Seven theses on the eurozone
A summary of heretical arguments on current accounts and fiscal
Free Lunch has long taken somewhat out-of-the-mainstream positions on international macroeconomic policy and especially as it applies in the eurozone. For your weekend musings, here are seven theses about current accounts and fiscal union.
The first three are about external surpluses and deficits of national economies, or current account asymmetries, as I insist on calling them. That is a better term than the more common “imbalances”, which builds into the terminology a sense of something that cannot be sustained (after all, being out of balance is to be ripe for a fall). But as the theses below suggest, asymmetric current accounts can be both sustainable and desirable.
1. The cyclical growth impulse from an economy’s trade and capital flows with the rest of the world is a function of the change in the current account (as a share of gross domestic product), not its level (as a share of GDP).
That is not to deny that a country’s external balance can affect short-term demand growth in its trading partners — so-called aggregate demand externalities. But it is to insist that it is a change in the external balance that imposes such an externality. An increase in an external surplus, and indeed a reduction of an external deficit, is a drag on growth elsewhere, but a constant surplus is not.
2. For aggregate demand externalities in the eurozone, what matters are changes in intra-eurozone current account asymmetries.
It is mistaken, therefore, to blame Germany for reducing growth in the eurozone after the financial crisis. Its surplus with the rest of the monetary union shrank in 2011-13 and has remained constant since. That means it cushioned the recession in the periphery. What is true is that its growing surplus with the rest of the world passed the eurozone’s aggregate demand contraction in that period on to other parts of the global economy.
3. Current account levels asymmetries can matter for financial stability (as opposed to aggregate demand externalities). That is because they add up over time to excessive stocks of cross-border liabilities. But that is only so if they are out of proportion to economic growth in the recipient economies, and if they take the form of hard-to-restructure claims such as debt.
Some implications of these theses are that Europe’s monetary union should want asymmetric current accounts, not try to avoid them. Part of the promise of the euro is to make it easier for capital to flow to the economies that have the least of it and where it should therefore be the most productive. But the eurozone should also push capital flows away from shorter-term debt instruments towards very long-term debt or ideally equity-type investments. That is both less destabilising and more likely to be well invested.
As for fiscal union, the term is used to mean many things — common borrowing; or a eurozone budget; or compensation mechanisms for countries in economic trouble. Here are four theses that apply to “fiscal union” in the basic sense of “insurance against shocks”, that is to say temporary transfers based on unpredictable events so that nobody can expect to be a net recipient or loser ahead of time (actuarially fair insurance, in the jargon).
Fiscal union is proposed as a solution to a whole list of challenges; in fact it may not be the best solution to any of them.
4. Fiscal union (in this sense) is neither necessary nor sufficient for national fiscal countercyclical stabilisation.
It is not necessary so long as one allows national-level fiscal policy to be sufficiently countercyclical, and so long as there is market access (on which see the next point). It is not sufficient because the scale will be too small (the US fiscal union cushions only about 20 per cent of idiosyncratic shocks to state economies). It is also not sufficient because if any transfers are truly temporary and will later have to be paid back, then markets will take this into account when assessing the creditworthiness of a country in crisis. That takes away from the overall ability to stabilise a national economy if it makes government borrowing from markets more expensive than it would otherwise be.
5. Fiscal union is neither necessary nor sufficient for sovereign “safe liabilities” — that is to say, for governments to have market access.
Note that market access is not a binary matter; the question is what price a government has to pay to borrow. With a sufficiently long-term debt structure, temporarily high interest rates are affordable. Fiscal union is also not necessary because further alternatives exist: central bank support such as the European Central Bank’s programme to intervene against speculation that a country may leave the euro; or in extremis, various forms of debt restructuring starting with the subordination of the outstanding debt stock to new bonds.
Fiscal union is not sufficient for the same reason as above: since risk-sharing is essentially a form of borrowing, limited transfers can have counterproductive effects on the cost of normal government financing.
