Google’s Holiday Gift To China

There are only three shopping days remaining until Christmas Eve! Have you purchased and wrapped all of the presents on your Gift List?

Some of us, of course, confront more difficult challenges than others in choosing appropriate gifts for recipients. But imagine how tough it must be to select a gift for the world’s largest communist nation!

In a sense, that’s exactly what Google may have delivered for the government of China. On December 13th, the internet services giant announced that it will open a center for basic Artificial Intelligence research in Beijing.

So why is this a gift? Because Google’s services, like Facebook’s, are banned in China. And on December 18th, just five days after Google’s announcement, a Chinese official confirmed the ban by declaring:

That’s a question maybe in many people’s minds, why Google, why Facebook are not yet working and operating in China. If they want to come back, we welcome (them). The condition is that they have to abide by Chinese law and regulations. That is the bottom line. And also that they would not do any harm to Chinese national security and national consumers’ interests.

It’s possible, of course, that Google’s decision will help it gain access to the Chinese market in 2018. If that occurs, its AI Center may be perceived in retrospect as a profitable investment in a new business market.

But what if the Chinese government doesn’t open its market to Google next year? Perhaps the center’s Chinese technology specialists will provide valuable developmental expertise to the American firm. And perhaps those same specialists will learn just as much from Google.

At the moment, though, Google has made a commitment to open an advanced research center in a nation that bans its services from its entire domestic economy. Unless Google’s commitment eventually “pays off” in some substantive manner, it isn’t very difficult to characterize its decision as a gift.

Goodbye, United States

Much has been made of the United States’ isolationist position regarding climate change at the recent G-20 summit. At the gathering of the national governments of the twenty largest economies on earth, nineteen spurned the United States and endorsed the Paris Accord.

Nevertheless, that was solely a political event. What about the business community? Will private corporations throughout the worlds’ leading economies spurn the U.S. market as well?

The jury is still out on that question, but a few days ago, one global financial organization offered an implicit response. Manulife, the insurance company and financial services organization that is headquartered in Canada, indicated that it is interested in spinning off its John Hancock subsidiary.

Manulife acquired the Boston-based John Hancock in 2004 to gain access to the United States financial services market. After thirteen years of disappointing returns, it is apparently considering a withdrawal from the U.S. market to focus on more promising opportunities elsewhere.

Where? They haven’t publicly declared their intentions. But Dow Jones reported that “the Canadian insurer is instead focusing on expanding in Asia.”

Dow Jones also reported that the spinoff transaction is being considered after “some months of work by investment bank Morgan Stanley to sell pieces or all of the John Hancock unit.” Apparently, these assets failed to prove attractive to potential buyers.

The Manulife story raises the possibility that global investors and businesses are no longer flocking to the shores of the United States to purchase its corporate assets. Is it possible that the current political environment in Washington DC is contributing to their disinterest?

NAFTA’s World Cup

After Presidential candidate Donald Trump repeatedly told the American people that the North American Free Trade Agreement is “the single worst trade deal ever approved in this country,” we might have presumed that it would be well on its way to extinction by now.

But guess what? NAFTA is alive! And it appears to be overwhelming all global competitors in a particular international endeavor.

That endeavor is the World Cup of global football, known as soccer in the United States. Apparently, the sport’s international governing body has placed its 2026 quadrennial championship tournament up for bid. And earlier this month, NAFTA partners Canada, Mexico, and the United States instantly became the overwhelming favorites to win the bid when they revealed their plan to jointly host the games.

So why is the soccer championship series such a popular target for NAFTA cooperation, when other economic targets — such as the automobile industry, for instance — generate such hostility between nations? One possible reason is that sovereign countries like the United States can easily produce quality automobiles without help from others, but cannot easily host World Cup tournaments on their own.

Naturally, critics may note that the United States did indeed host its own World Cup tournament more than two decades ago. But with the field of participating teams soon to expand to 48 competitors, many more host cities will be needed in 2026. And relatively few cities in the United States can match metropolises like Toronto, Vancouver and Mexico City for cosmopolitan glamour and passion for The Beautiful Game.

Is North America the only region where such an approach is beneficial? Could the bitter debates that now divide the European Union, for instance, be calmed by a pan-European World Cup? Perhaps any sporting event that is too large to be hosted by a single nation could help promote a spirit of globalism by adopting a multinational hosting strategy.

Unfortunately, it may be a very long time before the European Union can even consider such a venture. And thus, at the moment, the three nations of NAFTA possess a golden opportunity to lead the way.

Demise Of The TPP

We’ve now witnessed the first week of Donald Trump’s Presidential administration in the United States. And as a result, perhaps we can all agree about one observation:

He’s no Hillary Clinton, is he?

