TOTAL NUMBER OF VOTES (DEMOCRATS MINUS GOP)
If the U.K.
leaves, the
immediate
concerns
about EU
disintegration will
likely fail to
appreciate
that the rest
of the EU’s
member
states have
higher
thresholds
for going it
alone.
-200
Th.
300
0%
200
200
100
100
5%
FLORIDA
10%
15%
10%
15%
+ 2.31%
0
0
-100
-100
-200
-200
-300
-300
-400
-400
WHITE HYPE SCENARIO
HISPANIC ANGST SCENARIO
-500
-500
-600
-600
-700
Th.
100
0%
5%
NEVADA
80
80
60
60
40
40
+ 2.90%
20
20
00
White Hype Scenario
Hispanic Angst Scenario
WHITE HYPE SCENARIO
HISPANIC ANGST SCENARIO
-20
-20
-40
© BCA Research 2016
%
5
10
0% PERCENTAGE OF
5%WHITE VOTE SWING
10% TO THE GOP 15%
Please see BCA Geopolitical Strategy Special Report, “U.S. Election: The Great White Hype,” dated March 9, 2016, available at
gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
12
geopolitical Strategy - June 2016
BCA Research Inc.
80%
%
70%
70
The Battle Of The Baby Boomers
Share of Millennial Vote
in Democratic Primaries
60%
60
50%
50
40%
40
30
30%
10%
10
0%
%
70%
Sanders
20%
20
Clinton
Share of Millennial Vote
in Republican Primaries
Sanders
60
60%
50
50%
Anti-Trump (cruz, Kasich, Rubio)
Hispanics would present a challenge for Trump
even if he had not catapulted to the lead in the
GOP race through offensive comments about
immigrants and plans to wall off the southern
border (and 56% of Hispanics are from Mexico,
the target of much of Trump’s ire). They favored
Kerry over Bush by 18 points in 2004, and
Gore and Obama by even more (Romney only
got 29% of their vote in 2012). Yet Hispanics’
motivation to organize and vote against Trump
will likely be even higher than with previous
Republican candidates given his proposals and
rhetoric. Our simple analysis shows that an
increase in Hispanic turnout by 5% and only
a moderately worse performance than Romney
would make it considerably harder for Trump to
win Florida, Colorado, and Nevada (Chart I-10).
In these three states, Trump would have to increase his white share of the vote significantly
higher than if he could keep Hispanic voters at
2012 levels of turnout and support.
chart I-11
Clinton
they now make up 13% of the electorate –
and a much larger share in swing states like
Nevada (19%), Florida (18.2%), and Colorado
(17.1%). Yet their turnout has always been
low, dropping by two points in 2012 to 48%.
In the past two elections it has hung around
15-18% lower than turnout among both black
and white voters.
40
40%
30
30%
20
20%
10%
10
0%
Trump
Trump’s
ability to
steamroll his
opponents
will suffer
from
structural
challenges
in the
general
election
that he did
not face in
the GOP
primaries.
© BCA Research 2016
Note: Weighted
by number of registered
voters; (Cruz,
excluding
other
Trump
Anti-Trump
Kasich,
candidates.
Rubio)
Source: CNN; U.S. Census Bureau; BCA calculations.
Trump’s second major challenge comes from
age demographics. He has more in common
with Hillary than just left-leaning stances on trade and entitlements – as Chart I-11 shows, they
both appeal primarily to Baby Boomers! Though millennials have a lower turnout than Hispanics,
they make up 38% of the electorate, second only to those above 50 years old (44%). They heavily
favored Obama in the past two elections. But they supported Clinton relative to Sanders less than
Trump relative to his opponents. Thus they pose a threat to Clinton if the wrangling between grandma
and granddad suppresses their turnout further. And yet they clearly pose a threat to Trump if they
can be reconciled with Hillary after the dust-up with Bernie.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
13
geopolitical Strategy - June 2016
BCA Research Inc.
Hispanics’
motivation
to organize
and vote
against
Trump will
likely be
even higher
than with
previous
Republican
candidates
given his
proposals
and rhetoric.
Gary Johnson, on the Libertarian ticket, could
exacerbate this problem for both candidates,
since his policies and persona are more appealing to millennials, he has a solid running mate
(former Republican Governor of Massachusetts
Bill Weld), and he will have a rare chance to
shine in contrast with the two un-likable frontrunners. This ticket could conceivably spoil
Clinton’s millennial support in swing states
like Colorado or New Mexico (where Johnson’s
familiarity and liberal social policies could
offset the large minority populations), though
it could equally spoil some of Trump’s support
from the libertarian wing of the GOP, making
it hard to say who will get the short end of the
stick. The bottom line is that Clinton’s lack of
support from millennials is worrisome for her,
but the ranting septuagenarian Trump is not
the best candidate to exploit this weakness.
chart I-12
70.0%
%
60.0%
60
Trump’s Support In GOP
Primaries By Voter Type
All States With Exit Polls*
57.9%
55.3%
50.0%
50
52.8%
45.7%
51.0%
45.3%
43.0%
43.1%
40.0%
40
30.0%
30
20.0%
20
10
10.0%
0.0%
%
70.0%
60.0%
60
Men / Women
College
Under $50k/yr Urban / Rural
Swing
Degree
/ NoneStates**
/ Over
58.3%
55.0%
51.4%
54.2%
Women, obviously, are Trump’s third challenge. 50.0%
50
45.8%
45.0%
In our “White Hype” scenario we assumed – in
42.1%
41.7%
a very old-fashioned and perhaps politically in- 40.0%
40
correct way! – that white women would vote no
30
differently than white men. But in fact Trump 30.0%
underperformed with all women voters in the
20
primaries (Chart I-12), and the GOP has a pro- 20.0%
nounced gender gap – even within its ranks.
10
The female share of the GOP vote has fallen 10.0%
from around 60% in 1972 to just above 40%
© BCA Research 2016
0.0%
in 2012. Trump’s performance with women in
/
College
Urban
/
Under
MenMen
/ Women
College
Under
$50k/yr Urban
/ Rural
Women
Degree
/
Rural
$50k/yr.
Degree
/ None
/ Over /
the GOP primaries is about the same as Bush’s
None
Over
* Exit polls from all states available, weighted by number of
in the 2000 election, McCain’s in 2008, and
registered voters.
** Exit polls from swing states Iowa, New Hampshire, Nevada,
Romney’s in 2012, which is not good for Trump.
Virginia, Michigan, Florida, North Carolina, Ohio, Wisconsin,
and Pennsylvania; weighted by number of registered voters.
Now, appealing to males is historically beneficial to Republican candidates, as Chart I-13
shows, but the key point for 2016 is that GOP-leaning women tend to oscillate. That means that
even if Trump succeeds in maximizing the white male vote, he may fail to do the same with white
women. Given that women make up 53% of the electorate, this gender bias is critical. Even a 2-3%
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
14
geopolitical Strategy - June 2016
BCA Research Inc.
Gary
Johnson,
on the
Libertarian
ticket, could
exacerbate
this problem
for both
candidates,
since his
policies and
persona
are more
appealing to
millennials.
deviation could have an outsized effect on the
election results. And while the Clinton camp
may not succeed with the “War on Women”
narrative, it will presumably capitalize on the
historic “first” of her candidacy.
Bottom Line: We are buyers of Trump stock
when bookies put him at a 10-25% probability
of winning the election. That is too low. But
as he approaches 40%, we look to sell. He is
still a serious candidate, but the “White Hype”
strategy is unlikely to materialize fully – he
will need more than white voters to win. An
exogenous variable, such as a recession, market crash, Clinton scandal, terrorist attack, or
other shock, opens up his likeliest path to the
White House.
chart I-13
12
%
10
Republican Presidential Vote By Gender
Gender Gap
Gender Gap (M minus F)
(Male minus Female)
8
6
4
2
0
© BCA Research 2016
-2
China: The Socialist Put
And Rising Government Leverage
Men And Women Disagree On GOP
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: CNN; Best and Krueger, Exit Polls: Surveying the
American Electorate, 1972-2010 (Washington, D.C.: CQ Press, 2012).
Over the course of the great Chinese credit boom in recent years, China bulls have happily pointed
out that government debt remains relatively low. Central government debt is officially at 16% of
GDP; local government debt is about 24% of GDP. Though this 39% of GDP is without a doubt understated, China’s total government debt is still apparently lower than most developed markets (DM),
as well as fellow emerging markets (EM) like Brazil, India, and Vietnam (Chart I-14). The increase
in its debt-to-GDP ratio over 2008-15 ranks in the lower range of countries monitored by the IMF.10
The central government has always limited its obligations. Take, for example, the often mischaracterized 4 trillion RMB stimulus package that Beijing launched in November 2008 to stave off the
global financial crisis. The central government committed about 1.18 trillion RMB or one-fourth
of the total.11 The rest of the package came from unleashing the state banks, state companies,
and local governments on a massive credit spree. Our own calculations show that, in 2009-10,
total credit grew by about four trillion RMB above trend, or about 13% of China’s 2008 GDP
(Chart I-15).
10
For China’s latest central government debt number, please see “Report on China’s Central, Local Budgets (2016),” Xinhua, March
18, 2016, available at www.npc.gov.cn. For the IMF, please see Fiscal Monitor, “Acting Now, Acting Together,” April 2016, available
at www.imf.org. As just one example of understatement, IMF statistics do not include China Railway Corporation debt, which now
totals over 4 trillion RMB. Please see “Rail Operator Says Its Debts Have Risen To More Than 4 Trillion Yuan,” Caixin Online, May
5, 2016, available at english.caixin.com.
11
For the central government contribution, please see Nicholas R. Lardy, “China’s Response To The Global Crisis,” in Sustaining
China’s Economic Growth After The Global Financial Crisis, Peterson Institute for International Economics (January 2012), available
at www.piie.com. For a larger estimate of the full stimulus effort, at 9.5 trillion or 27 percent of GDP, please see Christine Wong,
“The Fiscal Stimulus Program And Problems Of Macroeconomic Management In China,” OECD Public Governance Committee,
dated June 6-7, 2011, available at www.oecd.org.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
15
geopolitical Strategy - June 2016
BCA Research Inc.
chart I-14
%
80
China’s Public Debt Low Among Emerging Markets
Gross Government Debt
70
2008
2015
60
50
Percent of GDP
40
30
0
China
© BCA Research 2016
Vietnam
10
India
20
Brazil
An
exogenous
variable
opens up
Trump’s
likeliest path
to the White
House.
Source: IMF.
In short, over the course of 2008-15, government debt grew by 12% of GDP, while total private
non-financial debt grew by 93% of GDP.
The upside of this trend, the bulls assert, is that, entirely aside from the ability to mint money, the
government has plenty of fiscal room to bail out the financial and corporate sectors, where debt
has ballooned, keeping the economy as a whole stable. The government can thus clear the way for
another large economic expansion, this time (presumably) led by consumers rather than manufacturers and construction companies.
Today, the government has doubled down on investment-fueled growth, putting the transition to a
consumer economy on hold, a process we have dubbed the “Socialism Put,” i.e. Beijing’s decision
to protect against downside risks to growth no matter what the cost.12 Part of this effort is that a
transfer of debt to the public balance sheet is underway. There was a brief period of “austerity”
after the Xi administration took power, but falling growth rates and rising financial turmoil drove it
to adopt its predecessor’s reflationary stance in 2015. A critical part of this policy pivot has involved
increasing central government fiscal spending:
Strengthening the regime: The Xi administration came into power when the public was losing
faith in the Communist Party. The massive stimulus package saved aggregate demand at the
cost of aggravating economic imbalances and social ills. Banks, property, and heavy industry
saw great benefits; the rest of the country saw an even sharper rise in corruption, inequality,
FF
12
Please see BCA Geopolitical Strategy Monthly Report, “The Socialism Put,” May 11, 2016, available at gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
16
geopolitical Strategy - June 2016
BCA Research Inc.
and pollution.13 Table I-1 shows that while
the Hu administration boosted spending
on the property sector most of all, and cut
financial regulation and general public
services, the Xi administration has boosted
spending on the environment and financial
regulation while cutting energy (especially
coal), property, and some infrastructure.
