The Ironies of Brexit, A New Banking Sheriff and U.S.-China Popularity

This week we celebrate the 88th anniversary of the recording of West End Blues by Louis Armstrong and His Hot Five who blew, drummed and scatted with perfection on June 28, 1928. One music critic called it “the greatest record ever made during the 20th century.” In a week filled with hyperbole every bit as hyper as that statement and bursting with legions singing the blues over recent events in the UK and elsewhere*, we celebrate by looking at the compounding ironies of the Brexit vote, peek at another underreported change in our global order and determine whether the US or China is more popular around the world. It’s this week’s International Need to Know, an opening cadenza followed by bars and measures of international knowledge delivered to you each and every week.

Without further ado, here’s what you need to know.

A Towering Inferno of Irony

There has been much reaction to the Brexit vote last week, including some overreaction. We were surprised by the result having speculated in this very spot two weeks ago that the election might be similar to Scotland’s recent independence vote: lots of talk but in the end people deciding to stay. We are not surprised by overreaction to the event. Markets don’t like surprise and love to chew the scenery like an overwrought William Shatner scene. Brexit, if it ultimately happens, is likely a net negative for the UK, but for the world as a whole it is not a catastrophe unless, as we also worried about two weeks ago, it leads to further exits. Brexit at the least is a wonderful portal into a world towering in contradictions built upon beams and rebar of irony.

      • The British Pound took a pounding right after the vote which raised alarms and tremendous concern around the world. But a traditional remedy for economic difficulties is to devalue your currency, making it easier to export and create jobs in the exporting industries. Ironically, the inability of distressed members to devalue has been a major flaw of the EU. In a rational world, countries such as Greece, Portugal and Italy would have seen their currencies devalued after they went into economic crisis seven years ago, allowing them to rebalance their economies by making it easier to export. Maybe the British were smart to leave a consortium with such flaws, right?  Except, of course, that the UK while part of the EU, is not part of the Euro currency zone.
      • Anti-EU groups in the Netherlands, France, Austria and Italy are licking their chops at the opportunity to hold similar exit elections in their countries. Two weeks ago we speculated at such possibilities and it is by far the biggest worry of the Brexit result. And yet, upon reflection, Brexit could end up making such further exits less likely if things continue to go badly in the UK as a result of the election. If the UK economy is indeed badly affected and if Scotland separates and Northern Ireland unites with Ireland (additional ironies for the irony pudding that is Brexit), won’t other countries be scared off from taking similar exit actions? Perhaps the best thing that can happen for the EU staying together is for the UK to head into catastrophe. Come on, Brits, we must all make our sacrifices for the good of the world.
      • And yet, the EU is badly in need of reform. It cannot succeed as a currency union without instituting a fiscal union. It is also not particularly democratic which leads to our last irony (at least of those that can fit in this space). We must hope the overabundance of direct democracy–a majority referendum taking place on a complicated question of remaining or leaving the EU may not have been the best idea–will lead to democratic reforms of the EU. Perhaps it will take too much democracy harming the UK to bring better democracy to the EU, or at least what’s left of it.

A New Development Bank Sherriff

It would be easy to forget amongst all the hub and bub of crazy world activities that China’s President Xi Jinping announced two years ago that China was establishing an Asia Infrastructure Investment Bank (AIIB), no longer satisfied at playing second (third? fourth?) fiddle at the World Bank and other such institutions. Last Friday, the AIIB approved its first investments, totaling $509 million in four projects. Rather than competing with existing development banks, however, it is cooperating with them. Three of the four projects are co-financed with the World Bank, the Asian Development Bank, the United Kingdom Department for International Development and the European Bank for Reconstruction and Development. The projects are power grid upgrades in Bangladesh, slum renovation in Indonesia and highway construction in Pakistan and Tajikistan. AIIB has 57 founding member countries and $100 billion in committed capital. AIIB plans to invest $1.2 billion this year. The way the world is organized changed a lot this week, in ways both noticed and not.

