103 Months of recovery, what could end it

After years of single-direction trajectory for the markets, the recent correction has jolted people from their complacency. Well, many people. The subsequent rallies are proof to one set that pressure has been taken out of the markets, and the upward track can restart. To others, the expression "dead cat bounce" continues to be the phrase of the week.

Being very clear, I do not know if the top has been reached, or is there more headroom in this market. I have no idea. None. Also being clear, while the discussion focuses on the US markets, there is nothing in here that either does not have or is not impacted by events and economic situations in other countries.

If the markets continue their advances, how far can they go, and for how long? Is theUS in the "demographic sweet spot" that I wrote about in August 2017? I asked if the fall in the US labour market participation rate had been strong enough to create sufficient pools of surplus labour to allow for multi-year growth as that surplus labour drip-feeds into the workforce. If it is, then there may actually be a few more years of growth in the economy and the markets. If not, then the third longest recovery in US history may come to a sudden end.

So what happens when this recovery comes to an end, and the US enters recession? At 103 months as of writing, this recover is the third longest since the end of theGreat Depression, and only 4 months short of being the second longest. The fourth longest was only 92 months, and the fifth a mere 73. This recovery is almost a year longer than its number four, and two and a half years longer than the fifth. Interestingly the longest lead up to the “dot-com” bubble and subsequent crash. Does this recovery have another 17 months, another year and a half, of additional steam, to tie the longest recovery? And if so, will we see continued growth in bubbles that we saw leading up to 2000? Or, do we have enough bubbles already?

Again, I cannot answer that because I simply do not know. The recent market "correction" was a wake-up call, and a reminder that it is not all "sunshine and lollipops". There are systemic pressures building up, and one day, the markets will switch from Bull to Bear. What might make that happen?

There are a number of potential catalysts that could provide the tipping point, and with that a sustained downward trajectory for the markets. The following list is not complete by any means, but gives an idea of the range of potential situations that could, once the fall is well underway, be pointed to as the catalyst.

Most important, there is not one situation that will cause the coming crash, and all are interlinked and interdependent. Each can, and probably will, impact and potentially exacerbate another or multiple others. If housing starts collapse, so will house prices, and with that the “wealth effect” tripping over into consumer credit (although in this example, consumer credit may stabilise instead of continuing to grow) and potentially rising default rates.

I will delve deeper into each one of these in coming posts, but for now, the following outline of each should serve to set the scene, so to speak.

Interest Rates: Off the back of rate hikes by the Fed, the Feb rate could reach as high as 3.25% or even 3.5% by late 2018. This will flow into the 10-year Treasury, already hovering around 2.9% up from a low of 2.06% only six months ago. Should the rate continue to rise, the flow-on effects will be felt throughout the debt-driven economy. At some stage, the forward potential negative impact on consumer credit creation and utilization capability will strike, and with that a sudden loss of confidence.

Inflation shock: Years of QE, QEII, Twist, Abbenomics, and ECB purchases has flooded the system with new money. Where has it gone, what why hasn't inflation appeared as so frequently predicted? Countering the assumption that the new money should be driving inflation, there is an argument that surplus labour is keeping wage inflation in check, and with the, general economy-wide inflation. If they are not making more money, then the average worker cannot drive up prices. What happens when a really bad inflation number prints - in the US, UK or Germany for example?

Budget deficits: But what is the single event that is used by media pundits to 20/20 explain what happened. Could it be a Congressional Budget Office projection stating that servicing of the national debt will exceed 8% of the 2019 federal budget (from a current 6% of the federal budget)? Or could it be a projection for $1 trillion budget deficits for the next four years? After all, no one believes the projected temporary increase in spending followed by a drop to a balanced budget level.

External Shock: Or maybe the markets will react to an external event or geopolitical risk event, such as a US strike against the nuclear capabilities or Iran or North Korea. The intervention in northern Syria by Istanbul has already resulting in a sharp drop in the Turkish stock markets. Such a shock could undermine confidence in international trade or fuel expectations of increased in input costs and commodity costs. The markets have been remarkably resilient to geopolitical risk over the past year, so any shock will probably need to be a big one. Ultimately, the list of potential geopolitical shocks is as long as you wish to spend reading or writing.

We should not forget that there are a number of major economies each under their own strains, with many of those strains being similar to those witnessed in the US economy. The UK has suffered a 5.7% drop in year on year private auto sales, with predictions for a further drop in car sales in 2018. And before saying "but they are a small country" remember that they represent 65 million people, and that this slowdown will impact German auto makers as well, providing some stress, albeit minor, to the German economy. 

Housing market: Bad news in the housing market could tip the scales, and send the marketing into a self-reinforcing negative spiral. This potential shock is tied closely to underlying interest rates, inflation, and the Wealth Effect based on an ever-raising stock market. A multi month sustained drop in housing starts, completed sales, or house prices could shock the markets, and become the 20/20 hindsight event that causes a crash.

