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Great Vacuum War, Peace in Trouble?, Poor Middle Class

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We find ourselves today ruminating about pancakes, Roger Federer and excellence. We were fortunate, thanks to a friend, to attend a charity exhibition match in Seattle last weekend between perhaps the greatest men’s tennis player in history, Roger Federer, and one of the top ranked players in the world, John Isner. Earlier in the evening these two matched up with Bill Gates and Pearl Jam’s Mike McCready in a doubles match. It was a wonderful evening that featured this amazing shot by Federer (fourth video on the page). Federer has lots of talent, of course, but he worked hard mentally and physically to become one of the greats. Before we were married, most Sunday mornings we would make pancakes while listening to Johnny Cash. We still cook pancakes today though not as often as in our weekly bachelor days. And yet, despite our many hours practicing our pancake skills, we cannot claim we are the Roger Federer of pancake makers. We do not know if we have spent Malcolm Gladwell’s 10,000 hours making pancakes but one would think we should be pretty darn good by now. But instead we research pancake schools on the Internet as we serve hot off the griddle more evidence of China trying to fill a vacuum, some worrisome signs about peace in our world and just how global the fall of the middle class is. It’s this week’s International Need to Know, the French Toast of international news, data and information.

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

The Great Vacuum War of 2017*

We talked a few weeks ago about the world’s leadership vacuum. China is continuing to try to fill it. For example, last week China demanded that it be the sole source of financing for a major logistics railway in Pakistan, and the Pakistan government agreed to the demand. Originally, both China and the Asian Development Bank (ADB) were to finance the railway. The ADB is a multilateral development bank funded by both Western and Asian countries. The bank is often involved in projects like the Pakistan railway. However, Pakistani newspaper The Dawn (it’s always reddest before the dawn) reports that the Minister for Planning and Development Ahsan Iqbal said in a news conference, “China strongly argued that two-sourced financing would create problems and the project would suffer.” Originally the ADB was going to provide $3.5 billion for the 1,700 kilometer rail line which is “considered the backbone of the country’s logistics, connecting two major ports with the rest of the country for transporting goods and passengers.” Even before political changes in the United States, China was playing a larger role in world events, including in development. In fact, in 2015 it created an Asian Infrastructure Investment Bank (AIIB) to rival the ADB. The AIIB recently received a big endorsement from Bank of Japan Governor Haruhiko Karoda, “Infrastructure needs are huge and it’s simply not possible for the Asian Development Bank and the World Bank to fill the gap completely,” said Kuroda. Space is full of vacuums. China is trying to fill ours.

*A title that only Charlie Mitchell will fully appreciate

All We Are Saying

While listening to the remarkable Louis Armstrong cover of Give Peace a Chance (no, really, check it out—peace has never swung so hard) and reading about political protests by both the left and the right, it occurred to us that what is missing from today’s protestors as opposed to those from years gone by is optimism. There was an optimistic bent to long ago protests fueled perhaps by a belief that their agitation would lead to a better world. Today’s protesters fill the optimism void with anger.*  Perhaps this is because although we live in the most peaceful and prosperous time in human history, there are worrisome signs of regress. The last couple years of trouble are either a hiccup or perhaps this long virtuous cycle of peace and prosperity is turning towards something darker. Take peace, for example–the last few years have seen peace take a beating. Looking at one measure—The Global Peace Index—there are now fewer countries in the “more peaceful” part of the spectrum as you can see in the maps below. Much of this is due to increased terrorism:. According to the Peace Index, “Deaths from terrorism increased by 80 per cent from last year’s report with only 69 countries not recording a terrorist incident.” Internal conflicts leading to more displaced people also led to the peace index achieving its lowest score since 2008. Whether this negative data is a short term blip or we are in for a trend of trouble is, of course, one of the more important questions of our time. 

2016 Peace Index

 

 

2011 Peace Index

*Or maybe it is anger that is causing the regress.

The Poor Middle Class

There has been much debate about the difficulties that America’s middle class is experiencing but like most trends, including the decline in manufacturing jobs (not unrelated to the fate of the middle class!) this is a global trend. In fact, Thomas Piketty, who authored the famous book,  Capital in the Twenty-First Century, three years ago, recently published new research showing China’s middle class is suffering too. In the chart below, Piketty shows the income share of the middle 40% of the U.S., China and France, all of which are lower than they were a few decades ago. Piketty, in his new paper, writes, “China’s inequality levels used to be close to Nordic countries and are now approaching U.S. levels.” Clearly this is because of NAFTA…wait, maybe these issues are more complicated than those attacking trade deals realize.

The Young and Restless, China vs India, Who’s on First

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On the occasions we take public transit, our walk to the bus takes us by a cemetery. It’s a helpful reminder on our way to meetings which may contain challenges, puzzles and even on occasion acrimony, that in the long run, it will not matter. On a recent such walk, we were reading on our smartphone that Seattle has set a 122-year record for rain. It was, in fact, raining while we read this news. As we looked up from our phone, we saw a cemetery worker fixing an automatic sprinkler. We noted that all the sprinklers were turned on, spraying water onto the already damp environment, which we found neither efficient nor smart of the cemetery. Compounding this, one of the sprinklers was spraying directly into the sidewalk upon which we trod. We are one of the few Seattleites who uses an umbrella which we turned from the sky towards the sprinkler to block its rush of water. As we passed by another tombstone, we thought at least stupidity is not dead. But even as close our umbrella we open up the skies to France’s young and restless, to what India is exporting more than China and to who is emitting the most CO2 into the atmosphere. It’s this week’s International Need to Know, coming to you weekly, almost as inevitable as death and taxes, but much more useful, sweet and helpful.