It also punished local bureaucrats, causing a temporary chill in local government
spending. The economy has grown slower
but the party’s image and China’s quality
of life may be improving somewhat. Xi’s
focus on social stability and regime security can also be seen from rising spending
on agriculture and water conservation, the
media, and diplomacy.
China bulls
have happily
pointed
out that
government
debt
remains
relatively
low.
Local government bailouts: In 2014-15,
Beijing began bailing out the local governments that oversaw the 2009-11 credit
boom by rolling out a 3 trillion RMB system
of debt swaps by which the local governments could clear their balance sheets. It
is also setting up a new fleet of local “bad
banks” to absorb the rising tide of souring loans. Eventually Beijing wants local
governments to become self-funding, but
the central government is implicitly taking
on the losses that will be incurred from
the bad loans of the hyper-stimulus years
(Chart I-16).
FF
chart I-15
Tn
RMB
20
China’s 2008 Stimulus
Package Was All About Credit
Tn
RMB
CHINA AGGREGATE FINANCING
TREND
20
2008-9
stimulus
15
15
10
10
5
5
Tn
RMB
Tn
RMB
DEVIATION FROM TREND
4
4
2
2
0
0
-2
-2
© BCA Research 2016
06
08
10
12
14
16
FF
Cash injections: The central government has been injecting cash into state-owned commercial
and policy banks to help finance new infrastructure projects, the so-called “Special Infrastructure Fund,” and is re-initiating debt-equity swaps for zombie SOEs (Chart I-17).
FF
Rising deficit spending: In 2016, the National People’s Congress declared that the budget
deficit would expand from 2.4% to 3% this year. It has already gone beyond this in a sign of
13
Please see BCA Geopolitical Strategy Special Report, “Taking Stock Of China’s Reforms,” dated May 13, 2015, available at
gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
17
geopolitical Strategy - June 2016
BCA Research Inc.
In 201415, Beijing
began
bailing out
the local
governments
that oversaw
the 2009-11
credit boom.
table I-1
Fiscal Priorities Of Recent Chinese Presidents
CENTRAL GOVERNMENT
SPENDING PREFERENCES
MAJOR BOOSTS
MAJOR CUTS
HU JINTAO (2008-12)
CAGR %
XI JINPING (2013-15)
CAGR %
Housing
98.6%
Environmental Protection
58.8%
Land Resources
19.1%
Financial Regulation
34.9%
Education
17.5%
Commodity Reserves
26.6%
Science & Technology
15.5%
Other
18.5%
Commerce
-15.7%
Urban & Rural Community Affairs
-4.0%
Other
-28.0%
Resource Exploration, Electricity
-6.7%
Financial Regulation
-37.9%
Transportation
-9.1%
General Public Services
-47.6%
Commerce
-17.1%
SOURCE: CEIC.
the general fiscal policy shift (Chart I-18).
The amount is not as large as the expansion of credit, but the trajectory is what
matters. And it shows that the government
is preparing to take up more slack when
credit growth stalls.
New stimulus packages: Just last month,
the National Development and Reform
Commission unveiled the action plan of a
new infrastructure program, the “100-200300 Transportation Program,” first outlined
in its March annual report. Though some
have taken it for a new stimulus package,
the 2.2 trillion RMB of new projects slated
to begin in 2016 is probably contained
within the March budget. Either way, the
transport program marks a notable increase
on 2015 spending and policymakers are
clearly signaling more infrastructure spending to come.14
FF
chart I-16
Tn
RMB
3
Beijing Bails Out The Provinces
Tn
RMB
!
ANNUAL CHANGE IN LOCAL GOVERNMENT
DEBT SWAP
3
2
2
1
1
2015:
Bailout
begins
0
0
© BCA Research 2016
06
08
10
12
14
16
Social safety net: The new administration is expected to increase outlays to improve social
benefits and quality of life for a still relatively poor populace. Expanding the social safety net
is a prerequisite to creating a consumer society, since consumers are reluctant to spend their
rainy-day funds in a country with a tumultuous modern history. So far this shift in government
priorities is happening slowly (Chart I-19). But it should gain pace in the coming years if China
FF
14
Please see BCA China Investment Strategy Weekly Report, “Chinese Reflation: Less Monetary, More Fiscal,” dated June 1, 2016,
available at cis.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
18
geopolitical Strategy - June 2016
BCA Research Inc.
The Finance
Ministry
says China’s
government
will expand
debt on
central and
local levels
to offset the
deleveraging process
in the
corporate
sector.
chart I-17
Tn
RMB
Central Bank Lending Across The Spectrum
Tn
RMB
PBoC ASSETS:
CLAIMS ON GOVERNMENT
CLAIMS ON DEPOSITORY CORPORATIONS
CLAIMS ON OTHER FINANCIAL CORPORATIONS
OTHER
9
8
9
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
© BCA Research 2016
04
06
08
10
12
% Of
GDP
% Of
GDP
CHINA:
BUDGET DEFICIT
1
1
0
0
-1
-1
-2
-2
-3
-3
04
06
[email protected] •
08
Above all, the central government has clearly
signaled that it is willing to spend more to
maintain the 6.5% average growth rate that it
expects through 2021. The Finance Ministry
stated the obvious a few weeks ago when it
said that China’s government will be expanding debt on central and local levels to offset
the deleveraging process in the corporate
sector.15
15
© BCA Research 2016
10
12
14
16
16
is remotely serious about economic rebalancing. And more consumer-oriented
growth is not merely a policy preference
but a strategic necessity to wean China
off economic dependency on the U.S.
and the West.
chart I-18
China: Expanding Deficits
To Support The Economy
14
Please see “Treasury Officials answer reporters’
questions on government debt,” Ministry of Finance
Information Office, dated May 26, 2016, available at
www.mof.gov.cn.
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
19
geopolitical Strategy - June 2016
BCA Research Inc.
chart I-19
AFFAIRS OF COMMERCE & SERVICE
TRANSPORTATION: EXPENDITURE FOR PURCHASING VEHICLE
HEALTH & FAMILY PLANNING
DIPLOMACY: AID TO FOREIGN COUNTRIES
CULTURE, PHYSICAL EDUCATION & MEDIA
AFFAIRS OF LAND RESOURCES & METEOROLOGICAL
HOUSING SECURITY
ENVIRONMENT PROTECTION
FINANCIAL REGULATION
DIPLOMACY
OTHER
TRANSPORTATION
AGRICULTURE FORESTRY & WATER CONSERVANCY
SOCIAL SECURITY & EMPLOYMENT
© BCA Research 2016
URBAN & RURAL COMMUNITY AFFAIRS
0.0%
GENERAL PUBLIC SERVICE (GP)
5
5.0%
PUBLIC SECURITY: ARMED POLICE
10.0%
10
EDUCATION
15
15.0%
PUBLIC SECURITY
20
20.0%
SCIENCE & TECHNOLOGY
25
25.0%
Interest Payment For Debt
30
30.0%
China’s Spending Priorities Today
RESOURCES PROSPECTING, POWER & INFORMATION SERVICE
Where Is China’s Social Safety Net?
GRAIN, OIL & MATERIALS RESERVE & MGMT. SERVICE
%
35.0%
National Defense
When
the credit
channel
is thus
disrupted,
the government’s fiscal
tool becomes
more
important in
stabilizing
growth.
Share of Total Expenditures, 2015
Source: CEIC.
The reasoning for all this is clear. The Communist Party’s most effective tools of economic control
have become blunted in recent years from overuse – the banks and state firms are overly indebted
and the effectiveness of new credit has declined. Some bank bailouts have already occurred; we
think more are forthcoming.16 When the credit channel is thus disrupted, the government’s fiscal
tool becomes more important in stabilizing growth. The March decision to expand the fiscal deficit fits the playbook of the reformist Premier Zhu Rongji in the late 1990s, who demanded fiscal
expansion to offset the tightening of financial conditions while he restructured the banking system
(Chart I-20).
Of course, the casual way in which investors assert that China will “simply” transfer its corporate
debt onto the public balance sheet is misleading because it neglects what has for most countries
been a rocky financial and political process. As China’s central government takes on more debt,
its leaders will become more directly involved in how the local governments tax and spend. With
the 2017 “mid-term” Communist Party congress only a year away, the administration is likely to
remain tactically accommodative. But increasingly the central leadership has to think about its
present and future liabilities, so fiscal discipline will have to be re-imposed at some point, putting
a limit on reflationary capabilities – especially after 2017.
16
Please see BCA Geopolitical Strategy Monthly Report, “What Geopolitical Risks Keep Our Clients Awake?” dated March 9, 2016,
available at gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
20
geopolitical Strategy - June 2016
BCA Research Inc.
With the
2017
“midterm”
Communist
Party
congress only
a year away,
the administration
is likely
to remain
tactically
accommodative.
chart I-20
Ann%
Chg
32
chart I-21
Beijing’s Credit And Fiscal Levers
Ann%
Chg
32
CHINA:
GOVERNMENT SPENDING
28
28
24
24
20
20
16
16
12
12
8
8
Ann%
Chg
30
Ann%
Chg
30
CORPORATE DEBT
20
20
10
10
0
%
12
10
China’s Non-Defense Spending Priorities
CHINA
SHARE OF CENTRAL GOVERNMENT EXPENDITURES:
PUBLIC SECURITY
SCIENCE AND TECHNOLOGY
INTEREST PAYMENT FOR DEBT
TRANSPORTATION
EDUCATION
%
12
10
8
8
6
6
4
4
2
2
0
© BCA Research 2016
96
98 2000 02
04
06
08
10
12
14
© BCA Research 2016
16
10
12
14
16
SOURCE: CEIC.
There are three major implications for investors. First, Chinese growth will remain stable,
perhaps longer than the market consensus
currently holds (the Socialist Put).
Second, the government is boosting fiscal
spending because it recognizes that the credit
lever is losing effectiveness. It will also lean
against overheating in a bid to keep alive (some)
credibility on reform. Both factors make it unlikely that growth will overshoot. Maintaining
a minimal growth rate is not the same as “no
holds barred” stimulus. Still, for the markets,
given the gloom surrounding China in late
2015, the risks are to the upside for now.
Third, today’s concerns over Chinese corporate
debt will – in the long run – translate into concerns over Chinese sovereign debt, as occurred
in Japan. This will reflect the price the government paid to maintain the status quo, i.e. keep
[email protected] •
chart I-22
BPs
Are Chinese Sovereigns More
Vulnerable Than Corporates?
BPs
CHINA:
SOVEREIGN CDS* (LS)
OFF-SHORE CORPORATE AND
QUASI-SOVEREIGN SPREADS** (RS)
400
140
360
120
320
100
?
80
280
240
© BCA Research 2016
14
15
16
* SOURCE: THOMSON REUTERS/DATASTREAM.
** SOURCE: BARCLAYS.
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
21
geopolitical Strategy - June 2016
BCA Research Inc.
Given the
gloom
surrounding
China, the
risks are to
the upside
for now.
the SOEs from being culled or the economic structure from changing much. Debt-servicing costs
are already conflicting with science and technology and education spending that is badly needed
(Chart I-21). It is possible that markets are already calling attention to this phenomenon (Chart I-22).
Bottom Line: China’s central government is increasing bailouts, spending, and entitlements. This
will help prevent growth from collapsing in the short run, though it will coincide with volatility arising from the troubled banking and industrial sectors, and will heighten the need for the economic
restructuring policies that are now being postponed. Hence the social and political disruption likely
to coincide with tough reform has yet to be felt.
A Message From Our Indicators: Risk Is To The Upside
The two pillars of the ongoing reflation trade are Fed policy and China’s Socialist Put. The Fed’s
turn towards hawkishness has not impacted risk assets because, unlike in December 2015, its
signal for rate hikes is occurring in a context of reflationary Chinese policy, stable oil prices, and
some optimism that policy in emerging markets is moving along an orthodox path.
On the other hand, structural headwinds remain. The U.S. economy is beginning to feel the effects
of the USD bull market, which does not jive with the Fed’s hawkish rhetoric. Private-sector leverage
in EM remains large, as do decreases in investment efficiency. Political reforms in EM could prove
to be fleeting, particularly in Brazil. Global growth remains subdued. And Chinese fiscal stimulus
is focused on downside-risk protection, not on a pedal-to-the-metal expansion of economic activity,
which suggests that it will be “just enough” for China and “too little too late” for the rest of EM.