A Popularity Contest

Every country has its good points and attributes that we may wish were different. This is true even of the two largest economies in the world, China and the United States. However, amongstcountries polled by the Pew Center, the US would receive many more invites to the prom. Other than some strange grudge Greece has against America (maybe they mistakenly think Angela Merkel is president), the US has much stronger favorability numbers than China. Unsurprisingly, China is least popular in Japan. There is an age gap in views of China with younger people far more likely to have a favorable view of China than oldsters. This is especially true in the US, Canada, France, the Netherlands, Poland, Spain and the UK. Pew notes that in Spain, for example, “42% of Spanish respondents ages 18 to 34 give China positive marks, compared with 32% of people ages 35 to 49 and just 17% of those 50 and older.” To bring this full circle, we saw this same age gap in the Brexit vote, where young people voted overwhelmingly to remain in the EU. The world will be very different decades from now when the over 50 set is gone. But already the young see a different world than their elders do.

    

 *Istanbul is one of our favorite cities, full of wonderful sights, food and people. We send our condolences and best wishes after the latest terror attack there and hope for better times and political reforms in that now troubled country. 

Venezuela, Smart Companies and Cheap Places to Drink Beer

Over three thousand years ago, ancient Babylonian shippers paid an additional fee to merchants so that they would be compensated should their shipment be stolen or lost at sea. and thus, insurance was created. An ancient papyrus scroll was recently discovered detailing a shipper’s complaint about the merchant’s stinginess in providing said compensation. Today, in the 21st century, International Need to Know is learning the same painful lesson that the insurance industry is not our planet’s most helpful, honest or fair business sector as we continue to deal with the aftermath of a human driver (we need self-driving cars!) running a red light and totaling our internal combustion steed. A certain insurance company should really replace their gecko logo with a snake. But we move forward nonetheless, whether by foot, pen, bike or pixel to explain oil is not the problem in Venezuela, explore where the smart companies are and tell you where you can find a cheap beer in this world. It’s this week’s International Need to Know, like an ancient Babylonian exploring the uncharted seas of world

Without further ado, here’s what you need to know.

Oil is Not the Lubricant for Venezuela’s Problems

Here at International Need to Know’s worldwide headquarters, our house is not made of glass.  So we do not mean to pick on anyone, but when we keep reading that Venezuela’s problems are due to continuing low oil prices, we can’t help but grab a small stone from our analytical quarry and at least lightly toss it at those making such misleading claims. The Skimm, a fine and enjoyable read, is but one example of those making this misleading assertion. In their daily email update they write that low oil prices are “good for your gas bill, very bad for Venezuela’s economy.” Yes, the decline in the price of oil certainly affected Venezuela’s economy. But the fall in the price of black gold affects all oil producers, from Saudi Arabia to Nigeria to Norway. However, only one oil producing country has completely empty shelves, the looming threat of starvation, power outages, deteriorating water conditions and the specter of chaos–Venezuela. The reason Venezuela is in these straits is not because of oil but because of misguided economic policies. From a convoluted currency system meant to encourage food imports but accomplishing the exact opposite, to instituting price controls to the government taking control over everything from soda making to supermarkets to food production, they have distorted and screwed up their economy. Venezuela’s current catastrophe is rooted in these and other misguided policies, not in low oil prices. The lower price of oil opened a view into the empty shelves of Venezuelan government thinking but it is not the cause of the country’s problems.

Where are the Smart Companies?

Not too long ago, we worried about the slow down in productivity growth all over the world. MIT’s Technology Review is also concerned, so much so that they went in search of the “smartest companies” in the world, compiling a list of the 50 smartest of the smart (see list below). By “smart,” MIT means companies that combine “innovative technology with an effective business model.” For our purposes we note that 64% of the companies on MIT’s list are based in the United States. In examining the smaller list of international businesses, we see that China has five companies on the list, validating our assertion that China does not get the credit it deserves for being innovative.* It’s slim pickings after China with both the UK and Japan having 3 companies on the list and Israel with 2.

*Though we admit that all five of the Chinese companies are businesses that took ideas from U.S. companies (Google, Amazon, etc) and recreated them in China with all the government protection that entails.