6. Fiscal union is neither necessary nor sufficient for “safe assets” often thought to be needed as benchmarks for a stable private financial system.
It is not necessary because there are alternatives, such as the proposed European Safe Bonds. Besides the ECB can always issue its own liabilities for this purpose. It is not sufficient because not all forms of fiscal union would create a common bond; and none would realistically create it in sufficient quantities.
7. Fiscal union is neither necessary nor sufficient for eurozone-level fiscal countercyclical stabilisation.
It is not necessary because the European Commission can use its power over national budget policy to pursue a common fiscal stance for the eurozone. It is not sufficient because any fiscal union mechanism to insure against national shocks may have no ability to stabilise economic fluctuations that affect all countries at the same time.
None of this makes a fiscal union undesirable. But to the extent that it is politically resisted, it is wise to realise that there are alternatives. A combination of smarter structuring of cross-border financial claims, better use of the eurozone’s fiscal rules (which the treaty does not just allow but arguably requires) and a greater acceptance of debt restructuring — together these go a long way to restoring national fiscal policy to its rightful place.
When, in addition, efforts on private financial markets — the banking union and capital markets union — eventually secure risk-sharing through private channels, there is little left for a fiscal union to do.
Carlyle Said to Buy Supreme Stake
The private equity giant and the skate brand are rumored to be close to a deal.
Just as Mayor Bill De Blasio cut the ribbon on Supreme’s second New York store, in Brooklyn, speculation swirled that the elevated skatewear brand has even bigger developments ahead.
Sources buzzed Thursday that private equity giant The Carlyle Group could be close to a deal to invest in the company, which was founded by James Jebbia in 1994 and steadily worked its way into the hearts of the downtown cool kids and eventually fashion at large.
Supreme did not immediately respond to a request for comment and a Carlyle spokesman declined comment.
Terms of any potential deal could not be learned, but it would be a boon to both companies. Carlyle would be acquiring a stake in one of the fastest-growing brands in fashion — and one that has completely rewritten the rules of retail with limited product runs regularly “dropped” at its stores which then quickly sell out. Backing from Carlyle would give Supreme added financial muscle in a streetwear world that is becoming increasingly competitive.
Meanwhile, in a retail world where giants are struggling with sales declines and searching for direction, Supreme has had problems of a completely different kind: How to manage the heaving crowds looking to get into its Manhattan location, which was about to burst at the seams.
The streetwear brand had alleviated the lines and crowds with a new release system — customers no longer need to camp out because they put their names on a list and enter the store during a designated time slot — but demand for Supreme’s products has continued to increase, which is why the team opted for a 3,000-square-foot store in Brooklyn at 152 Grand Street between Bedford Avenue and Berry Street.
Outside of New York, Supreme has stores in Los Angeles, London, Paris and Tokyo, in addition to its web site.
Surpreme deftly linked with brands such as Schott, The North Face, Vans, Stone Island and Playboy, shoring up and broadening its skate base. A hook-up this summer with Louis Vuitton on pop-up stores selling a collaboration collection with the French luxury brand spurred rumors, which were ultimately unfounded, that the brand had been bought by the luxury giant.
That broad appeal and still-small base makes it something of a textbook growth story for the savvy private equity set, which looks for brands that have proven they are for real across several markets but still have room to grow.
Carlyle is working on its sixth U.S. buyout fund — a $13 billion pool of money being put to work across consumer and a number of other sectors. The firm’s investments include skin-care brand Philosophy (sold to Coty Inc. in 2010), Dr. Dre and Jimmy Iovine’s Beats by Dre (sold to Apple in 2014) and hair-care player Vogue International (sold to Johnson & Johnson last year).
Carlyle’s consumer and retail team is led by Jay Sammons, who told WWD earlier this year that he’s looking not so much for what’s hot now, but “businesses or business models or brands that are going to endure for a very long period of time.”