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

The Young and the Restless

Explanations for the results of the French election, like explanations for most election results, like life itself,* are complicated. We could post a myriad of charts about the election but today we choose only two. The first shows who the young voted for, and it was not for the remaining centrist in the race, Macron. No, the populist on the left, Melenchon received the most number of votes from the age 18 – 24 crowd, with the populist on the right, Le Pen, coming in second among hip millennials. This is perhaps not surprising given a) that as in much of Europe, youth unemployment continues to be high in France (23.5%); and b) as we told you last year, democracy’s brand with the young is not as strong as it was with previous generations. The second chart below (courtesy of Ian Bremmer’s Twitter feed) maps high unemployment geographic areas with where Le Pen did best, and the similarities are striking. The French election like many elections in the last year have brought to the fore two crucial issues for the world–economic stagnation and an increasing affinity for authoritarianism. These two issues, of course, are related.

*We find ourselves thinking like a French philosopher.

    

China vs. India on Exports

China has far outpaced India in merchandise exports over the last 15 years. Everyone knows that. But perhaps not so well known, though obvious when one thinks about it, is that India is a much larger exporter of services than China, service exports being things like software, programming, architecture, engineering and the like. China is trying to transform into more of a services economy and one might expect that services export gap with India to narrow over the coming years. But, for that to happen, we expect China will have to do something about intellectual property theft and other associated issues. It will be difficult to have trust in services provided by China under the current legal and cultural norms there. That is not to say that China does not have a large services industry, including in information technology (Tencent is very large and very innovative), but will these services translate internationally? We expect they will over time and that will eventually compel China to open up its markets to foreign competition. Interestingly, both China and India’s economies are roughly equal in their dependence on exports. For China, exports are 22% of GDP and for India, they are 20%. But, China relies on goods exports, and India relies on service exports.

 

Who is on First?

We recently came across on Twitter (one of the worst human inventions of all time, and yet one we can’t stop ourselves from using) the first chart below showing China far and away as the largest emitter of CO2 into the atmosphere. China’s environmental problems are a huge challenge. Fortunately, they are working to address these environmental problems, although often it is a one step forward, one step back process. By its sheer size and increasingly developed economy, what China does or does not do, will have a huge effect on climate change efforts. But, it’s important to note China is not even close to being the largest emitter per capita. As you see in the second chart below, Australia takes that dubious prize. The U.S., the second-largest overall emitter, is a much larger emitter than China per capita. Everybody’s favorite northern cousin, Canada, is also, because of its large energy industry, a large per capita emitter.

 
 
Emissions per capita (t)    

IMF Explanations of Declining Labor, Are We Wrong about Chinese GDP, Where the Money is Going

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It is all about the hunt, the seeking, the thrill of the chase in this little world of ours. And so after many years, countless hours of research, many false leads, we are ecstatic to announce that we have finally found a bialy worth its name here in the Pacific Northwest, the home of the worldwide headquarters of International Need to Know. Wait, what is a bialy you ask? Ahh, a bialy is like a bagel but a thousands times better–baked rather than boiled and rather than a hole, the middle contains onions or garlic. We sampled bialys as a child visiting family in New York and continued to enjoy them over the years whenever we were in the big city. But outside of New York they are hard to find and almost impossible in the Seattle area. A few local bakeries carry something they claim are bialys but they are virtually unrecognizable from the real thing. But then our friend (the now sainted) Pete Gladhart handed us a bialy from The Bagelry in Bellingham, Washington, and as we bit into it the skies opened and glory (and taste) rained down upon the land. For this was a bialy almost as good as Kossar’s on the Lower Eastside of Manhattan. Unfortunately, Bellingham is a long drive from our Seattle headquarters so as we make plans to develop a bialy food truck with a secret method of replicating New York bialys we bring you an explanation for the decline in labor’s share of income, ask whether we’ve been wrong about China’s GDP and tell you where the money is going. It’s this week’s International Need to Know, the new, better, more honest, non-harassing, no-spin zone of international news.

IMF-Splaining of Decline in Labor Share of Income

Earlier this year we pointed out that the global share of corporate income has been decreasing since the early 1980s, noting “it’s not just in developed countries like the U.S., Germany and Japan–China is seeing the same trend.” We did not hazard an explanation for this trend but just in time for kids and anarchists to dance around the May Day Pole, the International Monetary Fund (IMF) does, arguing that “this trend is driven by rapid progress in technology and global integration.” The reasons for the trend differ by type of economy. In advanced economies, the IMF asserts, “half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.” In emerging markets, on the other hand, the IMF states, “We find that global integration, and more specifically participation in global value chains, was the key driver of declines in labor shares in emerging markets.” The IMF’s claim is that such integration is “shifting the production in emerging markets and developing economies towards more capital-intensive activities.” We’re not sure we buy these explanations for the decline in labor’s share of income but since we raised the issue we offer up the IMF’s ideas for the cause of this trend.

