From Greg Ip: In Davos, Nobody Knows Anything, and That’s the Problem

The raison d’être of Davos is intelligence gathering. Hedge funds go to chat up CEOs, CEOs go to chat up politicians, politicians go to chat up donors, and journalists go to chat up everyone.

This year, all that chatting is yielding distressingly little intelligence, and that helps to explain why the mood here, and indeed over the world economy, seems so dark.

Here are the questions people here most want answered: How will Brexit be resolved? No one knows, certainly not British parliamentarians or cabinet ministers. When will the federal government shutdown ends? Nobody knows. Will the U.S. and China reach a deal to avoid all-out trade war by March 2? Nobody knows. This isn’t because no one from the Trump administration is here; if they were, they wouldn’t know, either (or so the people here who have dealt with Trump have concluded).

In the economy uncertainty is, of course, a constant. Businesses, markets and investors are used to working with probabilities rather than certainties, whether it’s the outlook for profits or interest rates. But with today’s problems you can’t even assign probabilities. Since Mr. Trump himself does not seem to know what he wants out of the China trade talks, how can you judge the odds and provisions of a deal?

How do you assign a probability to Mr. Trump or Democrats breaking a promise to their bases, as would be necessary to end the partial federal shutdown? Shutdowns used to treated as localized natural disasters, Harvard economist Ken Rogoff noted on a panel moderated by Journal editor Matt Murray: painful for those involved but without national repercussions. This shutdown, he said, is like one local disaster after another, each worse than the one before. In such a situation, “We don’t know what happens.”

As for Brexit, French finance minister Bruno Le Maire, asked about reopening the European Union’s deal with Britain, shrugged: “It’s up to the British people and British politicians to decide what they want.”

“Nobody knows anything,” screenwriter William Goldman once said of making hit movies. Too bad he died last year; he could have taught Davos a thing or two.

Trump has always been erratic and impulsive. Why is Wall Street surprised now?

Was the president trying to shore up his support with a base grown tired of foreign interventions? Did he cave when Turkish President Recep Tayyip Erdogan told him over the phone that he was going to carry his operations against the Kurds into Syrian territory? Was Trump’s decision a momentary whim now incredibly become indelible history? Who can say? Just in time for Christmas, Trump has finally brought us the peace that passeth all understanding.

Even by Trumpian standards, the troop-withdrawal announcement looked haphazard. And it wasn’t the Trump administration’s only holiday surprise. On Saturday, Treasury Secretary Steven Mnuchin announced (on Twitter, naturally) that the president had no intention of firing Federal Reserve Chair Jerome H. Powell. Which of course raised the possibility that he might. On Sunday, Mnuchin returned with a stunning encore: He said he had spoken with the heads of the United States’ six largest banks to confirm that they had “ample liquidity available for lending” and haven’t had “any clearance or margin issues . . . the markets continue to function properly.”

.. Mnuchin’s actions are both more and less mysterious than the president’s. Less, because it seems clear why his Twitter feed developed a sudden nervous tic: He was trying to appease his boss. More, because neither Mnuchin nor anyone else understands how to calm the impetuous, irascible occupant of the Oval Office.

Presumably, the president is displeased by the recent decline in financial markets. It’s less clear whether he, or anyone else, actually believed that investors would perk right up if the treasury secretary, for no apparent reason, started shouting, “Guys, everything’s fine! We’re not going to have another financial crisis, okay?”

To be fair, it’s not clear what would cheer them up. Which brings us to the deepest mystery of all: Why were investors so optimistic in the first place?

I asked a number of financial professionals that question back when the bull market was still charging ahead. After all, Trump had promised tariffs, which large, publicly traded corporations tend not to like; he had promised immigration restrictions, which such companies really don’t like; and finally, he had promised lots of uncertainty, which those firms hate with the white-hot fire of a thousand suns.

The boom could be viewed as a collective sigh of relief that Democrats wouldn’t be finding new and creative ways to regulate the private sector. But given the protectionist drawbacks of a Trump administration, this didn’t really justify a 35 percent increase in the value of the S&P 500 from November 2016 to September 2018.

The best answer I got was that investors and chief executives assumed that Trump was planning to do the stuff they wanted — the tax cuts, the deregulation — and that the rest of his campaign promises were just base-pandering rhetoric that would be quickly abandoned. Their belief seemed touchingly naive, even quaint. But also sincere and strongly held.

