Month: February 2020

US stock futures are back in the red as the number of confirmed deaths in China surpassed 600 while the death of a doctor who was punished by the police for first reporting the virus back in December has stoked outrage on the mainland, as messages of rage and frustration flooded social networks operating on the Chinese Internet.

Over night, Beijing was repeatedly embarrassed as its extreme quarantine/lockdowns spread further throughout the country, with nearly all of the country’s major cities except for Shenzen imposing at least some level of travel restriction, with many cities imposing the harsh quarantine measures requiring everyone to stay indoors.

As more companies from tech to automotive warn about serious supply-chain disruptions that might temporarily halt production, JPMorgan warned last night that the outbreak could drive China’s economy to a virtual standstill, wiping more than 4 percentage points off annual GDP growth in 2020. It should go without saying, but this would mark a return to the economic stagnation of the cultural revolution.

President Xi has already started scapegoating local officials, meanwhile, reports emerged overnight of another confirmed case of the virus in Singapore with no links to China, suggesting that it was another human-to-human transmission.

But after Beijing yesterday announced that it would scale back trade-war tariffs to allow greater numbers of US goods to flow into the country, President Trump has decided to do him a good turn, handing him a powerful propaganda tool in a pair of supportive tweets, uncritically relaying Xi’s assessment that the effort to suppress the virus is going “very well”.

Trump praised China’s “building hospitals in a matter of days” and added that they are “doing very well.” Meanwhile, the US will continue to work closely with China, the president pledged.

Just had a long and very good conversation by phone with President Xi of China. He is strong, sharp and powerfully focused on leading the counterattack on the Coronavirus. He feels they are doing very well, even building hospitals in a matter of only days. Nothing is easy, but…

— Donald J. Trump (@realDonaldTrump) February 7, 2020

….he will be successful, especially as the weather starts to warm & the virus hopefully becomes weaker, and then gone. Great discipline is taking place in China, as President Xi strongly leads what will be a very successful operation. We are working closely with China to help!

— Donald J. Trump (@realDonaldTrump) February 7, 2020

But it looks like we’re going to need some more bullish trade headlines to once again assuage the market’s anxieties about the viral outbreak.

After the very public scapegoating of former Credit Suisse COO Pierre-Olivier Bouee, most observers probably believed the Credit Suisse spying scandal was over, and that CEO Tidjane Thiam would survive to lead the Swiss megabank through hopefully happier times.

But last month, we reported that Bouee had decided to fight back. And now, not three weeks later, on an already-busy Friday, Thiam’s resignation has reportedly been accepted unanimously following a brief but brutal boardroom power struggle between Thiam and CS Chairman Urs Rohner.

Offering an unmistakable sign that this is the end of an era at Credit Suisse – an era of choppy transformation led mostly by executives who hailed from the outside world, instead of the bank’s native Switzerland – the board announced that Thomas Gottstein, the head of CS’s domestic business in Switzerland and a Swiss native, would take the reins as the new CEO, per FT.

Tidjane Thiam

The conflict between Thiam and Rohner began shortly after the Zurich-based bank hired a corporate espionage company to tail its former wealth management head Iqbal Khan while he was on “gardening leave” from CS ahead of taking a new job at rival UBS. That scandal was very public, very messy (before the scandal subsided, an employee with the corporate-espionage company had killed himself) and most believed it would be an irrevocable stain on Thiam’s reputation. After it emerged that Khan wasn’t the only executive  who was surveilled, the relationship between the chairman and CEO appeared to be irreparably broken.

But somehow, Thiam survived (after offering Bouee as a human sacrifice). And although the financial press largely applauded his resourcefulness and expressed an eagerness for Thiam’s second act, the CEO was never really able to get clear of the scandal.

Tidjane Thiam

As recently as earlier this week, it appeared that Thiam, who has claimed to have no knowledge of the spying incident, had won the support of the bank’s American shareholders, a critical constituency, and that he would likely resist Rohner’s bid to push him out.

But some time late this week, Rohner clearly landed the kill shot, and on Friday morning, Thiam revealed that he had “agreed with the Board that I will step down from my role as chief executive. I had no knowledge of the observation of two former colleagues. It undoubtedly disturbed Credit Suisse and caused anxiety and hurt. I regret that this happened and it should never have taken place.”

Thiam will formally step down after presenting 2019 earnings next week. CS shares sunk 4% on news of his departure (they had rallied 7% on the day back in 2015 that Thiam was announced as the bank’s new CEO, while shares of Prudential sank). The soon-to-be-former CEO had an interesting career: He distinguished himself as the head of Prudential, a UK-based insurer, after arriving in the UK after fleeing the Ivory Coast, his home country, after a military coup, the Guardian reports.