Are We Wrong About Chinese GDP?

On more than one occasion we have joked about the validity of official Chinese government statistics on GDP growth, asserting they are higher than the actual growth of the economy. But is the joke on us? A new economic paper tells us we are wrong—not that the government’s statistics are correct but that the official GDP figure is actually undercounting GDP?!!! The method these three economists used was to count satellite-recorded nighttime lights, something that cannot be manipulated the way GDP statistics can be. To vastly oversimplify, these economists found that they could correlate the increase in these lights to increases in GDP and to other variables which simulate economic growth such as electricity use, freight volume and bank loans. Using the nighttime lights variable they calculate that Chinese GDP figures are actually higher than what was reported by the government. The  economists used nighttime light data from 2004 to 2013 before many of us thought China was having economic difficulties. But the paper also examined late 2015 data: ” We find that GDP growth in 2015 Q4, a time when the financial press was awash with stories about a hard landing of the Chinese economy, is somewhat higher, but quite close to the officially reported rate, with a 95% confidence interval…”  We are curious what nighttime lights show for 2016 GDP growth. This paper does note that the growth seems to be driven by credit which could foretell an economic stall when this credit growth is removed. While we await others analysis of this economic paper that is upending our beliefs, we file it in our increasingly large file labeled “China is complicated.”

China’s real GDP Growth. You do the math! Or, maybe not, the math the economists used is a bit complicated:

Where the Money is Going

The world seems to be more volatile than usual, at least if you scan the headlines. But even in the midst of the constant churning, money continues to flow around the world. In which places do investors currently have the most confidence? The 2017 A.T. Kearney Foreign Direct Investment Confidence Index tells us the United States is number one for the fifth year in a row. In fact, Canada, coming in at number five, makes North America an investment destination powerhouse. Rounding out the top five are Germany, which rose to second as China fell to third (but the nighttime lights?) and the United Kingdom comes in fourth. The folks at A.T. Kearney were surprised that the UK did so well given the uncertainty of Brexit. A.T. Kearney explains the the U.K.’s investment destination resilience, by noting that, “U.K. Prime Minister Theresa May has promised they will emerge as a ‘Global Britain,’ one with fewer cumbersome EU-mandated regulations…” We still hope to do a deep dive into Brexit in the coming weeks–in fact, we are assembling our mask and oxygen tanks as we type.

Who is the World’s Superpower, Where Taxes are High and Where Millennials Buy Houses

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Earlier this week we spoke at a business event about the so-called Border Adjustment tax as well as about H1B visas. On the latter we noted that many analysts frame the issue as there not being enough talent domestically to fill certain high skill positions. This is certainly true (just as we are sure there are certain abuses in the H1B system–this is the nature of all such systems in this little world of ours). But, we also stressed it is important to recognize that companies are in a worldwide competition for talent. The best talent that is not allowed to work for Microsoft, Amazon or Google, will work for their competitors overseas. Think about our beloved Seattle Mariners baseball team without international players Felix Hernandez, Robinson Cano and Nelson Cruz…hold on a minute! The Mariners are horrible, bad, terrible even with this international talent!* As we search for a different sports analogy, we bring you news about which country is considered the world’s economic superpower, which countries tax labor the most and where millennials own houses. It’s this week’s International Need to Know, not giving up our plane seat as we fly into clouds of international information and data.

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

Who is the World’s Superpower?

If we utilized click bait to gain readership from Marvel Universe readers, that headline would have read, “What is the World’s Superpower?”  Fortunately we are not so sleazy in seeking eyeballs. But last week in asking whether China is dominant, we concluded: “..for now the world leadership vacuum is exactly that, a dark empty void, for good, bad or between.” This week, however, comes news that the world, when choosing between the U.S. and China, now sees the U.S. as the world’s economic superpower as you see in the chart below. According to a Pew survey, most countries now rank the U.S. higher than China for economic power. That’s very different than in 2012 when countries thought just the opposite, ranking China as the main economic superpower. But, today the world is looking through red-white and blue-colored glasses. “By contrast, in the most recent release of the survey, only three of 16 countries picked China over the US: France, Canada, and Australia.” Not sure why the French (and French Canadians and French Aus–, er, uh, Australians) have such a different view of economic power.  Regardless, in terms of leadership, there is still a void, perhaps even more so now since the country seen as the greatest economic power in the world is less so a political one.

World Tax Rankings

Most of our American readers are busy preparing to file income taxes next week, well, except for those in perpetual audit. But which countries have the highest tax rates on labor? Among Organization for Economic Cooperation and Development (OECD) countries, the answer is Belgium. The OECD measured “the level of personal income tax and social security contributions in each OECD country by calculating the ‘tax wedge’ – the total taxes on labour income paid by employees and employers, minus family benefits received, as a percentage of the labour costs of the employer.” Interestingly, this tax wedge for the average worker in OECD countries has been falling for a number of years and in 2016 the average fell to 36%. But, the OECD points out that although the OECD average tax wedge decreased slightly in 2016, it actually increased slightly in more countries (20) than it decreased in countries (14), with most of the increases and decreases driven by changes in personal income tax. So some countries have sizably cut their income taxes which lowers the overall average but the majority of countries are increasing their tax on labor. Keeping with the austerity program imposed there, Greece suffered the largest increase in these types of taxes. Regardless of the rate, how many Greeks actually pay their taxes is another matter.