Ironically, though, Trump and Clinton had actually concurred on one of his least controversial executive actions. It was his Presidential declaration that the United States would withdraw from the Trans Pacific Partnership (TPP), thereby causing its disintegration.

So what was the TPP? It was a trade agreement that the United States had finalized with one dozen nations throughout the Pacific Rim. Donald Trump, Hillary Clinton, Bernie Sanders, and other U.S. Presidential candidates had all vowed to torpedo the agreement; last week, Trump simply executed their bipartisan pledge.

Regrettably, though, this Presidential action has the potential to inflict significant long term harm on America’s international relationships. A brief review of the Partnership’s history may illuminate the potential impact of its demise.

The TPP began its existence on a far smaller scale, with Brunei, Chile, Singapore and New Zealand signing a Trans Pacific Strategic Economic Partnership (TPSEP) Agreement in 2005. Three years later, under Republican President George W. Bush, the United States promoted a massive initiative by far larger nations to broaden and extend the trade agreement.

That American-led effort launched seven long years of negotiations among a dozen nations, featuring nineteen formal rounds of talks that were followed by sixteen meetings of government ministers and negotiators. For relatively small nations such as Brunei and Singapore, as well as for larger emerging nations such as Malaysia and Vietnam, the grueling effort likely displaced other potential treaty initiatives.

And so what transpired at the conclusion of this incredibly long and difficult process? The United States, in essence, walked away from the table and destroyed the Partnership. After a bipartisan pair of American Presidents cajoled its allies to make politically difficult choices in support of free trade and globalization, the United States opted to sabotage its own agreement.

On the one hand, of course, the critics of the TPP voiced reasonable concerns about certain terms of the agreement. And they may have been correct to note that the general agreement possessed structural flaws.

But on the other hand, it’s difficult to disagree with this simple question of human nature:

After having been pushed and prodded by the United States to expand the original TPSEP agreement, and after having wasted seven long years on negotiations to craft the far more complex TPP, why would any of these nations — or any other nation, for that matter — ever feel comfortable entering another lengthy and complex negotiation with the United States?

There’s a message, embedded in that question, for American citizens who dislike certain Partnership elements, and who may be celebrating the treaty’s collapse. They may be drawing some comfort from the bipartisan level of political consensus regarding this decision.

But these U.S. citizens may reconsider their position the next time that their government leaders attempt to develop an international coalition to negotiate a solution to a vexing problem. At that future time, American leaders may discover that the leaders of other nations are no longer so eager to negotiate with them.

A Valuation Nightmare

Did you notice the news story that shook the foundations of our global economy last week? Although it didn’t receive much attention in the popular press, one doesn’t need to possess a PhD in Accounting or Finance to appreciate the potential threat that now confronts us.

You see, for the first time in the history of European finance, private corporations issued bonds with negative interest rates. Specifically, the corporations Sanofi and Henkel announced that they will charge investors to borrow money from them.

Although European government entities have issued securities with negative interest rates, never before have private corporations done so. Presumably, investors are now so nervous about the future of the European Union that they are willing to accept such terms from Sanofi and Henkel.

Why did this event shake the foundations of our economy? Because our global financial system is predicated on the assumption that it is worthwhile to invest for the future. Under normal circumstances, when a borrower pays interest to a lender, the interest payment represents an acknowledgment that the borrower is investing the principal in a project that is generating future value.

So what happens when interest rates turn negative? In essence, investors are incentivized to spend all of their money immediately, or to store their money in their proverbial mattresses, rather than investing in the private sector. And the calculation known as Net Present Value (NPV), which relies on positive interest rates to discount future payments to their current values, fails to function.

Furthermore, if we no can longer estimate the present value of future cash flows, many tangible and intangible assets will no longer possess calculable values. Commercial landlords, for instance, will no longer be able to estimate the values of their properties on the basis of their future rent receipts. And banks will no longer be able to estimate the values of their loans on the basis of their future repayments.

In other words, we’d experience a valuation nightmare. So why did the Sanofi and Henkel announcements garner so little public concern? Perhaps it’s because the financial press is assuming that their negative interest rates will prove to be isolated incidents.

If other private corporations start to issue debt at negative interest rates, though, there’s no question that we’ll start to hear about it. After all, if the practice of investing for the future is no longer perceived to be a generator of value, it’s difficult to envision how our economy will ever grow.

Our Globalizing Perspectives

Do you recall the great Dubai Ports World controversy of 2006? A global maritime organization, owned by the federal government of a major Arab ally of the United States, applied for permission to manage seaport operations in Baltimore, Miami, New Orleans, New York, New Jersey, and Philadelphia.

The American people, still recovering from the trauma of 9/11, exploded into a spirited debate. President Bush vigorously defended the deal, claiming that “it would send a terrible signal to friends and allies not to let this transaction go through.” But others, fearful of entrusting seaport security operations to any Arab organization, argued against the transaction.