.. Which may solve the twin mysteries of boom and the bust: Wall Street believed that Trump was just playing erratic and impulsive for the cameras, but that behind the policy scenes, what they’d be getting was a normal Republican presidency, only maybe a bit more so. The current correction may simply reflect Wall Street’s belated realization that investors would be getting exactly what they’d seen on the stump: a man who substitutes reaction for planning, and angry tweets for policy.

One thing, of course, is totally unsurprising: that when those on Wall Street finally figured out who they were really dealing with, and prices slumped, the guy from the campaign stump was going to find a way to make it all worse.

Trump May Kill the Global Recovery

In a sharp departure from this time last year, the global economy is now being buffeted by growing concerns over US President Donald Trump’s trade war, fragile emerging markets, a slowdown in Europe, and other risks. It is safe to say that the period of low volatility and synchronized global growth is behind us.

.. In 2017, the world economy was undergoing a synchronized expansion, with growth accelerating in both advanced economies and emerging markets. Moreover, despite stronger growth, inflation was tame – if not falling – even in economies like the United States, where goods and labor markets were tightening.
.. Stronger growth with inflation still below target allowed unconventional monetary policies either to remain in full force, as in the eurozone and Japan, or to be rolled back very gradually
.. Markets gave US President Donald Trump the benefit of the doubt during his first year in office; and investors celebrated his tax cuts and deregulatory policies. Many commentators even argued that the decade of the “new mediocre” and “secular stagnation” was giving way to a new “goldilocks” phase of steady, stronger growth.
.. Though the world economy is still experiencing a lukewarm expansion, growth is no longer synchronized. Economic growth in the eurozone, the United Kingdom, Japan, and a number of fragile emerging markets is slowing.
.. while the US and Chinese economies are still expanding, the former is being driven by unsustainable fiscal stimulus.
..with the US economy near full employment, fiscal-stimulus policies, together with rising oil and commodity prices, are stoking domestic inflation.
.. the US Federal Reserve must raise interest rates faster than expected, while also unwinding its balance sheet.
.. the prospect of higher inflation has led even the European Central Bank to consider gradually ending unconventional monetary policies, implying less monetary accommodation at the global level. The combination of a stronger dollar, higher interest rates, and less liquidity does not bode well for emerging markets.
..  Despite strong corporate earnings – which have been goosed by the US tax cuts – US and global equity markets have drifted sideways in recent months.
.. The danger now is that a negative feedback loop between economies and markets will take hold. The slowdown in some economies could lead to even tighter financial conditions in equity, bond, and credit markets, which could further limit growth.
.. Since 2010, economic slowdowns, risk-off episodes, and market corrections have heightened the risks of stag-deflation (slow growth and low inflation); but major central banks came to the rescue with unconventional monetary policies as both growth and inflation were falling.
.. These risks include the negative supply shock that could come from a trade war; higher oil prices, owing to politically motivated supply constraints; and inflationary domestic policies in the US.
.. this time the Fed and other central banks are starting or continuing to tighten monetary policies, and, with inflation rising, cannot come to the markets’ rescue this time.
Another big difference in 2018 is that Trump’s policies are creating further uncertainty. In addition to
  • launching a trade war, Trump is also
  • actively undermining the global economic and geostrategic order that the US created after World War II.

.. the Trump administration’s modest growth-boosting policies are already behind us, the effects of policies that could hamper growth have yet to be fully felt. Trump’s favored fiscal and trade policies will crowd out private investment, reduce foreign direct investment in the US, and produce larger external deficits.

  • His draconian  will diminish the supply of labor needed to support an aging society.
  • His environmental policies will make it harder for the US to compete in the green economy of the future.
  • And his bullying of the private sector will make firms hesitant to hire or invest in the US.

.. Even if the US economy exceeds potential growth over the next year, the effects of fiscal stimulus will fade by the second half of 2019, and the Fed will overshoot its long-term equilibrium policy rate as it tries to control inflation; thus,

achieving a soft landing will become harder.

.. By then, and with protectionism rising, frothy global markets will probably have become even bumpier, owing to the serious risk of a growth stall – or even a downturn – in 2020.

.. With the era of low volatility now behind us, it would seem that the current risk-off era is here to stay.