Share of Millennials Owning Houses

As millennials increasingly take their rightful place on the world stage, let’s examine where they are most successful, or at least are fulfilling their dream to own their own home. According to HSBC, China has the largest share of millennials who own a home. The percentage in China, 70%, is so high, that we doubt the validity of the HSBC survey. Nonetheless, the numbers provide an interesting comparison. Mexico comes in second which helps to explain the continued net negative immigration of Mexicans into the U.S–there is not as much economic incentive for Mexicans to come work in the United States. France and Malaysia are third and fourth in the number of millennials owning a home. What does the future portend for millennial ownership? Pay particular attention to the second graph below comparing house price growth and salary growth in these countries. In many places, salary increases are not keeping up with housing price increases. Does this mean ownership rates will decrease, salaries increase, personal debt rise or some other factors change? As we go pay our latest mortgage bill, we await the answer.

 

Deep Dive into China Plus Changes in World Population

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Recently at the gym while exercising, we were watching the Boston Celtics demolish the New York Knicks. It was a rather boring game. We looked across the room and saw a bank of TVs in front of a set of treadmills that were showing a different basketball game. We squinted our eyes to figure out who was playing. Later when we walked over to the TVs we realized the channel was showing a video game of basketball–the treadmillers preferred to watch two people playing a video game simulating a basketball game rather than watch an actual NBA game. I suppose we can’t entirely blame them given the poor entertainment value of the Celtics-Knicks matchup. We took two lessons from this: First, even admitting our bad eyesight, it is clear video game graphics have advanced so much that from a distance it is difficult to tell reality from virtual. Second, we are near a new era when it will be impossible to distinguish real life from artificial. Of course, if the recently popularized theory is true that we are all just a software simulation, then we are building imaginary worlds on top of illusions. Speaking of imaginary worlds, from time to time we will take deeper dives into issues and places, and this week, in honor of President Xi Jinping’s visit to the U.S., we look at the always confusing, confounding, complex China, including China’s role in the world and the state of its economy, finishing up with global population changes. It’s this week’s International Need to Know, using our game controller to keep you apprised of our massively multiplayer online role-playing world.

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

Is China Dominant?

Is China Dominant? That giant sucking sound you hear? Many people claim it is the United States abandoning its 70-year role as a global leader. Into that void many people assert (their voices are at least powerful enough that they reach our tender ears) strides China. They are asserting this is true for trade, the environment and the world economy in general. And it is true that China is much more important than it was twenty years ago and even ten years ago. But, as we noted in this space at the beginning of the year, it is difficult for China to be the leader of free trade when its borders remain mostly closed to trade and investment. China is working to clean up its environment and deserves credit for what they have accomplished, but China’s laws and practices have a long ways to go before they reach the standards of developed countries. And finally there is finance. China’s formal and shadow banking systems are murky and we’re not certain anyone, perhaps even the Chinese themselves, completely understand them. And when we look at global financial payments, China still lags far behind the U.S., the EU (the Euro is not gone yet!–soon we will dive deep into the roiling English Channel of Brexit and the EU) and even the British Pound. For that matter, though close, the Renminbi is still behind the Japanese Yen and Canadian dollar in its share of global payments. Barring catastrophe, we expect over the next two decades that China may become a leader in any number of these categories. But for now the world leadership vacuum is exactly that, a dark empty void, for good, bad or between.

China’s Economy is…?

As President Xi sits down to a meatloaf sandwich in Mar-a-Lago, what is the state of his country’s economy? By many measures, the economy is doing fine. After some worries last year, the economy appears to have stabilized. The government has launched a variety of initiatives including a new Silk Road initiative and a new Special Economic Zone in Hebei Province. On the other hand, we have warned before that official data in China is like a cable company saying it will be at your house between noon and three, not always to be trusted. A year ago, we looked at beer sales to see what was really going on in China’s economy and as we often do, we turn to beer again, and noodles. Reuters reports that “Tsingtao Brewery Company, China’s number two brewer, posted its steepest drop in net profit in 20 years last week, blaming tough competition and weak demand. Noodle maker Tingyi saw profits drop by a third.” The stable economic growth also appears to be built on credit which has grown at a much faster rate than the economy. Much of recent investment in China is by state owned companies. For how long can China goose its GDP with credit? Finally, perhaps most relevant to the host at Mar-a-Lago and as we noted in the post above is that China’s economy is still very much closed in many ways. For example, as you see in the graph below, China ranks as the second most restrictive major economy in the world. Or, as former Treasury Secretary Henry Paulson says, China’s market is far more closed today than it was a decade ago when he was negotiating with the Chinese. So China’s ship is doing well but has some rocks and treacherous islands (not necessarily in the South China Sea) to navigate ahead.

