Daily Comment (February 21, 2017)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EST] Even with a three-day holiday weekend to work with, there isn’t a ton of news this morning.  The president did appoint a new National Security Director and the pick is being well received.  European and Asian PMI data (see below) generally came in above the expansion line of 50 and above forecast.  Equities remain higher; the dollar is up, gold and Treasuries are lower and oil prices are stronger.

Although Greece was facing a deadline yesterday, the Eurozone blinked and agreed to extend talks for an adjustment in bailout payments.  In return for lowering payments from Greece, the Eurozone wants legislation to enforce structural economic reforms.  The good news here is that the Eurozone has decided not to foster a crisis in a politically uncertain year.  However, this agreement is really more of “delay and pray” by creditors.  The simple truth is that Greece isn’t able or willing to pay; creditors must either negotiate the workout or consider other forms of collateral capture (in the 19th century, invasion might have been an option).

French polls show that National Front Leader Le Pen is gaining momentum.  Polls continue to show she will win the first round and lose the second but, given how poorly the polling industry performed in the U.K. and U.S., we still think that a Le Pen win in May isn’t out of the question.  On this news, French bond yields rose relative to Germany.

Bill Gates made headlines over the weekend with a provocative interview in Quartz[1] in which he recommended that firms that automate should pay a tax for the jobs they eliminate.  Although such proposals aren’t new, this coming from one of the “godfathers” of the tech revolution is news and suggests that Silicon Valley may be realizing that the unfettered introduction of new technology into the economy may have negative effects that need to be addressed.  Essentially, a “robot tax” is a tax on capital.  It would be quite difficult to create a tax that would have a positive effect on fiscal revenue and at the same time not severely undermine investment.  Still, it isn’t hard to see that this tax would make automation more expensive and may lead some firms to simply add people.  We will be watching this idea to see if it gains any traction.  Although the stories aren’t directly related, the NYT[2] has a long read on how technology is reducing the number of workers needed in oil exploration and drilling.  The reduction of jobs in this area due to the expansion of technology could be thwarted if a tax is implemented on the jobs lost through automation.

Finally, we have been watching China’s capital flight for a while now.[3]  Due to a combination of declining investment opportunities, General Secretary Xi’s campaign against corruption, environmental degradation and the desire for political freedom, wealthy Chinese citizens have been steadily moving money out of China.  Much of it has found its way into U.S. and European real estate, although we are seeing investment broaden.  Capital flight has caused a steady decline in foreign reserves and prompted the government to tighten restrictions on foreign investment.  Reuters is reporting that Chinese conglomerate Dalian Wanda’s purchase of Dick Clark Productions is on hold because the firm can’t get permission to move $1.0 bn out of the country to consummate the deal.  This would be the largest transaction so far that has failed due to Chinese investment restrictions and may dampen other investment areas in the West, mostly real estate.

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[1] https://qz.com/911968/bill-gates-the-robot-that-takes-your-job-should-pay-taxes/?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam

[2] https://www.nytimes.com/2017/02/19/business/energy-environment/oil-jobs-technology.html?emc=edit_ee_20170220&nl=todaysheadlines-europe&nlid=5677267

[3] See WGR, 7/16/2012, The Mystery of Chinese Capital Flight.