The management contract was never granted to Dubai, and the entire episode left bitter feelings about America’s refusal to differentiate between Arab friends and Arab foes. Now that a decade has passed since the days of 2006, are such feelings still relevant?

We now know the answer to that question. Two weeks ago, the national oil company of Saudi Arabia arranged to assume sole ownership of the largest oil refinery in the United States. And guess what? There wasn’t even a peep of protest.

The deal is occurring in the wake of a number of innovative announcements by representatives of Saudi Aramco. For instance, its executives have acknowledged that they are considering the possible launch of the world’s largest-ever Initial Public Offering, possibly on multiple equity exchanges across the globe. New York and London, naturally, have been named as possible joint hosts for such an Offering.

The global energy sector, and the financial institutions that provide it with capital, will be buzzing about these ground-breaking transactions during the upcoming year. Nevertheless, as we look forward to learning more about these present and future stories, it might be helpful to pause for a moment, and to reflect on how far our perspectives have evolved during the past decade.

Indeed, would the Saudis have even considered a public offering on the New York and London exchanges ten years ago? And would Americans have dreamed of permitting the Saudis to operate the largest oil refinery on U.S. soil at that time?

During the days of the DP World debate, such proposals would have likely been rejected by all of these parties as dangerous to their national interests. But in an era of progressive globalization, the very perspectives that frightened us in 2006 now excite us in 2016.

Nike: 10,000 Jobs From The TPP?

Good news! Nike is promising to create ten thousand jobs in the United States if America ratifies the Trade Promotion Authority and the Trans-Pacific Partnership. But do you believe it?

The TPA / TPP is the proposed free trade agreement that will integrate the Western Hemisphere economies of the United States, Canada, Chile, Mexico, and Peru with seven nations in the Asian-Australian Pacific region. Similar to NAFTA, the North American Free Trade Agreement that links the United States to its northern and southern neighbors, proponents claim that its establishment will lead to regional prosperity.

President Obama has been urgently supporting its ratification as a key component of his vaunted “pivot to Asia” global strategy. In advance of his visit to Nike headquarters last week, Nike executives issued its bold job creation promise.

In the two decades since NAFTA was first ratified, though, its overall effect on the American economy remains unclear. Although many economists believe that its benefits outweigh its drawbacks, others charge that that the removal of trade barriers with Mexico has decimated many American and Canadian industries.

Nevertheless, today President Obama is declaring that the TPA / TPP will support the American economy. Do you believe his claim? And do you believe Nike’s promise of 10,000 new American jobs?

One reason for skepticism about the job claim is that Nike hasn’t explained where it will actually find those new positions. Will they transfer manufacturing jobs back to America from Asia? Or will they create new positions to manufacture products for export to TPA / TPP member nations? Nike hasn’t answered such questions, which leads one to suspect that the firm can’t (or won’t) guarantee its own job creation promise.

Another reason for skepticism is that New Balance, the only American athletic footwear firm that is still operating significant manufacturing facilities in the United States, is not fully supporting the agreement. Instead, it has continued to advocate for trade tariffs on Vietnam, as well as for similar legislation that contradicts principles of free trade.

In other words, a major American manufacturer with virtually no remaining factories in the United States is supporting this free trade agreement. And its rival American manufacturer, one with significant domestic factories, is lining up against the agreement. Are these positions consistent with the presumption that the TPA / TPP will boost America’s economy?

It is always possible, of course, that the benefits of such an agreement will ultimately outweigh its costs and risks. Nevertheless, it would certainly be reasonable to be skeptical about any claims that a failure to ratify the TPA / TPP would necessarily be “catastrophic for our country and for the world.”

Women’s Basketball: Score One For Russia!

It has been a rough year for the Russian Federation, hasn’t it? First it became enmeshed in the ongoing conflict in the Ukraine. Then its government budget took a hit when the price of crude oil, its primary export, dropped by half. That led to a dramatic decline in the value of the ruble, and a severe economic recession.

And yet the Russian bear remains fully capable of beating its Western rivals at their own games. Just last week, for instance, it scored an upset “win” in the world of global sports by enticing a major star to leave an American sport to play exclusively in Russia.

The star is Diana Taurasi, perhaps the greatest player in the history of the WNBA woman’s basketball league. A graduate of Geno Auriemma’s dominant basketball program at UConn, Ms. Taurasi spent many years playing for the Phoenix (Arizona) Mercury during the American regular season and then playing for Spartak Moscow (and now UMMC Ekaterinburg) following the WNBA playoffs.

Why would a star basketball player deny herself a normal off-season to recuperate from the rigors of a full season of games? Perhaps it is because Ms. Taurasi, despite her status as a star player, was only earning a base salary of $107,000 with the Mercury. Now, though, she will earn nearly $1.5 million with UMMC Ekaterinburg.