Cleaning Toilets, Following Rules: A Migrant Child’s Days in Detention

.. Adan Galicia Lopez, 3, was separated from his mother for four months.
.. Do not misbehave. Do not sit on the floor. Do not share your food. Do not use nicknames. Also, it is best not to cry. Doing so might hurt your case.

Lights out by 9 p.m. and lights on at dawn, after which make your bed according to the step-by-step instructions posted on the wall. Wash and mop the bathroom, scrubbing the sinks and toilets. Then it is time to form a line for the walk to breakfast.

.. one of more than 100 government-contracted detention facilities for migrant children around the country that are a rough blend of boarding school, day care center and medium security lockup.

.. The facility’s list of no-no’s also included this: Do not touch another child, even if that child is your hermanito or hermanita — your little brother or sister.

Leticia had hoped to give her little brother a reassuring hug. But “they told me I couldn’t touch him,” she recalled.

.. the government returned slightly more than half of the 103 children under the age of 5 to their migrant parents.

.. But more than 2,800 children — some of them separated from their parents, some of them classified at the border as “unaccompanied minors” — remain in these facilities

.. these facilities are united by a collective sense of aching uncertainty — scores of children gathered under a roof who have no idea when they will see their parents again.

.. She would quickly write these notes after she had finished her math worksheets, she said, so as not to violate yet another rule: No writing in your dorm room. No mail.

.. She kept the letters safe in a folder for the day when she and her mother would be reunited, though that still hasn’t happened. “I have a stack of them,” she said.

.. it chose one of the harshest deterrents ever employed by a modern president: the separation of migrant children from their parents.

.. earning “big brother” status for being good role models for younger children. They were rewarded the privilege of playing video games.

.. You couldn’t touch others. You couldn’t run. You had to wake up at 6:30 on weekdays, with the staff making banging noises until you got out of bed.

.. Diego said that he was not afraid, because he always behaved. He knew to watch for a staff member “who was not a good guy.” He had seen what happened to Adonias, a small boy from Guatemala who had fits and threw things around.

They applied injections because he was very agitated,” Diego said. “He would destroy things.”

A person he described as “the doctor” injected Adonias in the middle of a class, Diego said. “He would fall asleep.”

.. But because of the rules, the two boys did not hug.

.. Yoselyn Bulux, 15, is a rail-thin girl from Totonicapán, Guatemala, with long dark hair and no clear memory of how she summoned the strength to climb the wall at the border.

.. “If you do something bad, they report you,” Yoselyn recalled. “And you have to stay longer.”

..  Also on Saturday, Yoselyn met with a counselor, whom she liked. They talked about her hope to be with her mother soon.

.. then the woman serving as her escort handed Yoselyn over to her father, who was so overcome at the sight of his daughter that he could not speak.

.. They were taken to the shelter, given new clothes and separated: Victor to the boys’ area, Leidy to the girls’.

.. But at least he had a trabajadora de caso — a caseworker — named Linda who helped him navigate his new world. “She did everything she could to find my mother,” Victor said. “She called every state.”

.. The walls that separate the sleeping quarters do not reach the high ceilings, which means that sounds travel in the yawning spaces within the 250,000-square-foot building. One boy will make a loud animal noise, after which another will emit an animal-like response.

“Someone will start mooing,” the employee said. “They just think it’s funny. They just do it long enough so everyone can hear, and then we all start laughing.”

.. staff is overworked and a little stressed out by the 12-hour shifts and the considerable responsibilities.

.. During the day, the staff is required to maintain a ratio of one worker for every eight children. The ratio sets the tempo and culture at Casa Padre, the employee said. “It’s a big deal if we’re out of ratio.”

.. If one boy in a classroom needs to use the restroom, then a staff member has to find seven others who also want to go to the bathroom. “They’ll all stand in a line and then we’ll walk to the restroom,”

.. Some of the boys at Casa Padre were separated from their parents at the border, but most were caught crossing without a parent or guardian. All seem to keep themselves entertained with soccer or movies or video games.

.. “If they get sad, it’s like a quiet thing,” the employee said. “You’ll see them sit on the floor and just kind of wrap their arms around themselves.”

.. Some time in the evening is set aside for prayer. Boys can be found praying in a classroom, in a game room, in a bedroom. Some kneel.