Most Expensive Cities for Expats

Not too long ago we spoke with a CEO of a Canadian company who complained about Americans saying they were going to flee to Canada if a certain one of our presidential candidates somehow was elected. The CEO’s complaint was that Americans felt they could just waltz into Canada as if we owned the place without worrying about Canadian immigration laws. For those Americans wishing to leave their country for reasons political or otherwise, they may want to study the chart below showing the most expensive cities in the world for expats. The actuarial/benefits company, Mercer, priced 200 items in 375 cities and determined that Hong Kong is the most expensive city in the world for expats. Illustrating how the world has changed over the last two decades, Asian cities dominate the top ten. We’re not sure what it says about INTN, but we have spent time in many of the 10 cheapest cities for expats, and wager we know how to find a cheap beer in cities expensive, cheap or otherwise.

Most and Least Expensive Cities for Expats

  

China Bears, Brexit and Positive Workers

International Need to Know recently stated to someone that by the time we need to purchase a new car, self-driving vehicles will be ubiquitous and with the rise of car sharing platforms we may never need to buy an automobile again. But, the future has a way of making fun of us, and certainly the driver who ran the red light on Sunday and barreled right into our car, mocked our visions of the future. But not even being slightly wounded by a reckless driver nor the trials and tribulations of buying a new car and dealing with insurance companies keep us from fending off Chinese bears, worrying about Brexits and examining where the happy workers are. It’s this week’s International Need to Know, your fully autonomous purveyor of crucial international information.

Without further ado, here’s what you need to know.

Shooh, bears, shooh

Okay everybody, gather around the campfire–we’re going to tell you a story about…wait, get out of here China bears. Come on, get away from our garbage–Well, I guess we’re going to have to address these rude China bears who came crashing into International Need to Know’s pristine global campground. They are definitely out there spewing out various troubling data about China’s economy. Even the IMF has gotten into the act with concerns about the level of corporate debt in China, which is now 145% of GDP, a very high level indeed. The IMF’s first deputy managing director (just how many deputy managers are there at the IMF? We’re angling for the fourth deputy assistant managing director position) David Lipton said in a speech in Shenzhen earlier this week that corporate debt “…is a key fault line in the Chinese economy . . . And it is important that China tackles it soon.” Lipton notes that this is mostly a state-owned enterprise (SOE) problem with SOE’s accounting for 55 percent of corporate debt, far greater than their 22 percent share of economic output. He further notes that these SOE’s “are also far less profitable than private enterprises.” But it’s not just corporate debt that has the bears riled up. As you see below, China is facing its worst job outlook since the Manpower Group began its surveys in 2005. The China Bears also point out that private investment is now below 4 percent (see 2nd chart below). Of course, public investment has spiked in recent months, but this has the bears worried too since they believe China can’t continue to prime the credit pumps to grow GDP as they have in the past. Certainly China continues to pile money into infrastructure, spending more than the U.S. and Europe combined, but that’s partly a function of underinvestment by the U.S. and Europe. And, of course, others probably think this is smart Keynesian policy in times of an economic slowdown. China’s economy has slowed down and is unlikely to grow at its previous rates. But, at least as of yet, it is not crashing and there is still lots of robust economic activity and economic transition occurring along with its deep challenges. So, we welcome bears to our garbage and may even share some of our food and drink, but we’re not prepared to cede the entire campground to them yet.

  

  

Exit Stage…?

A week from today, the good people of the United Kingdom will vote on whether to exit the EU. As we write, the polls show those wanting to leave are in the lead. But we wonder if this will be similar to the Scotland separation election in 2014, where the polls indicated a toss up, but when it came time to pull the lever, voters found it difficult to vote “see ya later”. That being said, there’s a real chance that next week’s INTN will be delivered in a different world, one in which the EU is smaller. An even larger worry than the UK leaving is that their exit could set the stage for additional departures. A new Pew Center poll finds that 61% of the French have a negative view of the EU. That doesn’t mean, of course, that the French will vote to leave the EU. They may just want the EU to be reformed. In fact, one hopes the lesson learned, no matter which way the UK votes, is that the EU needs to reform itself, politically and in how it is structured economically. It is unfortunate that as the world in some ways is becoming more splintered institutionally, we live in an age of more and more transnational issues: climate change, global health challenges like the Zika virus, terrorism, Justin Bieber world tours and more. Perhaps the current institutions and transnational infrastructure are not fit to address these problems. But the answer should be to develop an infrastructure that will, not merely tearing down the ones we have.