As the World Turns

Sixty some years ago in 1950, China, India and the U.S., in that order, were the largest countries in the world by population. The same is true today but many of the other top populous countries are very different. As you see below in the graph courtesy of Robert Ward of the Economist Intelligence Unit, Russia has fallen from fourth to eighth, Japan is barely in the top ten and Britain and Italy are nowhere to be found. Meanwhile places like Indonesia, Nigeria and Bangladesh have climbed into the top ten. If current trends continue, always an iffy proposition, India will be larger than China and Nigeria larger than the U.S. in 40 years. To give a sense on how long ago 1950 was and at the same time how much constancy there is in certain parts of life, this year is the first baseball season without Vin Scully or Connie Mack working in some level of it since 1885. Now graph that! 

 
   

Where Tech Workers Should Live, Where Inequality is Decreasing and Where the Flying Taxis are

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We have a rich history dealing with customer service representatives, so much so that we even made a movie with our friend, Mike Williams, about them called Please Hold. But today’s customer service representatives appear to be influenced by the current political landscape, asserting up is down and black is white, literally. We offer an illustration. The INTN better half recently gave her parents the gift of a DNA test so they could learn more about their genealogy. Our father-in-law is African-American and our mother-in-law is white. But the results they received from the company asserted that our father-in-law’s background is western and northern European. So our mother-in-law called the company and said there must be some sort of mistake. Ahh, but the customer service representative asserted their test was completely accurate and offered a meandering and strange history of whites bringing blacks to America and the mixing of the two. Our mother-in-law patiently explained that the test results asserted her husband had less than 1 percent African heritage in him despite the fact both his parents are African-American. The customer service representative, not unlike a White House spokesperson, stood her ground saying the test results are always correct, telling our mother-in-law that her husband must indeed be white. Our mother-in-law, whose husband was standing next to her, and who knows empirical evidence when she sees it, said, “If you look at the person I’m looking at now, you wouldn’t say that.” But today’s customer service representative creates her own facts and refused to admit there was something wrong with the test results. So as we adjust to our new world where black is white and white is black, we dive into where tech workers should live, examine where inequality is declining and tell you which country is the latest to test flying taxis. It’s this week’s International Need to Know, giving the Japanese-American perspective on our upside down world.

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

Where to Live as a Tech Worker

Tech workers can write their own ticket we are often told. Computer programmers and others of their ilk are in such great demand by technology companies that these workers can choose where they want to live. So where are the best places for such workers to lay their weary heads after a hard days night’s coding? The global real estate firm, Savills, gives us to two criteria to look at: commute time and rent costs. Among the tech cities Savills examined, tech workers in Austin had the shortest commute time. But in recent years the South by Southwest city has seen rents go north and is the sixth-most expensive city for rent among those examined by Savills. The cheapest tech city for rent is Seoul; followed by Santiago, Chile; and Berlin. We note that our city, Seattle, is both expensive and has lousy commutes. Of course, the same is true of other top tech cities in the world such as San Francisco and Boston. Will these disadvantages eventually affect these urban region’s prowess for being tech leaders or are there other factors that will continue to driver their success? We guess, at least for the mid-term, the latter. We note that Chinese cities are not even examined. in the study. We plan on soon updating you on China’s technological and innovation prowess, which continues to be underrated.

A Region Becoming Less Equal

Inequality has become a big topic nowadays, with evidence of growing inequality in the United States, Europe and other parts of the world. But over the last decade, one region has seen inequality decrease: Latin America. Most countries in Latin America, according to a new study, saw their Gini Coefficients (a measure of inequality–but also a great name for a character in a science fiction story) decrease from 2002 to 2012. Only in Honduras did inequality go up during that period. You might think because a number of these countries elected socialist governments during that period, that government transfers are the main reason for the decline in Gini coefficients. But that same study found that government transfers only account for a quarter of the decline. Other factors, including growing economies coupled with rising education levels, are the main factors for the decrease in inequality in Latin America. Of course, in Venezuela everything is now equal—equally catastrophic. Better to grow your economy and increase your education levels than to implement disastrous economic policies.

 

Singapore Flying Taxis

It is true that we have been waiting for an opportunity to write a headline about flying taxis, especially in Singapore, but this is also news well worth sharing. As long time INTN readers know, we have a soft spot for innovative transportation solutions. In fact, last month we reported from an Autonomous Vehicle conference that we attended in Santa Clara. And we recently reported on a flying taxi initiative in Dubai. So we read with interest about Singapore’s efforts in this technology. In fact, one of the prototypes the Singapore government is examining is the same Ehang 184 autonomous aerial vehicle that Dubai is planning to start testing this summer.  Singapore is taking a more cautious approach than Dubai. Pang Kin Keong, the Permanent Secretary for the Ministry of Transport recently told an audience that “In 2030, you bet your money that aerial transport will also be a means of urban mobility.” 2030 is not this summer but it is also not that long from now. Singapore is already working with Delphi Automotive to test and soon launch a fleet of self-driving taxis (the ground variety) and is investing in a variety of other innovative transportation options. We expect places such as Singapore, with an advanced economy, and a proactive assertive government, will lead the way in the initial use of new transport technology, ahead of Europe and the United States with their more stodgy bureaucracies. And we expect flying taxis to be far safer than taxi drivers in New York, where we have often nearly lost our life due to crazy cabbies.