“There’s a big market-share shift away from what I would refer to as traditional retail into modern retail,” Sammons said. “Modern retail is going to be very important — and it can be bricks-and-mortar and it can be e-commerce.
“I don’t think retail is dead,” he said. “Consumers still want to buy things but have tastes and preferences that are evolving and changing. Companies are coming up with new and innovative ideas and products. I think great ideas can be built into big companies faster and with less capital than ever before….And I think traditional retail was not built to be nimble in that kind of environment. I think there’s a technology component to that, there’s an innovation component to that, there’s a generational component to that. That, to me, is the rub — and I think there will be winners and losers.”
And Supreme has certainly been winning lately.
“The truth is we maxed out on the Manhattan space. We were at capacity,” said Angelo Baque, Supreme’s former brand director who started his own creative agency but still oversees art direction for the company. “We couldn’t serve any more customers or sell more items.”
The new, larger space follows Supreme’s retail formula: wooden fixtures, sparse merchandising that lines the perimeter of the store, a flat screen playing skate videos in the window and a couple of concrete blocks for seating.
The store also features an indoor skate bowl, which Baque said would be open to skaters based on the manager’s discretion. Jefferson Pang, who left a 10-year stint at DC Shoes, is the shop manager. He most recently served as director of DC specialty sales.
While the shop isn’t on a retail-heavy block, it does sit across from Fool’s Gold, the independent record label and apparel brand that probably attracts customers of the same ilk as those found at Supreme — and it isn’t too far from Williamsburg’s central shopping areas.
“We wanted to have a store that was close enough to the city that wouldn’t inconvenience our Manhattan shoppers, but at the same time a bigger store with more of a skate element that’s very similar to the L.A. space,” said Baque, who added that it will carry the same merchandise that’s available in the SoHo location.
Supreme has slowly built a strong brand by being extremely consistent and following the simple rules of supply and demand. And Baque said all the collaborations, most recently with Vuitton, haven’t changed how Supreme operates.
“It’s business as usual,” said Baque. “I think it opened us up to a different demographic; more of the Vuitton luxury customer. The customer that didn’t understand what we did or who we are, but now we are on their radar.”
Indeed, it seems Supreme’s pinging a lot of people’s radars these days.
Fed’s Bostic (non-voter, dove): US labor market is robust; firms are having difficulty filling open jobs
- US has seen sustained strong job growth
- Does not comment on monetary policy outlook or economy in prepared remarks
Fed's Kaplan (moderate, voter): we anticipated Sept jobs number would be affected by storms
- There should be some build in wage pressure with tighter labor markets, but companies have less pricing power because of technological changes
- Open minded about next rate hike, we should be patient, will take some more time to judge before Dec meeting
- Should be in the process of removing accommodation but should do it patiently and gradually
- Demographics liking aging population remain a headwind and will get worse
- Fed policy is accommodative but maybe not as accommodative as some people think
Gapping down
In reaction to disappointing earnings/guidance:
- COST -3.1%, (also reports September comps of +8.9%), HELE -2.4%
M&A news:
- IRM -2.6% (Iron Mountain to acquire two Credit Suisse (CS) data centers in London and Singapore; enters into $500 mln distribution agreement)
- CRH -2% (Ash Grove receives competing proposal from a third party)
- GIMO -2% (acquisition talks with Elliott Management are said to have stalled over disagreements on price)
Other news:
- SNCR 26% (provides update on strategic alternatives process; enters into exclusivity agreement with Siris Capital Group following improved terms )
- ITEK -4.3% (after surging nearly 50% higher on Thursday)
- NLY -3.1% (to offer 65 mln shares of its common stock)
- IMGN -2.3% (pirces 14.5 mln shares of common stock at $6.50 per share)
- CDE -0.9% ( lowers 2017 production guidance due to San Bartolomé mine; reports Q3 silver equivalent production increased 7% quarter-over-quarter and 10% year-over-year)
- TGT -0.8% (following COST earnings/comps)
- WMT -0.5% (following COST earnings/comps), .