Although Title IX of the federal law requires universities to establish equivalent scholarship (and other financial) budgets for men’s and women’s sports, there is no corresponding requirement that male and female professional basketball players earn equivalent salaries. Thus, while 8 male NBA players earn more than $20 million annually and 56 earn more than $10 million annually, the typical salary budget for an entire WNBA team of female players is reportedly less than $1 million.

When UMMC Ekaterinburg offered Ms. Taurasi $1.5 million, it did so with the understanding that she would only play in one league next year. By accepting the offer to play in Ekaterinburg, Ms. Taurasi walked away from her American fans (if only for one year) and left them unable to watch one of their favorite players.

American basketball officials are opining that Ms. Taurasi’s situation is a unique one. They are predicting that no other star players will follow her from the WNBA to the Russian league.

Nevertheless, American basketball fans might wonder why the WNBA — with its national television contracts and its arena based basketball schedules — refuses to pay one of its most popular stars more than $107,000 annually. With the cost of VIP tickets for Phoenix Mercury games starting at $111 per seat, was it too much to expect the team to pay more compensation for its most talented player?

2015: A Year Without Inflation?

Just a couple of months ago, market pundits were still discussing the possibility that the anti-recessionary Quantitative Easing (QE) policy of the Federal Reserve Bank of the United States would lead to “raging inflation” in the American economy. Have they been proven correct?

Hardly. Health care cost inflation, for instance, continues to remain below 5%, where it has lingered for the past five years. And energy costs have actually plummeted this year, with the price of a barrel of crude oil falling by well over 40%.

The implications of such low inflation rates may be profoundly positive for the American economy. After all, low inflation rates tend to be reflected in low interest rates. And when bank loan rates are low, organizations can better afford to finance speculative projects with costs that are significant in the short term and benefits that can only be recognized in the relatively distant future.

Such projects often promote the long term competitiveness of the American economy. Do you suport investments in renewable energy technologies, for instance? Driverless automobiles? Drugs to cure cancer? These investments are not likely to pay off in the near future, but in an extremely low rate environment, more organizations may be willing to pay for such projects.

There is a risk, though, that inflation and interest rates might plummet below the “zero lower bound” and actually become negative in direction. That hasn’t yet happened in the United States on an annual basis; even though energy costs have been dropping significantly and the Consumer Price Index (CPI) declined by a nominal 0.3% in November 2014, the annual CPI remained at positive 1.3% through that month.

But what could happen if inflation drops significantly below zero? If consumers and businesses become convinced that prices will continue to fall over time, they could stop spending money today and delay their purchases and investments in order to wait for a lower cost future.

Such debilitating deflationary psychology has plagued the Japanese economy for two decades. The European Central Bank (ECB) is reportedly worried that deflation and its effects may soon strike the European Union as well.

So there is a very real risk that an American bout of outright deflation may derail its economic recovery. Nevertheless, if the upcoming year features very low (or no) inflation, the economy of the United States may continue to serve as the engine that drives global prosperity.

China’s Curious Growth Data

What significant economic news from Asia cheered the global markets last week? The Chinese central bank decided to permit many financial institutions to lend more of their cash deposits to borrowers, a move that is expected to stimulate their economy.

As a result, analysts estimate that 1.5 trillion additional yuan (i.e. approximately $242 billion in American dollars) will be placed into the hands of Chinese businesses. China clearly needs this economic stimulus, given that the nation may miss its annual economic growth target for the first time since 1998.

Oddly enough, though, no one appears to have stopped for a moment to ponder the meaning of an annual target that has not been missed in sixteen years. Indeed, most pundits appear to share the universal assumption that the Chinese economy has been enjoying a perfect winning streak of real growth during that entire period.

Of course, that is certainly possible. And yet, sometimes, entities only appear to achieve an unparalleled string of economic or financial success through the adroit manipulation of statistics. General Electric, for instance, used advanced “earnings management” strategies to generate an astonishingly smooth and consistent string of annual profit announcements during the final years of the twentieth century.

To be sure, Nobel Prize winning economist Paul Krugman and others have cast occasional doubts on the validity of China’s statistical announcements. Nevertheless, generally speaking, most Western news organizations simply accept these announcements at face value and repeat them for public discourse.

So what should we make of this sixteen year Chinese winning streak that suddenly appears to be in peril? If most news organizations are correct, and if the winning streak is a real one, then the sudden threat to its continuation is indeed a serious concern about an unforeseen slump in economic growth.

And yet if the streak is simply a product of an actively “managed” series of economic statistics, then the sudden threat may represent far more than a simple slump. Indeed, it may represent the government’s unwillingness to continue to “manage” its economic statistics, a new position that may portend a long term shift towards a more transparent (and thus a healthier) Chinese economy.