The mix of near-term bullish reflation and long-term structural problems has to be digested by the
market in present-day prices. In our view, everything depends on whether Chinese reflation has been
priced in by the markets and whether Fed policy is perceived as a source of risk.
To gauge genuine investor sentiment, we recently introduced two market-focused behavioral indicators. The first is the policy-adjusted equity risk premium (P-ERP), which recalibrates the bond yields
in the standard equity risk premium to account for the underlying uncertainty related to economic
policy, measured by the Economic Policy Uncertainty index (EPU).17 Specifically, when the P-ERP
jumped higher than the standard ERP, uncertainty was much more subdued than what was priced in
(Chart I-23). Alternatively, when the P-ERP registered considerably lower than the ERP, uncertainty
was underestimated and the result was a significant correction in the market.
Current readings of the P-ERP demonstrate that the potential policy risks, if any, are properly priced
in for the time being. Based on this data, the market sees limited downside risk even as the Fed
could hike rates in June or July.
17
Please see BCA Geopolitical Strategy Special Report, “Invisibility, Uncertainty & The Equity Risk Premium,” dated December 15,
2015, available at gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
22
geopolitical Strategy - June 2016
BCA Research Inc.
chart I-23
12
%
The ERP And Where The ERP Should Be Based On Uncertainty
U.S. Equity risk Premium*:
Original Estimate
Policy-adjusted estimate**
10
8
6
4
2
0
-2
-4
ERP
ERP RISK
Black
Monday
No real
threat
Sept 11
attacks
Gulf
War
Asian
Financial
Crisis
Dot-com
Bubble
Global
Financial
Crisis
© BCA Research 2016
Jan-85
Sep-85
May-86
Jan-87
Sep-87
May-88
Jan-89
Sep-89
May-90
Jan-91
Sep-91
May-92
Jan-93
Sep-93
May-94
Jan-95
Sep-95
May-96
Jan-97
Sep-97
May-98
Jan-99
Sep-99
May-00
Jan-01
Sep-01
May-02
Jan-03
Sep-03
May-04
Jan-05
Sep-05
May-06
Jan-07
Sep-07
May-08
Jan-09
Sep-09
May-10
Jan-11
Sep-11
May-12
Jan-13
Sep-13
May-14
Jan-15
Sep-15
May-16
Our policyadjusted
ERP suggests
that the
market sees
limited
downside
risk even
as the Fed
could hike
rates in June
or July.
* BCA Calculations, ** Source: Bloom, Davis, and Baker (2015).
The second measure is our Investor Willingness To Pay For Risk Indicator (WTP). It tackles the
quintessential methodological issue of how to cut through the noise and capture the signal. In
this case, the indicator was constructed to ignore investors’ perceptions or sentiment (the noise)
and concentrate on their actions (the signal). Based on relative volume flows between equities
and Treasurys, the indicator measures how much investors value one unit of risk per unit of safety
(Chart I-24).18 Readings above 1 mean that investors prefer equities over Treasurys, which is also
indicative of a risk-on environment. Readings closer to 1 signal that investors are indifferent between the two assets. And finally, readings below 1 mean that investors have a preference for the
safer asset in Treasurys, therefore depicting a risk-off environment.
Currently, the WTP in the U.S. has broken out of its downward trajectory and hooked back up.
Now these readings still warrant an underweight equity position, but they also mean that investors’
preference for safety may have hit a peak. Simply put, the WTP signals that risks in the U.S. equity
market are to the upside.
In Europe, the WTP also appears to have hit its floor and, combined with a much tighter gap between the change in the Shiller P/E and the WTP, this suggests that market expectations are more
18
Please see The Bank Credit Analyst Special Report, “To ß Or Not To ß: Measuring Willingness To Pay For Risk”, dated March
31, 2016, available at bca.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
23
geopolitical Strategy - June 2016
BCA Research Inc.
Our
Willingness
To Pay
For Risk
indicator
signals that
risks in the
U.S. equity
market
are to the
upside.
chart I-24
There’s Value In Behavior
Ann
Chg
U.S.:
WTP INDICATOR* (LS)
SHILLER P/E (RS)
1.2
5
1.1
0
1.0
-5
.9
-10
.8
-15
Ann
Chg
EUROPE:
WTP* (LS)
SHILLER P/E (RS)
5
0
1.0
-5
Closing
gap and
rebounding
.8
-10
-15
Ann
Chg
JAPAN:
WTP* (LS)
SHILLER P/E (RS)
35
More
volatility...
1.2
25
15
1.0
5
-5
.8
...yet
properly
gauged
© BCA Research 2016
02
04
06
As for Japan, this increased volatility in
the WTP as well as its recent pronounced
downward trend should raise concerns for
investors. We had originally stated that the
WTP in Japan would augur well for Japanese
equities, given the above 1 reading and the
tight relationship with the Shiller P/E. But the
reality may be that renewed uncertainty over
the Japanese economy combined with Prime
Minister Abe’s not yet having redoubled reflationary policy may have driven investors to
adopt an increasingly risk-off bias.
10
1.2
2000
in line with valuations, resulting in an even
more stable and positive outlook for European
equities.
08
10
12
14
-15
-25
Bottom Line: According to our quantitative
indicators, risks are to the upside for the time
being. At some point, investors will price in
the Socialist Put from China and focus on its
effectiveness in lifting global growth.
Housekeeping: Early Oil
Rebalance And Brexit Watch
Close Long WTI Dec/16 Call At $50 / Short
Dec/16 At $55: After Canadian wildfires
started to remove about 1 million barrels per
day (b/d) of production over the past month,
global oil markets accelerated towards a
sooner-than-expected balance (Chart I-25).
The physical rebalancing of global supply
and demand catapulted prices to $50/bbl
last week, which prompted us to close our
December 2016 WTI $50/$55 call spread
recommendation for a 106.3% return. This
view was the product of collaboration with
our colleagues at BCA’s Commodity & Energy
16
* WILLINGNESS TO PAY.
SOURCE: BLOOMBERG; BCA CALCULATIONS.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
24
geopolitical Strategy - June 2016
BCA Research Inc.
Our indicator
suggests an
even more
stable and
positive
outlook for
European
than
American
equities.
Strategy.19 They provided the physical rebalancing narrative, while we focused on the risks to
supply in politically unstable regimes.
Open Long WTI Jan/17 / Short WTI Jul/17:
Since oil markets have balanced, we have adopted the recommendation of BCA’s Commodity
& Energy Strategy to follow a new front-to-back
(FTB) crude oil spread, going long WTI Jan/17
and short WTI Jul/17. As we have described
in a previous Special Report, we continue to
expect geopolitical risks, particularly in Nigeria,
Venezuela, and Iraq.20
chart I-25
Mn Bbl/
Day
Crude Markets Are In Balance
BCA CRUDE OIL BALANCE (LS)
BCA WORLD SUPPLY (RS)
BCA WORLD DEMAND (RS)
Mn Bbl/
Day
98
2
94
1
0
90
Since mid-2015, the market has consistently
underestimated right-tail risks to crude markets. In such an unstable environment, the
-1
© BCA Research 2016
front (or near-term contracts) of the WTI and
Brent curves will keep experiencing upward
13
14
15
16
SOURCE: BCA CALCULATIONS.
price pressures. Two factors are expected to put
downward pressures on the back of the curve:
first, longer-dated hedging by U.S. light-tight-oil producers (LTO) locking in revenues at $52-58/bbl
range; second, refiners bidding for crude from storage as markets go deeper into deficit, boosting
the dollar value of a delivered barrel relative to a barrel delivered in the future.
Since its May 26 initiation date, this recommendation has registered a 32% loss. It is important
to note that the returns for such a position are extremely volatile, though in absolute terms the
increments are quite small. But because we entered this position at a small spread, any change
will exaggerate the returns in either direction. Nevertheless, we expect the spread to play out in our
favor given the current backdrop in oil markets.
Hold Short British Pound / Long Norwegian Krone, close on June 22: As the Brexit vote approaches
rapidly, we continue to expect that the pound will suffer as uncertainty persists. Since initiation,
this recommendation has been rather flat at -0.72%. But, as described above, the resurgence of
the Brexit vote in the latest polls should force the GBP/NOK cross to weaken. As we reiterate this
view, we also want to stress that this position should be held until the day before the referendum.
Our base-case scenario remains that Brexit will not happen, which will put a floor on the GBP/NOK’s
weakness, thereafter negating the rationale behind this position.
19
Please see BCA Geopolitical Strategy Special Report, “‘Holy War’ And Oil Prices,” dated January 5, 2016, available at
gps.bcaresearch.com
20
Please see footnote above.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
25
BCA Research Inc.
Global oil
markets
have
accelerated
towards
a soonerthanexpected
balance.
geopolitical Strategy - June 2016
As an alternative strategy, we would contemplate the idea of betting against volatility in the pound
by shorting options. Given the recent polls reverting back towards a very close outcome, volatility
in the GBP has spiked up to levels of the Great Recession. Such a drastic event has prompted a
herd of investors to seek insurance against Brexit. But we believe that even if Brexit were to occur,
the outlook for the pound is nowhere near as dire as what happened during the Great Recession.
Therefore our view is that implied volatility is unwarrantedly high. As such, options have become
much more expensive and selling options more attractive. One should notice, however, that this
strategy offers limited upside risk, but unlimited downside risk.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
26
geopolitical Strategy - June 2016
BCA Research Inc.
Discover
what you
can do
with BCA
Analytics.
II. IN FOCUS
Japan: The Emperor’s Act Of Grace
Dear Client,
This month we are pleased to offer a Special Report on Japan co-authored by our colleague Garry Evans,
Managing Editor of BCA’s Global Asset Allocation service. We trust you will find it insightful.
All very best,
The GPS Team
FF
Abenomics has disappointed, but not failed. More is to come, providing a tailwind to Japanese
assets;
FF
The ruling party will likely retain its majority in the upper house election in July. If it loses that
majority, buy into the sell-off;
FF
Debt monetization is the path of least resistance given the country’s debt and growth predicament;
FF
Our models advise staying neutral, not underweight, in a six- to nine-month time frame for
developed market investors due to these positive policy effects.
J
apanese Prime Minister Shinzo Abe, whose ruling Liberal Democratic Party (LDP) faces a test in
July 10 elections for the upper house, painted a particularly bleak picture of the global economy
while hosting the G7 summit in May. He has announced the second delay to a planned increase in
the consumption tax rate from 8% to 10% and a “comprehensive” stimulus package to come this
fall. He is looking to shore up flagging support for his policies at home and abroad.
In the following report we argue that “Abenomics” remains intact due to the political and geopolitical
logic that gave rise to it in the first place.1 There are even some positive secular trends independent
of Abenomics that will provide a slight tailwind for a country whose structural weaknesses are only
too well known.
The upper house elections in July are likely to produce the most market-positive outcome, extending the horizon of policy support through 2018.
As a result, we see the Abe administration as having the political capital to continue experimenting with unorthodox policy solutions in the coming years to cope with the country’s unparalleled
structural challenges. These will be the modern equivalent of the ancient Tokusei, imperial “Acts
of Grace” or edicts ordering large-scale debt forgiveness.
1
Please see BCA Geopolitical Strategy Special Report, “Japan’s Political Paradigm Shift: Investment Implications,” dated December
12, 2012, available at gps.bcaresearch.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
27
geopolitical Strategy - June 2016
BCA Research Inc.
Japan
roared back
to life in
2012.
chart II-1
% Of
GDP
1.8
chart II-2
Japan: A Resource-Dependent Island
JAPAN:
CURRENT ACCOUNT BALANCE (LS)
IMPORTS OF FUEL (INVERTED, RS)
Japan: Worrying About The Neighbors
% Of
GDP
.09
.10
1.6
GEOPOLITICAL POWER INDEX*:
JAPAN
CHINA
RUSSIA
.6
.6
.11
1.4
.12
1.2
.5
.5
.4
.4
.3
.3
.13
1.0
.14
.15
.8
.16
.6
.17
.4
?