Canada First, Hello China from India and Where the Forests Are

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In recent months, thanks to a client providing us a bus pass, we have been taking the bus more frequently into downtown Seattle. Specifically we have been riding the notorious E Rapid Ride which travels down Aurora Avenue and whose ridership is not, shall we say, the type of people who are members of the Bellevue Club (where we had a meeting yesterday–more on that, perhaps, in the future). In fact, we are fairly certain on one mid-day ride a few weeks ago that we were the only rider not on meth. On various rides, we have had to roust the passenger next to us who was passed out, broker a fight between a homeless woman and the bus driver and walk by a passenger brandishing a sword. At first we were a bit snobbish about all of these rumblings on the bus but now we accept them and welcome them (as long as the sword is not brandished on us or anyone else). We realize these rides are one of our few exposures to people outside of our socio-economic class. A book we are reading, which we highly recommend, The Complacent Class, talks about how the U.S. is more segregated than ever: economically, educationally, socially and racially. We do not agree with everything in the book but its assertions and data are thought provoking. Even as we continue reading the book, we are not complacent about immigration in Canada, or about how China and India measure up on the Internet or even upon discovering some surprising data about forests. It’s this week’s International Need to Know, integrating data, analysis and information as best we can.

Canada First

We have witnessed revolts against immigrants in parts of Europe and have seen it up close here in America as well. Now Canada, the apparently mild mannered country to the north (having been to hockey games I’ve never understood that stereotype), might be joining the raucous fray. A new poll shows a “plurality of Canadians disapprove of the way the Trudeau government is handling the recent illegal border crossings.” 48 percent of those surveyed say those migrants crossing illegally from the United States into Canada should be sent back. One might think these Canadians are merely worried of American blue state refugees wandering into their country with glasses of roséand quinoa kale wraps* (and who wouldn’t be?), but the survey question clearly refers to people “from the Middle East and Africa” as you see in the graphic below. In addition, 46% of respondents disapprove of the way the Trudeau government is handling the refugee issue. In refugee matters, Canada is not an outlier but following other countries attitudes. As we have written before, we live in a new age of fear, and like all such ages, the risks of giving in to such an emotion are ripe for trouble and danger. .

 
  

*Full disclosure: in the last two weeks we too have sipped rosé and munched quinoa (but not in a wrap!)

Hello India? This is China

Twenty years ago there was a debate about who would develop faster, China or India. China won that argument as easily as Gonzaga will defeat West Virginia later today. China, until recently, averaged higher GDP growth and built up much better infrastructure. It is also way ahead in the digital economy. As you see in the graph below, far more Chinese use the Internet than those in India—71% to 21%.  Not coincidentally, Chinese are also far more likely than Indians to own a smart phone—68% to 18%. As the Pew Research Center reports, this digital advantage is due to China building a larger middle class with more wealth, “Between 2001 and 2011, the share of middle-income Chinese, those making $10.01-$20 a day, jumped from 3% to 18%. In India over the same decade, the middle class share of the population grew from 1% to 3%.” Of course, today China’s economy is growing more slowly (probably slower than official China government reported figures of 6.7%) and India’s economy is growing faster, around 7%. And since all those Chinese on their smart phones will be distracted playing video games and hanging out on WeChat, India’s economy, and digital sphere, may catch up more quickly than we think.

 

Seeing the forests through trees of new data

We have all read stories about the loss of forests, including the catastrophic loss of rain forests, but did you know in some countries there has been a gain of forest land in recent years? China, Russia* and India all have more forest land today than twenty-years ago, according to the World Bank. There have been huge losses in South America, especially in Brazil which since 1990 has lost 531,000 square kilometers since 1990. Large parts of Africa have also lost forest land. But many countries, especially developed ones, are gaining forest land. In fact, this data provides evidence for a pet (buffalo, as you will see) theory of ours that as more and more people huddle in mega cities, country sides will return to the way they were 200 years ago since no one, or at least few people, will be living in those areas. This will happen in many large countries, including in large swathes here in the U.S. In the future, we may again be singing about where the buffalo roam.   

Spanish Recovery, Crediting the Chinese and Where Women Dominate the Internet

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Regular readers of International Need to Know are aware we are unafraid of controversy, willing to tackle the big issues, able to buck convention when convention needs a good buck. So we report to you that last week while in the Valley of the Sun we tried, for the second time, an In-N-Out Burger, fries and milkshake. When we first tasted the famous Los Angeles based chain’s burger a number of years ago we posted on our Facebook page that we far preferred Five Guy’s burgers and fries. This was before our new political age of rage, back when Facebook was a platform for earnest debate on such matters (as well as for kitten videos and photos of food–it was a more innocent, joyous time). Our post caused much consternation, counter-attack and disbelief. But we stuck to our guns. However, we also believe in second chances and so eagerly ordered our food at In-N-Out last week. After this rigorous, fully scientific study we are eager to report that we stand by our original assertion no matter how many INTN readers it may cost us: In-N-Out is not worthy to carry Five Guy’s lettuce. But even as we dip another Cajun fry in ketchup, we serve you Spanish success, Chinese worries and information on where women rule the Internet. It’s this week’s International Need to Know, the fast food of international information only more nutritious.