Analyst comments:
- CREE -3.3% (downgraded to Underweight from Neutral at JP Morgan)
- ALB -2.5% (downgraded to Neutral from Buy at Goldman)
- WBA -2.1% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
- HFC -1.8% (downgraded to Underweight from Neutral at JP Morgan)
- VLO -1.6% (downgraded to Neutral from Overweight at JP Morgan )
- SAVE -1.3% (downgraded to Hold from Buy at Deutsche Bank )
- SYF -0.8% (downgraded to Neutral from Buy at BofA/Merrill)
- SAFM -0.7% (downgraded to Underweight from Neutral at JP Morgan)
Gapping up
In reaction to strong earnings/guidance:
- YUMC +2.6%, (also announced CEO succession plan; Joey Wat will become Yum China's CEO)
M&A news:
- SNCR +26% (provides update on strategic alternatives process; enters into exclusivity agreement with Siris Capital Group following improved terms )
- LGL +3.7% (received a non-binding proposal to acquire for cash the assets of its two principal operating subsidiaries, M-tron Industries and Precise Time and Frequency)
Other news:
- GIGA +46.8% (received an additional $4.9 million order extending ongoing production of its high performance RADAR filters for a major aerospace company; updates Q2)
- TROV +19.7% (granted orphan drug designation by the FDA for its compound for the treatment of Acute Myeloid Leukemia)
- XXII +16.9% (reveals fundamental findings of 1,250-patient 20-week study that demonstrates immediate reduction to very low nicotine is most likely to lead to less harm)
- ELGX +7.4% (receives Investigational Device Exemption approval from the FDA to commence a confirmatory clinical study to evaluate the safety and effectiveness of the Nellix EndoVascular Aneurysm Sealing System)
- OHGI +6.6% (higher on light volume after confirming the opening of regional headquarters office in Hong Kong)
- GSAT +4.8% (prices offering of 73,365,231 shares of common stock at $1.65 per share)
- IMMU +3% (modestly rebounding after closing 8.5% yesterday
- KDMN +2.3% (granted orphan drug designation by the FDA for its compound for the treatment of graft versus host disease)
- APVO +1.8% (continued strength)
- MRK +1.8% (granted orphan drug designation by the FDA for Keytruda)
- UNFI +0.6% (authorizes $200 million share repurchase program)
Analyst comments:
- AVEO +6.3% (initiated with Buy ratings at Seaport Global Securities)
- PSTI +3.3% (initiated with Buy ratings at Seaport Global Securities)
- AUPH +1.1% (initiated with Buy ratings at Seaport Global Securities)
- CS +1.1% (upgraded to Outperform at RBC Capital Mkts)
Airbus is looking to put its flying taxi in the air next year, confirmed CityAirbus chief engineer Marius Bebesel this week. The schedule is on track after CityAirbus conducted successful ground tests of the electric power system it’s using to propel the vehicle through the air.
The CityAirbus craft is a vertical take-off and landing craft that uses a four rotor design, and that would be able to take up to four passengers on short flights in dense urban areas, with the aim of connecting major transportation hubs including train stations and airports. It’s designed to be pilot operated at launch, but to eventually transition to being a fully autonomous vehicle once the tech catches up.
CNBC reports that Airbus is aiming to operate the craft along fixed, predetermined routes, with top air speeds of around 80 mph. They’ll be able to skip over the traffic that can dramatically increase travel times entering and exiting busy city transit points, which would theoretically also help alleviate ground congestion.
Short hop flights are also an ideal application of battery electric tech, since that’s all that vehicles will be able to manage using fully electric power sources in the near-term. Plus, battery unit swapping or autonomous dock charging could help make it easier to make these vehicles fully self-flying in the future.