.18
.2
.19
.2
.2
© BCA Research 2016
08
10
© BCA Research 2016
12
14
16
90
92
94
96
98 2000 02
04
06
08
10
12
14
16
* THE GEOPOLITICAL POWER INDEX MEASURES A COUNTRY'S
POWER BASED ON A WEIGHTED AGGREGATION OF ITS ECONOMIC, MILITARY,
POLITICAL, TECHNOLOGICAL, AND GEOGRAPHICAL ENDOWMENTS.
Japan Is Low But Rising
Japan hit a secular bottom, as a nation, in
2011. The massive earthquake, tsunami, and
nuclear crisis that occurred that year struck
when the economy was still reeling from the
global financial crisis (Chart II-1). The Fukushima disaster shook the public’s sense of
security and safety to the core. Japan had also
come under pressure from all sides as a result
of China’s full emergence as an economic peer
and military rival, Russian resurgence, and
American inattentiveness (Chart II-2).
It is not a coincidence that the country roared
back to life in 2012 with reconstruction spending, regime change at the central bank, a more
assertive foreign policy, and a restoration of the
LDP, the traditional ruling party. The public was
casting about for solutions.
[email protected] •
chart II-3
Kuroda’s Jujitsu
130
REAL EFFECTIVE EXCHANGE RATE*:
JAPAN
KOREA
CHINA
EURO AREA
U.S.
130
120
120
110
110
100
100
90
90
80
80
70
70
© BCA Research 2016
12
14
16
* SHOWN REBASED TO JAN 2012 = 100.
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
28
geopolitical Strategy - June 2016
BCA Research Inc.
chart II-4
% Of
GDP
chart II-6
Abe’s Second Arrow Goes Awry
% Of
GDP
JAPAN:
FISCAL THRUST
.8
.8
Ann%
Chg
8
Abenomics Runs Into Some Trouble
Ann%
Chg
8
JAPAN:
NOMINAL GDP
.6
.6
6
6
.4
.4
4
4
.2
.2
2
2
0
0
-.2
-.2
0
0
-.4
-.4
-2
-2
-.6
-.6
-4
-4
-.8
-.8
-6
-6
-1.0
-1.0
-1.2
-1.2
© BCA Research 2016
12
HEADLINE CPI
CORE CPI (EX-ENERGY AND FOOD)
16
Corporate Reform Takes Time
4
2
2
0
0
%
JAPAN:
DIVIDEND YIELD (LS)
SUBSEQUENT 10-YEAR REAL
RETURN ON EQUITIES* (RS)
2.5
Ann%
Chg
4
14
chart II-5
%
Ann%
Chg
25
20
2.0
15
-2
-2
© BCA Research 2016
10
1.5
5
1.0
0
.5
-5
© BCA Research 2016
80
85
90
95
2000
05
* ANNUALIZED REAL TOTAL RETURN;
SOURCE: DATASTREAM / THOMSON REUTERS;
MSCI INC. (SEE COPYRIGHT DECLARATION).
[email protected] •
10
15
90
92
94
96
98 2000 02
04
06
08
10
12
14
16
Prime Minister Shinzo Abe promised to
“revitalize” the nation by firing up monetary and fiscal stimulus, recapturing the
structural reform momentum of the Koizumi
years (2001-5), and taking a sharp turn toward foreign policy hawkishness. As is well
known, Abe’s team at first succeeded on
the monetary and, to a lesser extent, fiscal
side (Charts II-3 and II-4), but fell short on
structural reform. Corporate governance has
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
29
geopolitical Strategy - June 2016
BCA Research Inc.
Secular
trends
suggest that
2011 was a
“bottom”
of sorts and
Japan’s
situation is
improving.
chart II-7
chart II-8
Shrinking Population And Low Potential GDP
Mn
Mn
JAPAN:
LABOR FORCE*
PROJECTION*
90
90
80
Ann%
Chg
Japanese Productivity Holding Up
Ann%
Chg
LABOR PRODUCTIVITY*:
JAPAN
U.S.
U.K.
EMU-5**
4
4
80
70
70
60
60
50
50
Th
USD/
Person
3
2
2
1
1
Th
USD/
Person
LABOR PRODUCTIVITY**
PROJECTION: BASE CASE
PROJECTION: BEST CASE
PROJECTION: WORST CASE
100
3
100
0
0
© BCA Research 2016
80
80
60
60
40
40
20
20
GDP GROWTH
POTENTIAL GDP GROWTH***
POTENTIAL GDP GROWTH PROJECTION****
Ann%
Chg
Ann%
Chg
16
16
12
12
8
8
4
4
0
0
© BCA Research 2016
60
70
80
90
2000
10
20
30
40
50
* SOURCE: UN POPULATION DIVISION.
** SOURCE: TOTAL ECONOMY DATABASE, CONFERENCE BOARD.
*** SUM OF LABOR FORCE AND PRODUCTIVITY GROWTH.
**** ASSUMING PRODUCTIVITY GROWS AT 1990-2015 AVERAGE.
[email protected] •
90
95
2000
05
10
15
* SOURCE: TOTAL ECONOMY DATABASE, THE CONFERENCE BOARD.
SHOWN AS 4-YEAR MOVING AVERAGE.
** GDP-WEIGHTED AVERAGE OF GERMANY, FRANCE, ITALY, SPAIN,
AND THE NETHERLANDS.
improved, but not dramatically (Chart II-5).
Moreover, since 2015, global headwinds and
the rising yen have canceled much of his
progress (Chart II-6).
Nevertheless, secular trends suggest that
2011 was indeed a “bottom” of sorts and
Japan’s situation is improving.
First, while there is clearly a deflationary
vortex at the base of the Japanese economy
from fewer people, less consumption, and
fewer workers, nevertheless both GDP growth
and potential GDP growth have perked up
under Abe (Chart II-7). Productivity growth
is sufficient, given the shrinking workforce
(Chart II-8). Meanwhile the net wealth of
households has increased over the past decade, and sharply so since Abe took office in
2012 (Chart II-9).
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
30
geopolitical Strategy - June 2016
BCA Research Inc.
chart II-9
% Of
GDP
chart II-10
Households Getting Richer
%
The Rise Of Working Moms
%
JAPAN:
FEMALE LABOR
PARTICIPATION RATE (LS)
FERTILITY RATE (RS)
Net Worth of Japanese Households
485
480
1.5
475
50
470
465
1.4
460
49
455
450
1.3
445
© BCA Research 2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
© BCA Research 2016
90
92
94
96
98 2000 02
04
06
08
10
12
14
16
Source: Japan Cabinet Office.
Second, fertility rates continue to improve,
albeit from a sickly level. It is becoming clear
that they bottomed in 2005, well before Abe’s
term. The fertility uptick is important because
the same period has seen a dramatic increase
in women’s participation in the workforce
– especially under the Abe administration
(Chart II-10). The society may be, at long last,
becoming more accepting of working mothers.
While it will take decades for the country’s
demographics to stabilize (assuming the positive trend continues), the important point is
that a rebound is occurring at all. Growth expectations, pro-fertility policies, or changes in
national attitudes, have gained traction. Japan
is already a decade into the trek toward some
new equilibrium.
chart II-11
Tn
JPY
Has Deflation Bottomed?
JAPANESE
PRIVATE NON-FINANCIAL DEBT (LS)
GDP DEFLATOR (RS)
1000
110
900
105
800
100
700
95
600
500
90
© BCA Research 2016
85
90
95
2000
05
10
15
Third, deflation may have peaked. Chart II-11
shows that the GDP deflator has bottomed,
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
31
geopolitical Strategy - June 2016
BCA Research Inc.
Even Japan’s
monstrous
public debt
burden is
looking a
bit more
manageable.
% Of
GDP
chart II-12
chart II-13
Improving Pace Of Debt Increase
Japan: A Top Investor In The World
% Of
GDP
JAPAN:
NET GOVERNMENT DEBT (LS)
GROSS NATIONAL SAVING (RS)
34
120
32
100
% Of
GDP
% Of
GDP
NET INTERNATIONAL INVESTMENT POSITION:
JAPAN
GERMANY
CHINA
SWITZERLAND
160
160
140
140
120
120
100
100
80
80
60
60
40
40
30
80
28
60
26
40
24
20
22
20
20
© BCA Research 2016
© BCA Research 2016
80
90
2000
10
06
08
10
12
14
16
while corporations are no longer deleveraging – a driving factor behind Japan’s anemic “lost decades” – but in fact taking on more debt. Despite recent setbacks in inflation expectations, core
inflation remains positive (see Chart II-6 above).
Lastly, even Japan’s monstrous public debt burden is looking a bit more manageable. Insofar as
the Abe administration raises nominal GDP growth and inflation, the debt dynamics will improve
(Chart II-12).
Few would deny that the country’s debt dynamics portend some crisis in future, perhaps not far
off.2 There are two key reasons for Japan’s ability to prolong the status quo:
FF
Savings: Japan is still a savings rich society, despite the slow ebbing of its treasure trove over
the years. It continues to run current account surpluses that replenish corporate, household, and
government coffers (see Chart II-1 above). Corporate savings remain massive, while households
have not yet become net debtors. And the country has one of the most positive net international
investment positions in the world (Chart II-13). All these factors have kept government bond
yields lower for longer than many investors ever imagined.
2
Academic research by Takeo Hoshi and Takatoshi Ito has shown that Japan could hit a physical (not political) debt ceiling as early
as the mid-2020s, assuming that foreign assets are not repatriated and government policies do not alter the country’s debt-savings
trajectory significantly. Please see “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?” NBER Working
Paper 18287 (August 2012), available at http://www.nber.org/papers/w18287.pdf.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
32
geopolitical Strategy - June 2016
BCA Research Inc.
Policy: The Bank of Japan (BoJ) continues to suppress Japanese Government Bond (JGB) yields
through massive quantitative easing. True, after the central bank’s partial retreat from its experiment with negative interest rates earlier this year, the market has become more skeptical
about how low real rates can go. A problem also looms in the medium run, when the BoJ runs
out of JGBs to buy. But as we discuss below, the central bank has yet to deplete its arsenal of
unorthodox reflationary tools.
FF
Bottom Line: Abenomics has disappointed, particularly on structural reform, but it has not failed.
Secular trends independent of the Abe administration suggest that the nation as a whole is recovering from its gloomiest point in recent memory.
What Next For Abe?
The Abe administration is likely to retain its majority in the House of Councillors, the upper house of
the National Diet, in upcoming elections. Abe is the most popular prime minister in recent memory,
not excepting Koizumi, and his administration’s support is holding up while the opposition parties
remain fragmented and unpopular (Charts II-14 and II-15).3
chart II-14
1.2
chart II-15
Shinzo Abe: More Popular Than Koizumi
%
Japanese Opposition Fragmented
Approval Rating Of Japanese Prime Ministers*
Abe(Dec.
(Dec2012
2012- -Present)
Present)
Abe
Noda(Sep.
(Sep2011
2011- -Dec.
Dec2012)
2012)
Noda
Kan
Kan(Jun.
(Jun2010
2010- -Sep.
Sep2011)
2011)
Hatoyama
(Sep.
2009
- Jun.
Hatoyama
(Sep
2009
- Jun2010)
2010)
Aso
Aso(Sep.
(Sep2008
2008--Sep.
Sep 2009)
2009)
Koizumi
Koizumi(May
(May2001
2001- Sep.
- Sep2006)
2006)
1.0
%
OPINION POLLS*:
LDP AND KOMEITO
DPJ
COMMUNIST
SOCIAL DEMOCRAT
50
50
40
40
30
30
20
20
10
10
0.8
0.6
0.4
© BCA Research 2016
0.2
0
5
10 15 20 25 30 35 40 45 50 55
Months After Coming To Office
60
65
11
12
13
14
* SOURCE: NHK BROADCASTING.
15
16
© BCA Research 2016
Source: NHK Broadcasting.
* Rebased to 1 at the beginning of the prime minister’s term in office.