Automotive Loans default rates: Current default rates are increasing, and the total outstanding loan period is also at a record high. In 2016 the average outstanding car load was 5.5 years. It is possible to get an auto loan at 72 or even 84 months duration. In addition, over 30% of used car trade-ins areunder water. Combine the two, and the consumer is likely to become trapped in the vehicle they are in, and with that trap will come a reduction in car sales, and an expectation of future poor performance by the automotive section, a sector that accounts for X% of the US economy.

Credit Card default rates: The American binge on consumer credit continues, and in fact never really stopped. Net savings rates are at historic lows of around 2% (average across the entire economy) while credit card debt continues to rise. This is unsustainable. The only questions are, what is sustainable and when will the bubble pop, and will we recognise that it has popped. A failure in confidence that consumers will be able to afford the current credit load will not come as a slow dawning, but will come as a sudden shock, and that shock could rock the markets.

Productivity: Linked so closely with that credit crisis is the concept that worker productivity will continue to improve. Yet for the past few quarters that has not been the case, or has been true at a much reduced level. A failure to continue to increase productivity will directly impact worker wages, company profitability and therefore achievement of earnings expectations. Again, a sudden realisation of future down-trend impact on company values may arrive as a shock, and may be the catalyst for a market collapse.

Environmental event: To this point I’ve focused purely on potential economic events or situations, and have avoided environmental events. These could range from the hurricane that breaks the insurance industry, storms in Europe that result in a short term economic downturn, or a major earthquake on the West Coast of the US. I’m ruling out volcanos and meteors, as the probability is simple too low. I’m not ruling out Climate Change related events or situations, major droughts, or resource depletion such as a collapse of the water table in the San Joaquin valley of California.

Maybe the "dead cat bounce" is just a slightly longer bounce, and the fall is already coming.

Whatever the trigger, when the fall in the markets come, it will be steep and quick, followed by months if not quarters of a cyclical bear market. And while I am writing based on the US economy and markets, the same issues highlighted above are true for so many economies, and any individual large economy could provide the trigger for a global rout.

Panama traffic is horrible

If there is a (tongue in cheek) truth, it is that every city claims to have the worst traffic in the world, and I can say that I have lived in some cities that could reasonably make that claim. None however compare with Panama City, and Panamanian drivers in general. Going to Google Maps, it frequently tells you that is will take significantly less time to walk between locations than it will take you to drive.

When we lived in the South of France, I used to say that I finally found out who taught the Malaysians to drive – the French from Nice. If that was true (probably not), I now know who the French took as their role model.

It is standard for a right hand turning vehicle to start the turn from the left-most lane (for those of you in the UK, NZ or Australia, a left hand turn from the far right lane). This is so common that we simply refer to it as the "Panama Turn" when it happens directly in front of us, sometimes requiring rapid braking on our part. Furthermore, the roads are actually configured to require the traversing of multiple lanes in fairly short distances, causing no end of start/stop driving.

My personal bet is that he was cut off.

Turn signals are, or course, optional. So optional that I suspect many cars don't actually have any turn signal mechanics inside the car. Swerving is common, as much to avoid potholes as to think about changing lanes and then deciding to stay in your current lane.

Some people have gone so far as to tell me that rear view mirrors are a waste in Panama, as the only thing you should care about are the cars in front of you. That certainly seems to sum up drivers - lane changes that cut you off, no blinkers, stopping anywhere, driving into traffic from side roads at speed, and of course the ubiquitous “Panama Turn”.

Remarkably perhaps, the traffic accident death rate per 100,000 peopleis 10, just under the US rate of 10.6, but far higher than the 2.9 rate for the UK, and below the rest of Latin America. So the horror of Panamanian driving is not the death rate, but the terrible traffic. 

While death rate are first world, sort of, the accident rate is pretty amazing, and the insurance and court system manages the volume poorly. Anecdotally, I know of a case in which a rear-ended insurance claim remains outstanding because the driver at fault simply ignores the court summons.

Flipping Cars onto their sides seems to a local speciality.

As the Panama economy has grown, so have the number of cars and trucks on the roads; a growth rate that has exceeded the rate of growth of paved road surface in the city. Partial solutions have included new roads, a confusing one-way system, widened roads, and increasing the number of lanes - where two lanes existed in the past, there are now three lanes. Three very cosy lanes. In some cases you can still see the original lane makers.

Add to this a history of corruption, with the issuance of17,000 "no test" drivers licenses between 2011 and 2014, and Panama City has not only a strained infrastructure, but thousands of drivers who have not passed even the most basic of driving tests.