    

Happy Workers

If you’re a tyrannical boss looking for where you can have maximum negative impact, move to India and run a company. That’s where we find the most employees who feel positive about their work. In fact, according to Atlas.com, in India 88% of employees feel positive about their work. The other 12% are more than likely customer service representatives for Comcast. Mexico comes in second and the US of A is third in percentage of positive feeling workers. On the other hand, more than half of Japanese employees do not feel positive about their work. While contemplating how you feel about your labors, examine the full list below.

    

India’s Fertility Rates, Trouble for Commodity Exporters and Mean Tourists

Not too long after eating shrimp and grits this week, we saw that obesity rates are again up in the United States. But bigger news than how large Americans are is that you can now access thearchives of International Need to Know at the Gittes Global website. So skip that donut (beignets are better anyway) and peruse the wit and wisdom of INTN at your leisure. But even the launch of a new website did not prevent us from examining Indian fertility rates, what the fall in commodity prices has done to exporters and where the meanest tourists are. It’s this week’s International Need to Know, providing all the international news that fits in our expanded waist band.

Without further ado, here’s what you need to know.

The Turning of the Indian Screw

India is large. It is the second most populous nation in the world, trailing China by only 40 million people. We’ve pointed out that the world’s working-age population is getting smaller except in Africa and India. But things are changing in India. The total fertility rate (TFR) is now atreplacement level of 2.3 (in developed countries replacement level is 2.1 but India’s higher infant mortality rate and skewed gender ratio makes 2.3 replacement level).  In rural areas TFR is 2.5 but in the urban parts of India, TFR is down to 1.8.  Since India continues to urbanize, it is likely that soon India will be below replacement level which means over time we will see the graying of India just as Grecian Formula is being dabbed on so many other parts of the world. This won’t happen for a few years but when it does it will have the same slowing impact on GDP as it has in other parts of the world. It likely also implies that the world’s population, which the UN currently predicts to peak at 11.2 billion by the end of the century (how many sentient robots will there be by then? Will the UN keep track of robotic demographics? Will they have a seat at the Security Council table?), will peak at a lower level. For the next 25 years or so India’s population will continue to grow because death rates are falling which compensates for falling birth rates, but that larger population will skew older. This will be beneficial in some ways and present challenges in others. Demography is, if not destiny, certainly a helpful, enlightening guide.

Commodities and Exports

The drop in commodity prices has affected economies all over the world, but its most devastating effects have been on large commodity exporters. As you see in the chart below, commodity exporters’ GDP growth rates have trended down the last two years right in line with the decline in commodity prices. This has led to credit growth in commodity exporting markets. According to the World Bank, “…credit growth in commodity-exporting EMDE (EMDE is World Bank speak for “emerging markets and developing economies”) has been rapid, near the pace and levels of credit-to-GDP ratios associated with past credit booms.” The implication is that this credit boom could lead to a credit bust if credit growth continues unabated.  All of this, of course, is connected to decreasing demand in China. China’s economic transition and whether other emerging markets pick up the growth slack, will have profound impacts on other countries’ economies. Will the policy reactions to decreased commodity prices lead to financial crisis in a host of commodity exporting countries? We ponder the question while enjoying a cheap bowl of Cheerios.

  

Mean Tourists

We all know ugly tourists. In the 1950s Americans were accused of being ugly tourists, later it was Germans and then Japanese and recently it is the Chinese being so accused. It comes with the territory of becoming a prosperous country whose citizens start traveling the world, bringing their cultural peccadillos with them.  But who are the meanest tourists? Priceonomics.com dives into the data to tell us that Koreans are. South, not North (presumably North Koreans are not doing too much touring). The good folks at Priceonomics looked at data of online reviews of tourism and travel activities and found Koreans were more likely than other nationalities to post bad reviews. Of course, even Koreans were fairly positive overall with only 18% of their reviews of tourism activities being unfavorable. If you have an Airbnb rental, run a museum or some other tourist attraction, lure in the apparently easy-to-please Czechs, they give the most favorable reviews.