3
Moreover, the LDP rarely loses the upper house: rural seats are particularly overrepresented in this chamber and the LDP remains
fairly popular in rural districts. See Kay Shimizu, “What the 2012 Lower House Elections Has to Say about Japan’s Urban-Rural
Divide,” in R. Pekkanen et al, Japan Decides 2012: The Japanese General Election, pt. III (London: Palgrave, 2013), pp. 148-53.
http://link.springer.com/chapter/10.1057/9781137346124_12
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
33
geopolitical Strategy - June 2016
BCA Research Inc.
chart II-16
Japan’s Liberal Democrats Have A Strong Electoral Record
67
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
67
Japanese Upper House Elections
SCENARIOS
2016 (Bottom X-axis)
Scenarios
2016
HISTORIC
RESULTS (Top X-axis)
Historic
results
62
Ruling Coalition Share Of Seats
Regardless
of the upper
house
election,
the ruling
coalition’s
two-thirds
supermajority in
the lower
House of
Representatives is not
at risk.
62
57
57
52
52
47
47
© BCA Research 2016
42
2013 RepriseLikely outcome if ruling
Public
Opinion Polls
Average
coalition
performs according toLong-Term
...
2013 REPRISE
PUBLIC OPINION POLLS
42
LONG-TERM AVERAGE
This is an important point given that we consistently hear from clients that Abenomics is unpopular
or losing popularity. The data tell the opposite story: Abenomics has made Abe the most popular
Japanese prime minister in recent memory.
At the same time, the July upper house election does present some risks to the downside. The LDP
coalition is likely to win only a thin majority judging by opinion polls (Chart II-16). The gradual
sapping of support over the course of Abe’s term and the weakening economy could leave his party
vulnerable to surprises. The opposition’s organization may also be improving.4 And exogenous
“shocks” could always tilt the scales.
The good news for investors is that regardless of the upper house election, the ruling coalition’s
two-thirds super-majority in the lower House of Representatives is not at risk. It is by far the more
powerful of the two chambers, and Abe’s two-thirds majority there will be able to override the upper
house if the opposition gains control of it.
In the medium term, the loss of a majority would call into question the recent stabilization of Japanese policy on the back of a unified parliament, threatening the continuity of Abe’s policies as the
next general election deadline approaches in December 2018.
4
The opposition parties are attempting a strategy of cooperation whereby certain parties, namely the Japanese Communist Party,
withdraw their candidates in certain districts so as to avoid dividing the opposition vote among themselves. This tactic failed in
recent by-elections in Hokkaido and Kyoto, but it remains to be seen how successful it will be across the nation in July.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
34
geopolitical Strategy - June 2016
BCA Research Inc.
Nevertheless, even in the unlikely event that the LDP loses its majority, Abe’s administration will
retain ultimate control of bills (and its control of budgets and treaties is not in question). So the
short-term policy risks are limited.
Moreover, ironically, the fact that the LDP coalition will probably fall short of a super-majority in
the upper house is market positive. An overwhelming victory would embolden Abe to try rapid,
ambitious changes to the constitution, one of his chief long-term policy aims, which would create
greater national controversy in the short and medium term. Changes are controversial because they
would ultimately allow Abe or his successors to re-arm the country faster.
By contrast, with a bare majority, Abe would have to trim his ambitions and work with opponents to
reach the required two-thirds vote for constitutional revision. The focus on more feasible structural
economic reforms would likely be greater.
Lastly, BoJ Governor Haruhiko Kuroda’s faction has recently consolidated its power, making it unlikely that the central bank will reverse course or impede Abe’s reflationary efforts.
Bottom Line: The best outcome for markets in the upper house election is the most likely one: an
LDP majority, but not a super-majority that would invite overconfidence and constitutional wrangling. An LDP loss of its majority is a buying opportunity, since it would prompt a negative market
reaction in the immediate aftermath, despite the fact that Abe’s party would retain full control of
policy, at least the next general elections due in 2018.
Imperial Debt Forgiveness?
How far is Japan willing to go to defeat deflation?
Along with our colleagues at BCA’s Global Investment Strategy, we think it likely that the BoJ will
introduce increasingly radical policies – including perhaps outright debt monetization – in the coming years to reduce the public debt burden, devalue the yen, spark inflation, and encourage growth.5
Given that Japanese policymakers are not openly debating such a policy, is this speculation justified?
To be sure, it will be only after much soul-searching that policymakers adopt a policy as radical as
helicopter money or “money financed fiscal deficits (MFFD),” to use the term preferred by Adair
Turner, a leading proponent of the concept.6
For one, Japanese politicians and bureaucrats, despite the relative boldness of the Abe era, are still
not given to leaping headlong into radical policy, as the recent experiment with negative interest
rates shows. There is at least some risk that, as the economy deteriorates, they could lose their
nerve and sink back into 1990s-style vacillations.
5
Please see BCA Global Investment Strategy Weekly Report, “Escape From The Land Of The Rising Yen,” dated April 15, 2016,
available at gis.bcaresearch.com.
6
His book, Between Debt And The Devil (Princeton: Princeton University Press, 2016) is probably the best detailed argument in
favor of the policy.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
35
geopolitical Strategy - June 2016
BCA Research Inc.
Could
policymakers
and the
public
change their
minds on
debt monetization? We
think so.
The Bank of Japan also has a very strong institutional memory of the events of the 1930s
(similar to the Bundesbank’s obsession with
the hyper-inflation under the Weimar Republic
in 1922-4). Under Finance Minister Korekiyo
Takahashi in 1931, the Japanese government
increased infrastructure spending to offset the
effects of the Great Depression, and changed
the Bank of Japan law to force the central bank
to underwrite new government bond issuance.
The policy was enormously successful: real
GNP growth recovered from -1.7% in 1931 to
+10.8% in 1935. But, when Takahashi tried
to rein back spending, the military objected to
cuts in its budget. Takahashi was assassinated
in the failed coup d’etat in February 1936. His
successor yielded to the military’s demands,
which led to consumer inflation rising quickly
to 15% – and indirectly contributed to World
War Two (Chart II-17).7
Moreover, a policy of deliberately creating inflation would be unpopular with savers who, in
Japan, are disproportionately old people. With
52% of Japanese household assets left in bank
deposits and postal savings, inflation would
essentially represent a tax on these savings. A
transfer of wealth from old savers to younger
consumers is exactly what Japan needs, but
with 26% of Japan’s population over the age
of 65, politicians might fear the opposition.
chart II-17
Ann%
Chg
Takahashi’s Impact On 1930s Japan
Ann%
Chg
JAPAN:
CONSUMER PRICE INDEX
15
15
10
10
5
5
0
0
-5
-5
-10
-10
Gold Standard
abandoned
Ann%
Chg
Ann%
Chg
REAL GNP
20
20
15
15
10
10
5
5
0
0
-5
-5
© BCA Research 2016
26
28
30
32
34
36
38
40
Could policymakers and the public come to change their minds? We think so, for the following reasons:
FF
Tax increases to control the debt have proven extremely difficult in practice, as is evidence by
the halting increases to the consumption tax, a saga that began in 1997 and is in the midst
of yet another postponement. Corporate taxes, meanwhile, would threaten the cash cows that
enable banks to keep buying JGBs.
7
A good description of these events can be found in Toshiki Tomita, “Direct Underwriting of Government Bonds by the Bank of Japan
in the 1930s,” Nomura Research Institute (2005), available at www.nri.com.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
36
geopolitical Strategy - June 2016
BCA Research Inc.
chart II-18
chart II-19
Social Spending In A Graying Society
Japanese Government Expenditures
% Of
GDP
Debt Costs Remain Low
240
42.5%
56.3%
% Of
GDP
JAPAN:
GROSS GOVERNMENT DEBT (LS)
INTEREST PAYMENT (RS)
2.0
1.6
200
Other
1.2
160
Social
security
related
Debt
service
Debt
costs
Service
Other
.8
120
24.4%
.4
80
0
Costs
24.0%
% Of
GDP
19.7%
2000
Source: MOF.
FF
FF
FF
8
Social
Security
Related
% Of
GDP
4.4
U.S.
33.1%
100
2016
4.0
3.6
80
© BCA Research 2016
Spending cuts are even farther fetched,
since new spending has gone toward
social care and pensions for the mushrooming population of long-living retirees.
To cut it significantly would be political
suicide given the country’s demographics
(Chart II-18).
Debt servicing costs remain near zero
(Chart II-19), giving little impetus for policymakers to press forward on fiscal consolidation and provoke a negative reaction
from the economy and voters.8
Deflation is no longer tolerable, if it ever
was. Households are losing their status as
net savers (Chart II-20). While deflation
increased the value of their savings, it also
led to low growth, part-time employment,
3.2
60
2.8
40
2.4
% Of
GDP
% Of
GDP
U.K.
3.4
80
3.0
60
2.6
2.2
40
1.8
© BCA Research 2016
80
85
90
95
2000
05
10
15
If opposition parties come into power, they will also be averse to raising taxes – none will want to make the mistake of former Prime
Minister Noda, who in 2012 essentially staked his political future and his party’s grip on power on raising the consumption tax,
helping to bring Abe and the LDP to power in December of that year.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
37
geopolitical Strategy - June 2016
BCA Research Inc.
Japanese
policymakers
will take
bold action
if the country
experiences
a “crisis”
that
threatens to
throw
Japan fully
back into
deflation.
stagnant wages, and national decline. Assuming Abe retains the upper house, his
mandate to fight deflation will be renewed
yet again.
Times have changed: The Takahashi analogy, like that of the Bundesbank, is only
loosely analogous to today’s situation. It is
like comparing Shinzo Abe’s overhaul of the
country’s security and defense policies to
the militarization of the 1930s.9 Unorthodox BoJ policies can certainly overshoot or
backfire, but they are not likely to lead to
military coups in the foreseeable future.
FF
chart II-20
%
30
Households Losing “Net Saver” Status
%
HOUSEHOLD SAVINGS RATE
(PERCENT OF DISPOSABLE INCOME)
JAPAN
EURO AREA
U.K.
U.S.
30
20
20
10
10
Indeed, Japan has historical precedent for nationwide debt forgiveness. The ancient practice
0
Dipped negative
© BCA Research 2016
known as Tokusei, an imperial “Act of Grace,”
entailed the emperor coming forward during
80
85
90
95
2000
05
10
NOTE: DATA SHOWN AS A 4-QUARTER MOVING AVERAGE.
periods of extreme indebtedness and granting
SOURCE: OXFORD ECONOMICS.
10
a blanket amnesty for debtors. The analogy
may seem far-fetched, but then again, Japan still has an emperor.
0
15
Bottom Line: Inflation is the path of least resistance compared to raising taxes or cutting spending.
For Abe’s team in particular, having staked so much institutional credibility on reflating the economy
since 2012, failure now would make deflationary expectations more entrenched than ever. Japanese
policymakers will especially take bold action if the country experiences a “crisis” that threatens to
throw Japan fully back into deflation.
What Are The Options?
Such a crisis could come quite soon. The IMF estimates that the Bank of Japan will run out of
JGBs to buy in 2017 or 2018, when its ownership will reach JPY400trn (Chart II-21). That is the
maximum the IMF believes the BoJ can own, given the need for banks, insurance companies, and
pension funds to maintain a proportion of their portfolios in risk-free securities. The IMF concludes
that the BoJ “may need to taper its purchases sometime in 2017 or 2018.”11
9
Japan today is not a newly industrializing nation and fledgling democracy, with a booming, youthful, nationalist population, determined
to carve out a sphere of influence against colonialist western powers at any cost, as it was in the 1930s. It is a fundamentally
status quo power, militarily subordinated to the United States, and a democracy with mature institutions.
10
Please see Delmer M. Brown, “The Japanese Tokusei of 1297,” Harvard Journal of Asiatic Studies 12 (1949), pp. 188-206. The
mass debt forgiveness led lenders, mostly shopkeepers, to riot in the immediate aftermath, but it benefited the majority, especially
poor farmers, and re-set the economy.
11
Please see Serkan Arslanalp and Dennis Botman, “Portfolio Rebalancing in Japan: Constraints and Implications for Quantitative
Easing,” IMF Working Paper 15/186, August 2015, available at www.imf.org.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
38
geopolitical Strategy - June 2016
BCA Research Inc.
What could the Bank of Japan do then? Assuming that inflation remained well below its target
and growth was still anemic, it would have to
use other measures to offset the impact of
this tapering. But it already owns 7% of Japanese corporate bonds and 47% of Japanese
Exchange Traded Funds (more ETFs could be
created for it to buy, but it would probably be
reluctant to raise its ownership of equities,
directly or indirectly, much above the 2.8%
of Topix market cap that it currently owns).