In a statement on Friday, Mr Thiam said: “I had no knowledge of the observation of two former colleagues. It undoubtedly disturbed Credit Suisse and caused anxiety and hurt. I regret that this happened and it should never have taken place. I have agreed with the board that I will step down from my role as CEO. I am proud of what the team has achieved during my tenure. We have turned Credit Suisse around.”

Thiam took over from American Brady Dougan with a remit to overhaul the lender. During his tenure, he shrank CS’s investment bank and built up its wealth-management franchise.

As the FT explained, the battle of Thiam’s future pitted American shareholders vs. Swiss insiders against one another. It’s possible that this battle will continue during Gottstein’s tenure.

Harris Associates, the bank’s largest investor, has been a vocal advocate of Mr Thiam’s, and has spoken at length about the danger of ousting him. The US asset manager blamed efforts to undermine Mr Thiam on a Swiss clique within the bank, resistant to necessary reforms and hostile to outsiders.

New York-based hedge fund Eminence Capital, which owns about 2 per cent of the stock, earlier this week threatened legal action or a proxy fight against Credit Suisse’s board if they fired Mr Thiam. “It’s not my preferred action, and I know it will be hard, but we are prepared to dig in and do this,” Eminence founder Ricky Sandler told the FT on Thursday, adding he would consider calling a special meeting of shareholders to oust Mr Rohner. “We have done these types of things before to protect our investments.”

Severin Schwan, the lead independent director on the bank’s board issued a statement in support of Mr Rohner’s chairmanship. “Urs Rohner has led the board commendably during this turbulent time. After careful deliberations, the board has been unanimous in its actions, as well as reaffirming its full support for the chairman to complete his term until April 2021,” he said.

It’s the end of an era for the Swiss lender. Now that the so-called “Swiss clique” is now back in control, will we CS step up to challenge HSBC and Barclays by rebuilding its investment banking business? We’re curious to see where they take things.

Authored by Ryan McMaken via The Mises Institute,

Chris Johns at the Irish Times is dismayed by all the support he sees for Brexit. He’s vexed by the fact so many of Brexit’s boosters are – in Johns’ eyes – going against their own economic interests.

Johns notes, for example, that Brexit may take a significant toll on British manufacturing, and may be problematic for income growth and tax revenues. Resigned to Brexit as a fact, Johns suggests trying to make the transition as painless as possible, but insists, “Britain will either be poorer or much poorer.” But it’s too late the avert at least some damage. Thus, the narrative goes something like this: “we tried to warn you people about the dangers of Brexit to your pocketbook. But you went ahead and supported it anyway. So now you’re worse off.”

Johns is missing a big part of the economic argument made by Brexit supporters.  At the moment, even the economic data suggests the British are better off today, but the Brexit gambit for many has always been one in which supporters calculate political independence will bring long-term economic gains, even if there are problems in the short term.  This hardly proves supporters are acting against their own economic interests, or that they don’t understand economic realities. It simply shows their predictions of the future are different from Johns’s.

But Johns’ misunderstanding is bigger even than this.  A big part of why he assumes people will soon be worse off thanks to Brexit is because he is too limited in how he understands the process of calculating costs and benefits. Once we move beyond “homo economicus” notions of benefits being limited to monetary gains, we realize the benefits of Brexit can be found in ways that aren’t tracked by any government office, and don’t show up in any statistical data.   Economists and pundits who limit their calculations to measurable statistics are missing a big chunk of how humans measure and value the world around them.

We Can’t Put a Number on the Opportunity Cost of EU Membership

Government statistics have been devised to keep track of identifiable and countable events and dollar amounts. This is why numbers such as “unemployment rates” and “median incomes” form the backbone of government stats. They can be identified and counted with relative ease based on survey data or direct observation. But these numbers are hardly comprehensive in measuring the real world.

But much of the concern over EU membership has focused on issues that are hard to quantify, such as government regulations and lost opportunities. How exactly does one quantify a new regulation on British businesses handed down by EU bureaucrats? An individual business might be able to hazard a guess, but aggregate data is far less reliable and far less available.

Even harder to count is the opportunity cost of EU membership. As noted by EU critics, for example, membership in the EU has limited the ability of the UK to expand trade outside the EU bloc. There’s no way to put a number on how much these lost opportunities have cost British households. Certainly some researchers have tried. But we end up debating the accuracy and relevance of the research. Ultimately, it all requires a judgment call as to whether or not EU membership is “worth it” to a specific person.

The “Psychic Profit” of Leaving the EU

Other things are even harder to quantify than lost opportunities. These are what many voters perceive as the intangible benefits of leaving the EU.

For example, a pro-Brexit voter might argue that British laws should be decided in Britain—even if this means paying higher tariffs. Thus: political independence is more valuable than selling goods to France at a lower tariff rate. Obviously, there’s no way to determine exactly how much benefit “political independence” produces for a person who values it. But the value is real.