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

Spanish Recovery

A number of years ago we had our cell phone pick-pocketed while on the subway in Barcelona. We chalked it up to the struggling Spanish economy and our careless ways. But amidst continued Brexit worries (more on that soon), Dutch election uncertainty and our continued angst over Italy, today we find European rays of light in Spain. The country’s economy was one of the hardest hit in the EU crisis, but last year its economy grew 3.2%, the third straight year of relatively robust growth.The Spanish economy continues to grow at the same rate this year. Deleveraging has occurred in Spain with household debt decreasing from over 120% of GDP to 97% of GDP over the last six years. Non-performing bank loans have fallen sharply too. There are, of course, still great challenges. Unemployment has fallen from 27% but it’s still high at 18%. And youth unemployment, although it’s fallen too, is still crazy high at just over 40% causing a lost generation of Spaniards. Also worrisome is that productivity is not only not growing but has decreased as you see in the chart below. Nonetheless, Spain, unlike Italy and Greece, has shown signs of life. That is a good and needed boost for the EU.

 
      

Crediting the Chinese Economy

If you want to look for positive signs in the Chinese economy, you can do so. If you want to look for negative ones, they’re easy to find too. China, as always, is complicated. Given that the rain pounds our window as we write, today we look for stormy weather in China and find it like Lena Horne humming a lyric. One worrisome barometer is that credit continues to grow at a faster pace than the economy. According to the chart below provided by the French financial firmNatixis, aggregate financing is growing 12.8% year over year. China is trying to transition from an export/infrastructure investment economy towards a more domestic consumer driven one. But, as you see in the second chart below, retail sales growth, although still increasing at a pretty good rate, has been steadily trending downwards since 2011.These two trends don’t seem sustainable. Of course, this is not to say China is about to crash, but it bears (wait, is that a pun?) watching.

  

Where Women Use the Internet More

We are not surprised but we were also unaware that in general men use the Internet more than women. Ten jokes immediately come to mind regarding men dominating Internet usage, none of which are suitable for a high-brow, sophisticated venue such as INTN. But, courtesy of the World Bank, we learn of 13 countries where women are on the web more than men. Almost all of the top five are fairly predictable coming from Northern progressive countries, including Finland, Denmark, Sweden and the Netherlands. But we never would have predicted that Bahrain would take the top spot. The full list of countries where women use the Internet more than men is below.

 

   

An Argument Worth Having, Economic Winning Streaks and the Best Passports

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We are on the road again this week, this time coming to you from the greater Phoenix area where we are keeping a close eye on our beloved Seattle Mariners. When we booked the trip many months ago, we forgot about the World Baseball Classic which started this week. In this tournament, countries play against each other with the winner earning a true world championship. This means some of the Mariners’ best players are off playing for their home countries–Venezuela, Dominican Republic, Canada–and not here for our viewing pleasure. One would think that someone writing something called “International Need to Know” would have kept up to speed on such a world event. But even as we bow our head in shame, take a sip from our beer, watch bright young prospects play in the sun and prepare to bite into a hot sausage sandwich, we bring you an argument worth having, inform you about the country that has the longest economic winning streak and issue information on which country’s passport you would be lucky to have. It’s this week’s International Need to Know, aiming to be at least a .300 hitter in the game of international affairs.

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

An Argument Worth Having

People fight about just about anything nowadays, often on social media platforms and even more often vociferously and angrily. So we were gratified to recently come across an argument worth having. Early last year, three economists–David Autor, David Dorn and Gordon Hanson– published a paper asserting China did indeed take away large swathes of jobs from the U.S. from 1990 to 2007. The paper, which was full of data, complicated equations and analysis, forced a re-thinking on trade issues by at least some. However, last week, George Washington University economist Jonathan Rothwell published a paper taking issue with Autor, Dorn and Hanson’s data. He asserts that the loss of jobs to China is not as significant as the original paper claimed. The three authors of the original paper have now shot back at Rothwell, stating, “The main methodological critique provided by Rothwell is unfounded. The critique provided does not follow from his own logic.” We do not have the chops to determine which side is right, but will note that the original paper, as we understand it, claims the negative trade effects were localized. That is, loss of jobs to China might have been very harmful to certain local communities, but the paper does not assert an overall loss of American jobs. In fact, as Kevin Drum recently illustrated, American, German and other countries’ manufacturing job losses have been remarkably steady over the last 50 years (see the chart below). Plus, China is now also losing manufacturing jobs–the U.S. is no longer siphoning jobs on net to China if it ever was (depending on which economist you believe). The economists’ argument regarding how many job were lost to China is definitely worth having but the squabble falls into the category of fighting the last war.