When it cut rates to negative in February, this
resulted only in banks’ share prices falling and
the yen appreciating. It could try to offset the
deleterious consequences of negative rates on
banks’ profits by introducing a scheme, similar
to the ECB’s Targeted Longer-Term Refinancing
Operation (TLTRO) or the Bank of England’s
Funding for Lending, to provide banks that grow
their loan books with funding at negative rates.
But it would be unlikely to be able to cut rates
more than another 20 or 30 BPs into negative
territory from the current -10 BPs.
So some form of debt monetization would likely
appear the least bad option. How would it work?
Several methods are conceivable.
chart II-21
Tn
JPY
900
BoJ Gobbling Up JGBs
Tn
JPY
OUTSTANDING JAPAN GOVERNMENT DEBT
BOJ-OWNED JAPAN GOVERNMENT DEBT
900
800
800
700
700
600
600
500
Max?
500
400
400
300
300
200
200
100
100
Tn
JPY
Tn
JPY
140
NON-FINANCIAL CORPORATION HOLDINGS OF JGB
CORPORATE PROFIT
140
120
120
100
100
80
80
60
60
40
40
The government could, for example, announce
© BCA Research 2016
a massive fiscal stimulus, of perhaps 5% of
98 2000 02
04
06
08
10
12
14
16
GDP (JPY25trn), mainly to be used on infrastructure, and announce that it will continue
to spend this amount annually until inflation hits the BoJ’s target of 2%. Even more powerfully, it
could increase the inflation target to 3%, or target a nominal GDP level (and the Abe government
already has a target of raising nominal GDP to JPY600 trn, from the current JPY503 trn, by 2020).
On the same day, the BoJ would announce an increase in its JGB purchases from JPY80 trn a year
to JPY105 trn, effectively buying up all the increased issuance. Since it would buy these bonds
from the secondary market, this would not be illegal (whereas direct underwriting of the bonds
would contravene Article 5 of the Public Finance Act).
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
39
BCA Research Inc.
What would
force the
Japanese
authorities
to resort to
such extreme
measures
when they
could
simply use
fiscal policy?
geopolitical Strategy - June 2016
Another option would be to extend the maturity of JGBs that the Bank of Japan buys, currently
mainly seven to 10 years (the average maturity of the JGBs it holds is 7.2 years). In the example
given above, the Japanese government could issue 50-year bonds (to match the lifetime of the
infrastructure projects), which the BoJ could buy and promise never to sell back into the market.
Alternatively, the BoJ could do a “mega twist’ (named after “operation twist” conducted by the
Federal Reserve in 2012-3, when it sold its holdings of shorter-term Treasury bonds and instead
bought 10-year bonds). The Japanese Ministry of Finance could decide to reissue a portion of its
current bonds (which have an average maturity of 8.4 years) and swap them for bonds with a maturity of say 50 or 100 years. Currently, the longest outstanding maturity is 40 years. The Bank of
Japan would agree in advance to buy these new issues from the secondary market, but never sell
them. Some economists in Japan have even proposed that the BoJ buy perpetual bonds (maybe
even with a zero coupon).
But what would force the Japanese authorities to resort to such extreme measures when they could
simply use fiscal policy? The problem is that Japan’s government debt-GDP ratio is 229% and, with
the fiscal deficit this year likely to be close to last year’s 6% of GDP, continues to rise rapidly. The
authorities fear that a significant further rise in the ratio would trigger a credit rating downgrade,
which could force Japanese banks to curtail their overseas operations.
Skeptics might also argue that Japan has little room to do productive infrastructure spending, having built too many “bridges to nowhere” during successive bouts of fiscal stimulus in the 1990s.
Even after 25 years of stagnation, Japanese gross capital formation, at 22% of GDP, is still higher
than the 19% in the U.S. and 17% in the U.K.
That would suggest an alternate method in which some of the “helicopter money” would be given to
households, in the expectation that they would spend it on consumption. Whether this would work
might depend on how far Ricardian equivalence extends.12 In the 1990s, the Japanese authorities
tried to stimulate the economy through, first, “temporary” tax cuts. As Ricardo would have predicted,
consumers saved the tax cuts, on the expectation that they would have to pay the money back in
higher taxes later. The government made the tax cuts “permanent” but the same thing happened.
Even when in 1999 the government introduced “shopping vouchers,” which consumers could not
save, this had little impact on consumption since households spent the vouchers but saved the
money they would have spent otherwise. The question, then, is whether consumers would understand that central bank financed handouts would never need to be repaid and, therefore, Ricardian
equivalence should not apply. The risk is that households find this concept hard to grasp and raise
their savings rate anyway.
12
The theory, not entirely accepted by Ricardo himself, that consumers are forward looking and so when the government tries to
stimulate demand by cutting taxes or through debt-financed government spending, they tend to save the excess money to pay for
the likely future tax rises.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
40
geopolitical Strategy - June 2016
BCA Research Inc.
Implications For Investors
How would any of the above measures affect
asset markets and the yen? On the assumption
that the measures were successful, they would
have the following implications:
FF
chart II-22
USD/
JPY
4.0
Takahashi’s Impact On The Yen
USD/
JPY
USD/JPY
The yen would weaken, at least initially.
3.6
The perception that debt monetization
represented a radical new monetary step,
3.2
along with the increase in money supply
and probable decline in the current ac2.8
count surplus (as Japan imported more
raw materials for infrastructure products
and consumer goods for household spend2.4
ing) would all be yen negative. During the
Takahashi reflation of the early 1930s, the
2.0
yen weakened by 65% against the dollar in
two years (Chart II-22). In the longer run,
26
28
however, if the policy proved successful at
raising economic growth – and long-term
growth expectations – the yen might start to strengthen again.
4.0
3.6
3.2
2.8
2.4
Gold
Standard
abandoned
© BCA Research 2016
30
32
34
36
38
2.0
40
FF
Asset prices, particularly real estate and equities prices, would rise. Higher inflation would lower
real interest rates, which would increase the opportunity cost of holding assets in bank and
postal savings accounts. Remember that 52% of household financial assets are invested in this
way. The only way to avoid a significant loss of real purchasing power would be to shift into real
assets. Japanese households have only 6% of their assets in listed equities and another 6% in
mutual funds, very low compared to the 38% of household assets in the U.S. held directly in
equities (and much more indirectly, if mutual funds and pensions are included). Moreover, the
boost to aggregate demand should be positive for corporate profits.
FF
Japanese government bonds would likely sell off somewhat. The percentage of the bond market
owned by the BoJ would not change significantly (since it would simply buy all of the increased
issuance). It would presumably try to ensure that the yield curve remained low and flat. However,
other holders of JGBs, particularly banks (which still have 9% of their assets in JGBs), might
be inclined to rebalance portfolios away from bonds, on fears of capital losses as inflation rose,
and would presumably see greater demand for borrowing. With 10-year JGBs currently yielding
-10 BPs, it is hard to see how the yield would decline further, although for the first few years
of the debt monetization program, the rise in yields is likely to be limited.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
41
geopolitical Strategy - June 2016
BCA Research Inc.
Japan’s
policy
options
are not
exhausted.
The current
bout of yen
strength and
asset
price
declines
is not the
death
knell of
Abenomics.
Bottom Line: Japan’s policy options are not
exhausted. The current bout of yen strength
and asset price declines is not the death knell
of Abenomics, assuming global growth holds
up. Currently, BCA’s Global Asset Allocation
quantitative model suggests investors should
underweight Japan within a global equity portfolio on a 6-12 month investment horizon, but
we have overriden this and recommend investors stay neutral to prepare for positive policy
effects going forward.
chart II-23
Willingness To Pay Is Negative
JAPAN:
WILLINGNESS TO PAY FOR RISK (LS)
SHILLER P/E (RS)
1.2
Ann
Chg
35
25
15
1.0
5
-5
Similarly, the Geopolitical Strategy service’s
Willingness To Pay (WTP) model suggests that
.8
-15
investors have not turned less bearish on Japanese assets, as they have done on European
-25
and American assets. There are still headwinds
© BCA Research 2016
relating to the strong yen, the fact that indus12
14
16
trial production is only now bottoming, and the
SOURCE: BLOOBERG, BCA CALCULATIONS.
range of emerging market risks. Nevertheless,
we see these risks abating soon. The delay of the consumption tax hike, the likely pro-LDP outcome of the July election, Abe’s forthcoming stimulus package, and our reasoning on unorthodox
reflationary policies – plus the Chinese government’s new stimulus push – suggest that policy will
remain highly accommodative and economic conditions allow for positive surprises (Chart II-23).
There can be no doubt that the unorthodox policies discussed above will bring with them considerable long-term political and economic risks and moral hazards. Those, and more broadly the “end
game” in Japan, will have to wait for a future study.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
42
geopolitical Strategy - June 2016
BCA Research Inc.
Discover
what you
can do
with BCA
Analytics.
We Read (And Liked)… Utopia
In recent Geopolitical Strategy reports we have discussed the rise of populism in the Anglo-Saxon world
as a symptom of long simmering social frustrations arising from income inequality, immigration, and
globalization. We see the pendulum swinging to the left in the U.K. and the U.S. – not to mention Canada
and possibly Australia in July.
The Anglo-Saxon world prizes liberty and enterprise, and it pays to do so. But during times of economic
adjustment, the social flexibility that helps private individuals and businesses pursue their plans can
manifest as a lack of social protection for those with hard luck. This lack can at times undermine the
original goal of high productivity.
Left-wing solutions will, of course, bring their own risks and excesses. But that does not mean they will
not be tried. This is what led us to pick back up a great book that is mostly relegated to colleges where
students write reports on it without having read it: Sir Thomas More’s Utopia, a masterpiece of the Renaissance, first published in 1516.1
More was one of the most brilliant Englishmen and Europeans of the era and a top adviser to Henry VIII
before being executed for treason after denying Henry’s supremacy over the newly created Church of
England. He experienced a revival of sorts in the twentieth century, when the clouds of totalitarianism
loomed, as an enemy to tyrants and defender of individual liberty. The Catholic Church canonized him
in the 1930s, and Fred Zinnemann’s film celebrating More, A Man for All Seasons, swept the Academy
Awards for 1966.
Utopia is a virtually unknown island, but one traveler, Raphael Hythloday, has seen it, and gives a detailed
account of the Utopian political, economic, and social institutions. The key feature is that all property is
held in common, all wealth is distributed equally, and money has been abolished. At times More reveals
a traditional hatred of money and “usury,” or lending at interest, but he also paints a convincing picture
of the real world and its injustices:
Is this not an unjust and unkind commonwealth, which gives great fees and rewards to gentlemen,
as they call them, and … on the contrary makes no provision for poor plowmen … laborers …
ironsmiths, and carpenters, without whom no commonwealth can continue?
Of poor laborers he writes, “their daily wages are so little that they will not suffice for the same day,
much less give any surplus that may be laid up for the relief of old age.” By contrast, the Utopians have
a robust universal pension system – and many other social benefits.
In essence, modern European societies have “two justices” – one for the “inferior sort of people,” and
one for the royals and aristocracy, for whom “nothing is unlawful,” including all manner of materialism,
waste, and fraud. What Europeans call “commonwealths” are really just “a certain conspiracy of rich
men procuring their own commodities under the name and title of the commonwealth.” Whereas Utopia
has done away with such hypocrisy. The children are raised communally, poverty has been abolished,
food and land are distributed fairly, and economic self-sufficiency makes interactions with the outside
world gratuitous.
1
Edited by Wayne A. Rebhorn (New York: Barnes and Noble Classics, 2005), 252 pages.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
43
geopolitical Strategy - June 2016
BCA Research Inc.
We Read (And Liked)… Utopia
The ironic and satirical aspect of all this is that More knows it isn’t achievable and everywhere undercuts
it. Utopia means “nowhere” in Greek, and the main character’s name means “speaker of nonsense.”
More really did believe in the need for sweeping reforms to reduce inequality and establish a social
safety net. But he was skeptical about politicians and human nature. He worried that “men shall never
live in wealth where all things are common … for how can there be abundance of goods, or of anything,
where every man withdraws his hand from labor?” There is an inherent trade-off between equality and
productivity. And More also suggests that without money or material success, even common people
wouldn’t feel a deep attachment to their country.