We’re now in the realm of “psychic profit,” which is the profit that a person perceives in his own mind from a certain action or state of affairs. The problem with psychic profits is that they are not quantifiable as money profits are. As economist Ludwig von Mises noted, at a fundamental level, profits and lossses are “psychic qualities and not reducible to any interpersonal description in quantitative terms.” Moreover, Mises notes that the “psychic phenomena” from which these valuations derive involve “incalculable intensive magnitudes.” Even if a person values Brexit more than low-tariff trade, it’s impossible to put a number on how much more.

A similar accounting problem arises with the immigration issue. Some voters support Brexit because they suspect or hope that it will reduce immigration. In this case, some have concluded that their psychic profits are improved by being surrounded by people of similar language and culture. 

Faced with the idea that greater controls on migrant labor could push up the cost of living, some may nonetheless conclude the psychic loss resulting from immigration outweighs the monetary benefits of low-cost labor at the supermarket.

All of this should illustrate that when we’re talking about a voter’s decision to support a certain policy, we’re not exactly employing an exact science. By supporting policies that might ultimately lead to higher prices or higher foreign tariffs, one is not necessarily falling victim to economic illiteracy. One is simply taking a position that, in one’s mind, something that can’t be measured in pounds is more valuable than something that can be measured in pounds. There is a rational—and possibly well-informed—process of calculation going on here. It’s just a calculation that’s impossible to quantify.

Some economists find this sort of thing quite irksome, however. Johns, for instance, bemoans the fact that the “culture war” behind Brexit has led to ” the economy tak[ing] acceptable collateral damage.” He apparently means that voters have abandoned what he considers to be sound economic thinking in favor of “benefits” that can’t be counted in any ledger.  In the minds of pundits like Johns, people are irrational if they chose a policy that might reduce their incomes as measured in dollars or pounds.

The Real Problem: Majorities Forcing Policies on Minorities

Brexit critics like Johns would do well to admit their adversaries aren’t necessary irrational economic illiterates. But even if we all agree different people calculate economic benefit in their own non-measurable ways, we haven’t solved our political problems. 

Policies like Brexit will always be problems so long as people who make very different value judgments are forced to live under a common government.  We have a problem because the democratic majority can impose a preferred policy on the losing minority. 

In the case of Brexit, for example, nearly half the population appears to be either indifferent to membership in the EU or actively in support of it. And just as statistical economic data can’t tell us whether or not pro-Brexit supporters are “right,” it can’t make a judgment about EU supporters. Many EU advocates simply like the fact the EU hands down lots of environmental regulations to all member states. Supporters may like that EU membership (presumably) increases total immigration for reasons totally unrelated to economic factors. Some feel they benefit emotionally from a politically united Europe.

But this doesn’t mean that this minority of voters ought to be forced into leaving the EU because 51 percent of the population says so.

The ideology underlying democracy offers no answer to this. We have a situation in which about half of the population believes that it profits (psychically or otherwise) from one policy. But about half of the population believes it profits from the opposite policy. This problem becomes even worse when reduced to a regional level. An outright majority of residents in Scotland, for example, apparently opposes Brexit. Now that Brexit is a reality, a slim majority of Scots support independence. It would seem to violate basic notions of justice to insist that Scotland be held to the dictates of the English majority forever.

Scottish Separatists Are Now the “Crazy” Ones?

In spite of years of being told how economically inept they are for supporting Brexit, some are now turning the same arguments on the Scots. This pundit, for example, might as well be saying  “look at those crazy Scots. They want to cut themselves off from their best trading partner (England)!” In the minds of those opposing independence, the dictates of economic good sense mean that Scotland should stay in the UK. But the anti-independence pundits may be making the same mistake the anti-Brexit pundits were making. It could be pro-independence Scots feel that they would gain more from independence than from unity—even if government stats say otherwise. If many Scots truly believe this strongly, it will be very hard to convince them otherwise, no matter how many studies by economists are trotted out.

Ultimately, we’re still left with a political problem that can’t be solved by insisting all the intelligent people agree with us because our spreadsheets and bean counters tell us which political position is “best” for us.

None of this should be construed to suggest that sound economics is wrong. Yes, low tariffs are better than high tariffs. Yes, business owners ought to be free to hire workers regardless of what country those workers are from. Yes, government regulations on businesses are a destructive burden, whether imposed by London or by Brussels. But the Brexit debate wasn’t really about whether high tariffs are better than low tariffs. It was about who should decide tariffs, and where and how. It was about issues far beyond whether or not an additional 1 percent growth could be wrung out of GDP next quarter. Many have tried to turn Brexit into just a debate about economic policy. But economics has never been a reliable guide as to how many people calculate the value of leaving the EU.