  

China’s Clean Energy Strides, Lazy Workers (?) and Where Smoking is Hot

This week International Need to Know attended a discussion regarding International Conflict on a Cyber Battlefield featuring the author Adam Segal. There was much angst expressed in the audience at the vulnerabilities in our computer systems and how at risk we are to being hacked. We would give you more details but it was an off-the record discussion. Of course, our smartphones were probably hacked and the discussion immediately leaked to Gawker.com. But even as we madly strengthen our passwords and ponder how to convince Peter Thiel to fund our lawsuit against David Stern, we still examine clean energy strides in China, worry about why people don’t get anything done at work anymore, and eye where cigarette smoking is hot. It’s this week’s International Need to Know, the weekly newsletter that knocks down three pointers on important information around the world.

Without further ado, here’s what you need to know.

China Carbon Dating

China bears continue to circle our campsite but we ward them off for at least one more week as we look at CO2 emissions in China, with the caveat that there is a bear component to it. You may remember, if you pay attention to such things (which is our job here at INTN) that back in 2014, China announced “ambitious” carbon emission reduction targets. In fact, their aim was to limit coal growth use to 3% per year. They so far are easily achieving that goal with coal use actually decreasing in the last year. Now we can definitely view this as another underlying sign that China’s economy is slowing down and not growing at the alleged 6.7% growth rate (back bears, back!). But, there are also signs that growth in renewable energy is also playing a big part. In the graph below you can see non-fossil fuel energy sources (solar and wind mostly) are growing. You won’t be surprised that we believe the dotted projection line is underestimating the future growth of these energy sources as solar installations are growing at an exponential rate. The current total installed capacity of wind and solar reached 180GW in 2015 (the target was 140GW) .Even current installation rates mean that the existing 2020 target of 300GW will be reached by mid-2018, and you can bet that installation rates will increase over the next two years (go ahead, book your flight to Vegas). China also aims to have coal’s share of energy use fall to 62% by 2020. It’s already down to 63%, falling 1% every year since 2010, so the 62% target is likely to be reached before the 2020 goal. The energy world is changing faster than most realize, including in the world’s largest polluter.

Stop Looking at Facebook and WeChat

There are two ways to increase GDP. One is for your working-age population to increase so there are more people working and producing more goods and services. The second is for those workers to produce more than they previously did thanks to improved technology and business processes. As we noted in this space last month, for most countries, other than Africa and India, the working age population is decreasing or about to decrease. So that leaves increasing productivity as the way our world will boost GDP growth rates. Unfortunately, productivity growth rates are increasing at a much smaller rate than usual. There’s been lots of talk lately about U.S. productivity rates lagging but it’s not just in America. The whole world is experiencing a productivity slowdown. As you see in the OECD chart below, productivity is increasing at a slower rate in Japan, Korea, Germany and the UK, not just in the United States.  Automation may change that in future years, with good consequences for GDP but perhaps bad consequences otherwise, at least in the short run.  But the question is what has been going on the last decade that has so reduced productivity gains? Have the technology advances in recent years been ones that do not boost productivity unlike in previous decades?  If economists weren’t so busy watching cat videos on the Internet maybe we’d know the answer.

Where is Smoking Hot?

One of modern’s life’s great pleasures is being able to go to a bar or a concert and not have to come home smelling like cigarette smoke. I once half-joked during the anti-smoking law debates that I’d rather the person at the table next to me in a restaurant was shooting up heroin rather than smoking a cigarette–the former doesn’t particularly affect me but the latter’s second hand smoke certainly does. But, there are still more than 1 billion smokers in the world, the majority of them men.  And, in 27 countries, smoking is actually on the increase. They are mostly countries in the Middle East and Africa. Take a deep, clean breath and see the full list below.