The idea of Utopia has enthralled subsequent generations, from socialist politicians to writers like George
Orwell who created “Distopias” to illustrate the nightmarish failure of states to realize such lofty ideals.
A key question today – when educated debate has fixated on helicopter money, universal basic income,
and artificial intelligence – is whether money and interest rates might in fact be abolished? At the same
time, might technological invention allow for dramatically reducing the burden on the poor and working
classes while maintaining economic productivity?
The Utopians thought the wisest people among them were those who “abstain from no pleasure that
doth not hinder them from labor.” But More concluded that this is a future more to be “wished for”
than “hoped for,” because human nature would ensure that reforms would fall short and capital would
be hoarded and protected. He had only an inkling of the mass benefits possible through technological
advance, but he also could not imagine that the chronically weak governments of his time would someday become powerful enough, with this technology, to create Orwell’s Oceania. Whether the twenty-first
century will find a golden mean is anybody’s guess.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
44
geopolitical Strategy - June 2016
BCA Research Inc.
III. GEOPOLITICAL CALENDAR
DATE
COUNTRY
EVENT
IMPORTANCE
THREE MOST IMPORTANT EVENTS IN JUNE-JULY:
SUMMER 2016
PHILIPPINES, CHINA,
Permanent Court of Arbitration to rule on South China Sea case
NETHERLANDS
HIGH
The international court is hearing Philippine complaints about Chinese maritime and territorial encroachments in the South China Sea and may
issue a ruling within weeks. The court’s ruling is nonbinding, and will not touch on ultimate questions of sovereignty, but nevertheless remains
a source of unusually high tensions in the region. China aims to discourage any states from following the Philippines’ strategy of getting
international legal bodies involved; the Philippines hopes to bring international attention and assistance to its claims. The situation is further
complicated by the Philippine presidential change, but the U.S. will not concede to China even if the Philippines softens its position.
JUNE 23, 2016
U.K.
National referendum on EU membership
HIGH
Prime Minister David Cameron and the Tories, under pressure from a changing socio-economic and political environment, are seeking a
referendum on whether the public supports Britain’s membership in the EU. Cameron is promoting the “Remain” campaign after a renegotiation
of U.K.-EU relations, but several of his cabinet members and the London Mayor Boris Johnson support the vote to leave. The vote looks to be
closer than many expect and could well rattle markets.
JUNE 19, 21,
26, 2016
GERMANY, SPAIN,
ITALY, EURO AREA
Short-term political risks
HIGH
Three sources of political risk in the Euro area deserve close scrutiny in June and thereafter. First, the German constitutional court will give a
final ruling on the ECB’s bond-buying program on June 21. To move markets, the court would have to reject a European Court of Justice opinion
and repeat its earlier view that the ECB has overstepped its bounds. Second, Spanish elections on June 26 after the December elections failed to
produce a government. At stake is the progress of Prime Minister Mariano Rajoy’s and the Popular Party’s structural reforms. Polls are sending
mixed signals, but the anti-austerity Podemos has recently overtaken the center-left PSOE as the second largest party. Third, the second round
of municipal elections will take place in Italy on June 19. The anti-establishment Five Star Movement should be watched carefully in Rome and
Turin. An upset for the ruling Democratic Party could have consequences for structural reforms and the October constitutional referendum.
GEOPOLITICAL CALENDAR
DATE
COUNTRY
SUMMER 2016
CHINA
EVENT
National Financial Work Conference
IMPORTANCE
HIGH
Bloomberg has reported rumors that the Chinese government could move forward the leadership’s once-every-five-year financial work
conference to this summer, or later in 2016, instead of waiting until the scheduled time next year. With rapid and excessive credit growth,
corporate debt, bad bank loans, defaults, bailouts, and layoffs, there are serious risks to China’s financial system. Investors should especially
watch for any signs of broad-based bank recapitalization or announcement of renewed push for supply-side reforms.
JUNE 2016
COLOMBIA/ECUADOR Peace talks with insurgents
MEDIUM
Colombia could sign a peace agreement with the Revolutionary Armed Forces of Colombia (FARC) as early as June. Meanwhile the government
is moving toward peace talks with another armed group, the National Liberation Army (ELN), which could take place in Quito, Ecuador this year,
though have already been delayed by last-minute demands.
JUNE 14-15,
2016
U.S.
Federal Open Market Committee meeting
HIGH
The Fed may resume hiking rates. Though Governor Janet Yellen seems poised to go, poorer than expected jobs numbers may cause hesitation,
and the British referendum on the EU presents one exogenous risk that may factor into the decision, also encouraging a delay.
JUNE 15-16,
2016
JAPAN
Bank of Japan monetary policy meeting
HIGH
After inaction in April that sent the yen higher, the BoJ will be watched closely to see if Governor Haruhiko Kuroda will pull off another
characteristic surprise. Inflation expectations have dwindled in Japan, raising fears that the Abenomics economic program may collapse – but the
BoJ still has unorthodox tools at its disposal.
JUNE 23-24,
2016
UZBEKISTAN, SHANGHAI
COOPERATION
Tashkent will host sixteenth annual summit
ORGANIZATION
LOW
The SCO may finalize India’s and Pakistan’s membership this year. The group’s discussions are noteworthy as a sign of security cooperation
among Eurasian states that face interconnected threats like terrorism and that also, in many cases, seek alternatives to American global security
leadership.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
45
geopolitical Strategy - June 2016
BCA Research Inc.
III. GEOPOLITICAL CALENDAR
DATE
COUNTRY
JUNE 28-9,
2016
EU
EVENT
European Council meets
IMPORTANCE
MEDIUM
The summit will decide on the fate of European sanctions against Russia, imposed in the midst of its invasion of Ukraine, which are slated
to expire on July 31 if not renewed. The meeting will also come in the wake of the British referendum on EU membership and in the midst of
negotiating visa-free travel with Turkey, which is tied to cooperation on the ongoing migration crisis as well as security protocols. The EU may
also test leaders’ commitment to the proposed trade deal with the United States, the Transatlantic Trade and Investment Partnership (TTIP), at a
time of protectionist election rhetoric on both sides of the pond.
JUNE 29, 2016
CANADA, U.S., MEXICO North American leaders hold “Three Amigos” summit
LOW
Prime Minister Justin Trudeau will host Presidents Barack Obama and Enrique Pena Nieto for the occasional trilateral meeting; Obama will
address the Canadian parliament and Nieto will visit several cities. The previous meeting was canceled due to the visa spat between Canada and
Mexico and fallout over the U.S. rejection of the Keystone pipeline. Hanging like the Sword of Damocles over the summit will be the impending
nomination of Donald Trump as the GOP presidential candidate.
JUNE 30, 2016
EU, TURKEY
Turkish visa liberalization
MEDIUM
Turkish citizens could – though unlikely – enjoy visa-free travel in the Schengen area from this month. The EU parliament and member states
must approve of the deal and Turkey must meet certain requirements; the plan faces considerable opposition. It was hashed out as part of the
March deal by which Turkey agreed to take back immigrants flooding into Europe through its borders.
JULY 1, 2016
U.S., Puerto Rico
Possible government debt defaults
HIGH
Puerto Rico is struggling to make debt payments of $2 billion by this date, on a total debt of around $70 billion. The Government Development
Bank has already delayed payments on $400 million and is in negotiations with bond investors about a haircut and restructuring. The U.S.
Congress is considering relief measures.
JULY 1, 2016
Kazakhstan
New land law goes into effect
LOW
The new land law, which facilitates 25-year foreign land-use contracts, has prompted rare protests in the authoritarian state that is suffering
from low commodity prices, a sinking currency, soaring debts, a succession struggle around President Nursultan Nazarbayev’s eventual death or
retirement, and recent Islamist militant activity.
JULY 2, 2016
Australia
Federal Election
MEDIUM
Prime Minister Malcolm Turnbull will seek a renewed mandate in the first “double dissolution” election since the 1980s – i.e. a vote for the House
of Representatives as well as the senate (previously expected). Unions, the construction industry, and carbon emissions will feature in the public
debate, but the backdrop is an economy reeling from volatility in commodities markets and China, giving the Labor Party a chance to bring an
early challenge to the three-year ruling Liberal-National coalition.
JULY 7-9, 2016
NATO
Summit in Warsaw
HIGH
The summit comes at a time of uncertainty regarding relations with Russia, including the precise specifications of proposed rotating battalions
in East Europe that may be approved. There is also a need to discuss naval missions to manage the inflow of migrants in the Mediterranean, to
shore up the Libyan government, to manage operations in Syria, as well as ongoing concerns in Afghanistan and elsewhere.
JUNE 16, 2016
U.S., POLAND, SPAIN President Obama visits
MEDIUM
Obama is continuing his high-paced diplomacy with visits to Warsaw for the NATO summit, and Madrid to discuss a range of issues, including
refugees, terrorism, and economic relations. He will meet with both the Spanish king and prime minister in the immediate aftermath of elections
that could be important for Spain’s reform agenda and economic recovery. Interestingly, the new prime minister may not be decided by the time
Obama arrives.
JULY 18, 2016
U.S.
Republican Party national convention in Cleveland, Ohio
LOW
Trump now stands almost certainly to win the nomination. But he will have high hurdles to unifying the party behind his bid for the presidency.
Then he will have to woo the median voter, including political independents and women, despite his low favorability with them so far.
JULY 10, 2016
JAPAN
Election to the House of Councillors
MEDIUM
Prime Minister Shinzo Abe’s Liberal Democratic Party is likely to retain control of the upper house. The opposition is attempting to form a grand
alliance against him, motivated by his security and defense agenda, the weak economy, and government pension fund losses, but his polls
are holding up. The decision not to hold a double election will secure Abe’s existing two-thirds majority in the lower house, while winning a
supermajority in the upper house is unlikely, leaving the status quo the likeliest outcome, barring outside shocks.
JULY 25, 2016
U.S.
Democratic Party national convention in Philadelphia, Pennsylvania
LOW
Hillary Clinton will win the nomination over Senator Bernie Sanders but her controversial past and lack of favorability could become a problem
in the presidential race itself, especially in the unlikely scenario that Republicans manage to patch up differences. Demographic shifts give her a
strong tailwind going into the election.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
46
geopolitical Strategy - June 2016
BCA Research Inc.
III. GEOPOLITICAL CALENDAR
DATE
COUNTRY
JULY 26, 2016
IRAQ
EVENT
Kurdistan counter-terrorism powers expire
IMPORTANCE
MEDIUM
The Kurdistan counter-terrorism law will expire unless renewed by the local government, which has renewed the law authorizing emergency
military actions against terrorist and insurgent groups since 2006. The need to renew will prompt political negotiations at a time of great
sensitivity as the Kurds make advances in the region at the expense of the Islamic State while facing a backlash from Turkey.
JULY 26-27,
2016
U.S.
Federal Open Market Committee meeting
HIGH
The market currently has a high expectation of a rate hike this month, especially as the British EU referendum is thought to discourage a hike in
June.
MERCOSUR,
VENEZUELA
JULY 2016
Venezuela takes over rotating chair of Mercosur
LOW
Argentina, Paraguay, Brazil and others may seek to delay Venezuela’s assumption of the chair because of the economic and political crisis in the
country and the regime’s defiance of the recent general elections which favored the opposition, now unified in a democratic coalition, for the first
time since Hugo Chavez’s rise to power in 1999.
AUG 1 – DEC
22, 2016
BRAZIL
Congress convenes, the Olympics begin
HIGH
Brazilian President Dilma Rousseff is under impeachment proceedings, and the senate’s 180-day deliberation period approaches toward
November. Meanwhile the Rio Olympics will be held August 5-21.
AUGUST 1, 2016
SYRIA/U.S./RUSSIA
Washington and Moscow offer a plan for Syrian transition
MEDIUM
The United States and Russia plan to present a plan for Syria’s political transition and a new Syrian constitution by this month, while hoping also
to arrange negotiations between the embattled government of Prime Minister Bashar Assad and rebel forces.
AUGUST 3, 2016
SOUTH AFRICA
Local elections
MEDIUM
The elections will come at a time when the opposition Democratic Alliance seeks to make gains against Prime Minister Jacob Zuma’s African
National Congress (ANC) as a result of the volatile economy and Zuma’s own embroilment in a corruption scandal over his Nkandla home. Zuma
may come under greater sustained pressure to resign, though the global reflation may buy him some breathing space.