Connecticut Women’s Basketball Team of Countries

The Connecticut women’s basketball team has won more than 100 straight games as it heads into the NCAA tournament. That’s darn impressive for any team not playing the Washington Generals. Australia’s economy has an impressive streak of its own going, having gone more than 25 years without a recession. That’s the current longest streak without a recession in the world. Poland comes in second with 86 consecutive quarters without a recession followed by South Korea (proving I guess that you don’t need an active president to have a successful economy and that a dangerous neighbor next door armed with nuclear weapons can’t stop you either). The mighty Slovak Republic is fourth. These are four fairly disparate economies so there’s probably no big lesson to learn from them as a group. But it should be noted that of the longest economic win streaks since 1970, these four current streaks all rank in the top ten. That so many of the hot streaks are taking place today may, or may not, say something significant about our current world economy. Is the economy better, more resilient, propping itself up artificially or is it just statistical noise? Let’s get Autor, Dorn, Hanson and Rothwell fighting about this.

Passport to Freedom

At the airport last week while standing in the TSA pre-check line, which was longer than usual, passengers pulled out their passports and other IDs. I saw identification papers from many countries which leads to the question: which countries’ passport is the best to have? Nomad Capitalist, a consulting firm that helps people move around the world and pay reduced taxes, offers their Nomad Index which provides one perspective of which is the best passport. Its rankings are based on which countries allow the most visa-free travel, are most lax about collecting taxes overseas, have the best perception, provide the ability to have dual citizenship and provide the most overall freedom. Under those criteria, Sweden tops the index mainly because someone with a Swedish passport can travel to 176 countries without having to get a visa. It is also easier for a Swede living overseas to avoid paying Swedish taxes. As you can see in the table below, all of the countries in the top ten are in Europe. For those of you curious, the U.S. ranks only 35th in this index due to the taxes, perception and freedom categories. Afghanistan comes in last.

 

    

Uncertainty, Investing for the Long Term and Manufacturing Costs

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This week INTN is on the road in lovely Santa Clara, California where we are attending the Autonomous Vehicles Conference. It was a little awkward talking with the Lyft driver on the way to the conference hall telling him we were attending an event that aims to put him out of a job. In fact, a Lyft executive was on one of the panel discussions we attended and we thought about bringing the driver in to ask a question. Just a few years ago such a conference would have been regarded as one focusing on speculative technology and indeed there are still challenges to achieving fully autonomous vehicles–one company told of an Australian partner who informed them the car would need to be able to distinguish between a cow and a kangaroo (they hopped right to the task). But all the companies we talked with agreed that the two main challenges are not building autonomous vehicles that can truly drive on their own, but instead the triple threats of regulatory issues, cultural barriers and hackers. In fact, the existence of the conference itself is testament to the arrival of autonomous vehicles–it is your basic trade show, with networking, trade booths, and rubber chicken for lunch. We might as well be at a vacuum cleaner convention. But even as we prepare to shift into our autonomous vehicle future, we still bring you the results of a global uncertaintly index, information on where to invest for the long term and the big changes in manufacturing costs around the world. It’s this week’s International Need to Know, discarding envelopes from Warren Beatty even as we open up the world to your inquisitive eyes.

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

May You Live in Uncertain Times

Last week we presented an economic uncertainty index for China developed by three business professors. It should be taken with a grain of South China sea salt since it was based on tracking the frequency of articles about policy related economic uncertainty from only one newspaper, the South China Morning Post. But the three profs also track global economic uncertainty and for that they have a more rigorous method: they track articles on economic uncertainty from a variety of newspapers, as well as changes in tax codes and Fed predictions. As you see in their graph below, the global economic uncertainty index is at its highest level since 1997, when they began tracking the data. The previous peak of global uncertainty took place right after the Brexit vote. It’s surprising that both today’s uncertain times and Brexit led to a higher score in the index than the fall of Lehman Brothers and the global financial crisis. Does this say something about what is happening today or about newspapers and the Fed? We are uncertain (darn, will that increase the index even more?).  

 
  

Investing for the Long Term

We are told to invest for the long term. So which country’s stock market has performed the best over the last 117 years? Credit Suisse provides the answer in their 2017 Global Investment Returns Yearbook. There they document the returns of stock markets all over the world dating back to 1900. Surprisingly the country with the highest rate of return over that 117 year period is South Africa, followed by Australia. The U.S. comes in third with a real annualized rate of return of 6.4% (which we note worriedly is below what many pensions plan for). For stock market returns, it’s good to be a resource rich country such as South Africa and Australia. In fact, Credit Suisse notes, “A common factor among the best-performing equity markets over the last 117 years is that they tended to be resource-rich and/or New World countries.” Of course, stock markets are not economies. South Africa has had a great stock market for the long run but it’s economy is problematic. One last historical point of interest: note in the pie charts below which stock markets dominate today as opposed to 1899. A century’s time leads to lots of changes. What will China’s and India’s stock market’s relative sizes be 117 years from now (assuming there are still stock markets in the AI dominated future)?


    

The Cost of Manufacturing

For all the current concerns about China’s economy, its success over the last 20 years, especially compared to other economies, is remarkable. Take the increase in wages, for example. Manufacturing wages have increased since 2005 from $1.20 per hour to $3.60 per hour. That means Chinese manufacturing wages are above the rates of Mexico, Thailand and Brazil, to name just a few. That’s one of a number of reasons China is attempting to transform from a mainly manufacturing exporting economy towards one more reliant on services and domestic demand. 

 

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