Daily Comment (January 27, 2017)

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

[Posted: 9:30 AM EST] It was a quiet night overall; the big news is Q4 GDP, which we will cover below.  Here are a few items we are watching:

The Italian Constitutional Court finally clarified the 2015 election reform law, known as the “Italicum.”  It ruled against a runoff system (similar to France’s) but did retain the proposal to offer “bonus seats” to parties winning over 40% of the vote.  The goal is to eliminate the influence of smaller parties and make Italian governments less fragile.[1]  This change probably won’t lead to that outcome as it is highly unlikely that any single party will gather 40% of the vote.  Thus, coalition governments will remain the norm.  Italy isn’t scheduled to hold elections until early next year but now that this Italicum has been clarified, the odds will increase that the current government may be dissolved early and we could see another major European election this year.

PM May is meeting with President Trump today.  There are reports that the president may offer May a bilateral free trade deal as a “reward” for Brexit.  Making such an offer, especially with TTIP virtually dead, may encourage other nations that are considering leaving the Eurozone (Italy, France) to look to bilateral deals with the U.S.  European unity is coming under strain and how this meeting goes today may lead to even more concerns in the EU.

Greece refused to extradite Turkish military officers who participated in last July’s coup.  Eight officers fled Turkey as the coup failed, seeking refuge in Greece.  Greek courts ruled that the alleged coup conspirators may face overly harsh punishment if they are returned and thus did not allow the government to extradite the soldiers.  Needless to say, this decision will infuriate Turkey and worsen already poisoned relations between the countries.  The legal decision is being hailed as a victory for “European values,” which will undermine EU relations with Turkey as well.  Will this prompt Turkey to open its borders and allow refugees to return to Europe in retaliation?  This is an issue we will be monitoring.

In our travels to the coasts we have noted a common comment that foreign money is boosting real estate values in local markets (not an issue here in St. Louis, BTW).  Similar reports are often heard from cosmopolitan cities such as London, Sydney and Melbourne.  Bloomberg is reporting that real estate agents in many cities are saying that there has been a sudden drop in interest, and transactions are not being consummated due to China’s tightening of capital controls.  One of the rules the Chinese State Administration of Foreign Exchange (SAFE) enacted late last year was a clause that forced anyone who was using their legal quota of moving $50k offshore to promise not to use the funds for offshore property investments.  Violating the promise would lead to a three-year ban on foreign currency and a money laundering investigation.  This change has apparently cooled the ardor for shifting assets out of the country.  As a general rule, regulation can’t completely halt capital flight but it can raise the cost of moving money out of the country.  Recent regulations appear to have succeeded for now, although we would expect new tactics to emerge over time which will allow Chinese citizens to invest overseas.

Finally, we note that Amazon (AMZN, $839.15) has been granted a patent for a robot that would pack shipping boxes, something that is currently being done by humans.  It’s not that humans are inefficient; CNN[2] reports that Amazon warehouse workers spend only about a minute fulfilling each order, which includes 15 seconds packing the box with bubble wrap and tape.  Automating the process suggests that the company simply wants to reduce the amount of labor involved.  It is fairly clear that the current administration wants to boost jobs in the U.S., especially the routine jobs that have traditionally been held by the middle class.  Trump and his government appear convinced that foreign trade is the primary reason these jobs have disappeared.  However, economists mostly believe that automation has probably played a larger role and so, if the goal is to increase routine jobs with good pay, regulations against automation may eventually be required.[3]

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[1] Not the word from the movie A Christmas Story which is usually associated with an Italian word describing a leg lamp.

[2] http://money.cnn.com/2016/10/06/technology/amazon-warehouse-robots/

[3] https://www.nytimes.com/2017/01/25/business/dealbook/how-efficiency-is-wiping-out-the-middle-class.html