AUGUST 7, 2016
THAILAND
Constitutional referendum expected
MEDIUM
A constitutional referendum may take place as the military government, which took power in a coup in May 2014, seeks to arrange a return to
civilian rule that nevertheless preserves its interests and forestalls the election of the rural-based, populist, democratic opposition, which tends to
win elections when given a chance.
AUGUST 27-9,
2016
JAPAN/AFRICA/IRAN Tokyo Africa conference and Abe trip to Iran
MEDIUM
Japan will host the sixth Tokyo International Conference on African Development. Prime Minister Shinzo Abe may travel to Iran afterwards to
meet with President Hassan Rouhani and discuss expanding business and security relations.
FALL 2016
JAPAN
Stimulus package to be unveiled
MEDIUM
Prime Minister Abe claims he will reveal a “comprehensive” fiscal stimulus package this fall, after upper house elections, having already delayed a
scheduled consumption tax increase from April 2017 to October 2019.
SEPT 2016
CHINA, JAPAN, INDIA,
KOREA, AUSTRALIA, Regional Comprehensive Economic Partnership (RCEP) negotiations
NEW ZEALAND, ASEAN
MEDIUM
The attempt to create a free trade agreement among the major Asia-Pacific economies will continue in 2016, with participants hoping to conclude
negotiations this year.
SEPT 2016
INDIA
Central bank chief’s term expires
HIGH
Reserve Bank of India Governor Raghuram Rajan will see his three-year term expire in September unless he and the Modi government agree
to another appointment. Markets have pinned great hopes on Rajan because of his independence from the government and his performance in
hiking interest rates, containing inflation, shoring up the rupee, and recognizing bad debts. A departure could threaten the market’s view of Delhi’s
commitment to reform.
SEPT 4, 2016
HONG KONG, CHINA Election of the Sixth Legislative Council
MEDIUM
Hong Kong voters will choose legislators. The election comes ahead of the 2017 election of a new chief executive, highly anticipated because
it is supposed to see universal suffrage. Tensions have been rising over meddling from the mainland, press censorship, and the revival of prodemocracy activism. Violent protests have already occurred. The vote also comes in the wake of Taiwan’s decisive electoral shift away from the
mainland.
[email protected] •
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
47
geopolitical Strategy - June 2016
BCA Research Inc.
III. GEOPOLITICAL CALENDAR
DATE
COUNTRY
SEPT 4-5, 2016
CHINA/G-20
EVENT
Eleventh G-20 leaders’ summit in Hangzhou, Zhejiang
IMPORTANCE
MEDIUM
The summit will be the first ever hosted by China, which holds the chairmanship this year. The G-20 forum can have some effect in policy
coordination among the world’s major economies, but China’s chairmanship is especially notable because members will be highly concerned
about its reform program, economic growth, and overall stability. Moreover, China’s relationship with the U.S. depends in part on the role it plays
and influence it is given within global organizations.
SEPT 4, 18,
2016
SEPT 18, 2016
GERMANY
RUSSIA
State elections for Berlin and Mecklenburg-Vorpommern.
Legislative elections
HIGH
MEDIUM
President Vladimir Putin’s United Russia is riding a wave of nationalism after the interventions in Ukraine and Syria, but Western-imposed
economic sanctions and weak global commodity prices and growth bring sources of potential risk. Better relations with Europe, and a possible
recommitment to economic reform, are on the agenda this year, but Putin’s party will have its eye on domestic control.
OCT 2016
ITALY
Tentative timing of Italian constitutional referendum
HIGH
The referendum would reduce the power of the Senate, strengthen majoritarian rule in the lower Chamber of Deputies, and give the government
more leverage over the Constitutional Court. It is significant given that Italian economic reforms and budgetary control have a heightened impact
on the EU’s financial and political stability and integration. Though the reforms are intended by the Democratic Party to strengthen its ability to
govern and push through structural reforms, the Euroskeptic Five Star Movement could conceivably benefit from the reforms, which would raise
concerns about the euro and risk premia.
OCT 2016
GREECE, EURO AREA Debt payments come due
MEDIUM
The May deal to release 10.3 billion euros in bailout funds to enable Greece to make debt payments will last through the summer. Then new
negotiations will be held over Greece’s adherence to budget balance provisions and progress in structural reforms to determine whether
subsequent bailout funds will be forthcoming.
OCT 20-21,
2016
EU
NOV 2016
PERU, APEC
NOV 8, 2016
U.S.
European Council meets
MEDIUM
Annual Asia-Pacific Economic Cooperation summit will be held in Lima.
MEDIUM
U.S. presidential and legislative elections
HIGH
Incumbent parties often have trouble getting their successor candidates elected and the United States has a rich vein of anti-establishment wrath.
But the widely disliked Hillary Clinton has broad institutional support, and an advantage with independents, Hispanics, and women, while the
Republicans will still suffer from their candidate Donald Trump’s being even more widely disliked and a source of internal party divisions, not to
mention their demographic disadvantages. A recession, major act of terrorism, or Clinton smoking gun could tilt the vote toward Republicans;
otherwise the odds go to Hillary. While a President Clinton and a GOP-dominated legislature would not be bearish for markets, Clinton is unlikely
to govern from the center like her husband, since the context has changed. Meanwhile Trump may lose the senate for the GOP, leaving Clinton
with a split congress, the worst outcome for markets over the four-year term. Nevertheless, elections are usually followed, in the short term, by
rises in both fiscal spending and share prices.
NOV 20 – DEC
4, 11, 2016
FRANCE
Republicans and Socialists hold primary elections
HIGH
The 2017 French presidential election will take place on April 23 and May 7, followed by legislative elections in June. Before then, the major
parties will choose their candidates. The political mood has soured as the country has been rocked by terrorist attacks, strikes, protests, and
floods. President Francois Hollande, who will probably stay in as Socialist candidate, has attempted to loosen labor regulations, but staunch
opposition from unions has highlighted the difficulty of structural reform. The Republican Party race will heat up, with former President Nicolas
Sarkozy likely to make a late dash for the top slot. The two-round electoral system may continue to act as a brake on populist parties like Marine
Le Pen’s National Front.
DEC 11, 2016
CHINA, WTO
China expects to gain “market economy” status
HIGH
Beijing argues that its accession agreement to the World Trade Organization in 2001 assures it of being granted “market economy status” by this
date. In particular, special provisions that allow countries to impose duties on Chinese exports regardless of low prices in China would have to
expire. The U.S., EU, Japan, Canada, and others are voicing reservations to granting China this status due to persistent state involvement, surging
exports, and falling export prices. Negotiations will get more heated as the deadline approaches and the U.S. especially may withhold granting
China this coveted status, setting the stage for litigation and trade retaliation.
DEC 15-16,
2016
[email protected] •
EU
European Council meets
www.bcaresearch.com • Copyright © 2016 BCA Research Inc. All Rights Reserved. Refer to last page for important disclaimer.
MEDIUM
48
GLOBAL OFFICES
Head Office – Montreal, Canada
1002 Sherbrooke Street West, Suite 1600
Montreal, Quebec, Canada H3A 3L6
TEL 1.800.724.2942 (514.499.9550)
FAX 1.800.843.1763 (514.843.1763)
London, U.K.
4-8 Bouverie Street
London, U.K. EC4Y 8AX
TEL +44 (0)207 556 6008
FAX +44 (0)207 827 6413
New York, U.S.A.
225 Park Avenue South, 6th Floor
New York, NY 10003
TEL 212 224 3669
FAX 212 224 3861
San Francisco, U.S.A.
580 California Street
16th Floor (suite 1640-41)
San Francisco, CA 94104
TEL 415 568 2123
Hong Kong
18/F, 248 Queen’s Road East
Hong Kong
TEL +852 2912 8055
FAX +852 2842 7007
Sydney, Australia
Level 19, 1 O’Connell Street
Sydney, Australia
NSW 2000
TEL +61 (02) 8249 1867
TEL +61 (02) 8249 1868
FAX +61 (02) 8249 1800
Cape Town, South Africa
7th Floor, Mandela Rhodes Place
Cnr of Wale and Burg Street
Cape Town, 8001
South Africa
TEL +27 21 403 6338
São Paulo, Brazil
Rua Tabapuã, 422 - 4°andar conj. 43/44 - Cep: 04533001
São Paulo - SP - Brazil
phone: +55 11 3074 2656
mobile: + 55 11 99484 5777
Copyright 2016, BCA Research Inc. All rights reserved.
The text, images and other materials contained or displayed on any BCA Research Inc. product, service, report, e-mail
or web site are proprietary to BCA Research Inc. and constitute valuable intellectual property. No material from any
part of any BCA Research Inc. web site may be downloaded, transmitted, broadcast, transferred, assigned, reproduced
or in any other way used or otherwise disseminated in any form to any person or entity, without the explicit written
consent of BCA Research Inc. All unauthorized reproduction or other use of material from BCA Research Inc. shall be
deemed willful infringement(s) of BCA Research Inc. copyright and other proprietary and intellectual property rights,
including but not limited to, rights of privacy. BCA Research Inc. expressly reserves all rights in connection with its
intellectual property, including without limitation the right to block the transfer of its products and services and/or
to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter
devised. BCA Research Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the
law any and all criminal and civil remedies for the violation of its rights.
Non-residents of Canada confirm that they do not, and have never had the right to use any of BCA Research Inc.’s
materials in Canada, and agree that they have not and never will use any of the materials in Canada unless they
acquire this right by paying the applicable Canadian and Quebec sales taxes. All unauthorized use of the materials
in Canada shall be deemed willful infringement of BCA Research Inc. copyright and other proprietary and intellectual
property rights.
While BCA will use its reasonable best efforts to provide accurate and informative Information Services to Subscriber,
BCA cannot guarantee the accuracy, relevance and/or completeness of the Information Services, or other information used in connection therewith. BCA, its affiliates, shareholders, directors, officers, and employees shall have no
liability, contingent or otherwise, for any claims or damages arising in connection with (i) the use by Subscriber of
the Information Services and/or (ii) any errors, omissions or inaccuracies in the Information Services. The Information
Services are provided for the benefit of the Subscriber. It is not to be used or otherwise relied on by any other person.
Some of the data contained in this publication may have been obtained from Thomson Reuters; Bloomberg; CEIC
data; Real Capital Analytics, Inc.; S&P Capital IQ; Reis Services, LLC; CBRE, Inc.; Barclays or from Standard and
Poor’s (“S&P”). Copyright © 2016 The McGraw-Hill Companies, Inc., S&P is a division of The McGraw-Hill Companies,
Inc. All rights reserved.
As well, some of the data contained in this publication may have been obtained from MSCI Inc. Neither MSCI Inc.
nor any other party involved in or related to compiling, computing or creating the MSCI Inc. data makes any express
or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof),
and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability
or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event
shall MSCI Inc., any of its affiliates or any third party involved in or related to compiling, computing or creating the
data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost
profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI Inc.
data is permitted without MSCI Inc.’s express written consent.
Important Disclaimer
BCA Research’s publications do not constitute an offer to sell any security, nor a solicitation of an offer to buy any
security. Only a prospectus may be used to offer to sell or purchase securities, and a prospectus must be read and
considered carefully before investing or spending money.
BCA Research’s publications are designed to provide information and analysis that BCA believes to be accurate, but
it is published with the understanding that neither the author nor the publisher is rendering investment advice, nor
offering individualized advice tailored to any specific portfolio or to any individual’s particular needs, nor offering
professional services such as legal or accounting advice. Anyone needing assistance in areas that include investment, legal, and accounting advice should consult a competent professional’s services.
BCA Research’s publications may reference historical performance data. Past results do not guarantee future performance. Additionally, business conditions, laws, regulations, and other factors affecting performance all change
over time, which could change the status of the information in this publication.
This communication reflects our analysts’ opinions as of the date of this communication and will not necessarily be
updated as views or information change. BCA or its affiliated companies or their respective shareholders, directors,
officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or
sell such securities without notice.
For important copyright, disclosure, disclaimer, and other information, including limitations on BCA’s liability, see
our terms and conditions, available here: http://www.bcaresearch.com/copyright.