I can attest to the "most basic of driving tests". The theory test includes such critical questions such as how far away from a truck carrying dynamite do you have to be before you can smoke a cigarette? (The answer is 150 meters, if you really want to know). Sure, there are real questions in the theory test, but many of the questions are contradictory and in some cases simply silly. For example, the proper answer to what is the impact of heavy rain? Your car stops. The only reason that this answer is sort of correct, is because the roads flood, and it you do not know from good experience just how deep that water is, don’t go there.

The only practical test required of a driver is to prove you can park. Yes, that is the only practical test. Park forward into a space. Park backward into a space. Parallel park. Full disclosure, I failed the parallel parking the first time; I mounted the curb, and had to return a week later to repeat the test. A Nissan Patrol is not a small car, and simple arrogance on my part was my undoing. The next time, we rented the smallest car we could find, and parallel parking was a breeze.

While this all sounds terrible, there is hope. Panama City has afantastic subway system, which is cheap ($.35 per trip, $.70 round trip), clean, fast and growing. The stations can cater for trains of 5 carriages instead of the current 3 per train. Current passenger numbers on the Metro are around 200,000 per day, in a city of 1.5 million. That number will increase with the expanding of the line, and the introduction of the second line, due in late 2018 in time to move the hordes expected for the Pope’s visit.

Still, the roads will be full, and fuller with each month and year. And with the driving style here, I am very happy with our beast, the Nissan Patrol. It is high enough for the puddles and floods, ugly enough that people cannot miss seeing it, and big enough that it tends to make smaller car worried about the outcome. All factors that give me much comfort driving in Panama.

(Photos are from one day only - from the Trafico Panama Facebook page)

22 Years later, Info Sec is still a problem

In about 1995, I remember an IT manager being dismissive of our internal audit recommendations to improve information security. No matter how we documented the issues, he either ignored then, argued with them, or promised to implement the sometime in the future, date unknown.

In my frustration I had one of our very smart people try something.

Two days later, I wandered into the IT managers office, politely knocking. Eye-roll, "Yes, what can I do to help you this time?" he asked. 

I silently handed his a plain white envelope. He looked at it, opened it, and pulled out the single sheet of paper, carefully folded in three. He opened the paper.

In the very middle of the page was one word: his password.

After a moment, his only comment was "Okay, I get it. Now bugger off."

Best "bugger off" I've heard in my life. Recommendations started to be implemented.

Sometimes it is fun to consider just how far we have come with computer security, and how how far we still have to go. Today I would have had that very smart person find a way to get a Trojan onto his laptop and would have stolen the saved passwords, or would have had someone sniff his packet traffic. Nothing new, but still wide open gaps in too many system.

Whalen on CDOs, OBS, Fraud and Europe - I suggest you be very afraid

In 2006, after reading one of my friend Chris Whalen's articles in which he discussed the size and dangers of the Synthetic Collateralized Debt Obligation (CDO) market, I picked up the phone and rang him. "Chris, I have to admit that I simply do not understand what you've just written. Could you please explain it to me in small words?"

To his credit he did, and he took his time, and used small words, and at the end of our call, the only thing I could say was "Chris, based on what you've just taught me and what you are saying, you are now the scariest person I know."

Not long after came the collapse of Lehman Brothers and the slide into the Global Financial Crisis (GFC). Everything Chris had written seemed to come to fruition, as if he had written the play-book for the crisis, or at least the reasons for the processes creating the crisis.

Fast forward to 2017, and over the past two weeks Chris has again written two very alarming articles. Last week focusing on CDOs and OBS risk, while this week's article sheds light on why Europe should worry us.

Last week Chris wrote a piece, this time called "CDO Redux: Credit Spreads & Financial Fraud". Read this article from Chris. It is as scary as anything he wrote in 2006. Toward the end you'll find the following statement:

The fact that Citi, JPM and GS are now pushing back into the dangerous world of off-balance sheet (OBS) derivatives just illustrates the fact that the large banks cannot survive without cheating customers, creditors and shareholders.

He points out that the very largest banks, like retailers, cannot be profitable by selling a greater volume at a lose, but only by, in effect, cooking the books. This suggests that systemic fraud is part of the natural business cycle, and he seems to be saying that we are nearing the end of this cycle.

As we note in "Good Banks, Bad Banks," larger institutions suffer from a fatal lack of profitability that ultimately dooms them to commit fraud and, eventually, suffer a catastrophic systemic risk event.

How big is this problem? Chris has a nice chart. Sure, it looks like the problems were in the past, but look at the re-growth to today. Notional Off Balance-Sheet Derivatives (OBS) are, between the three largest (Citi, JPMorgan, and Goldman Sacks) over $140 Trillion, not far from the GFC peak of around $130 and a later peak of possibly $175 Trillion.

Now, I seem to remember that "OBS" - Off Balance-Sheet, is bad. I seem to remember that it was the Off Balance-Sheet manipulation via the use of Special Purpose Vehicles (SVPs) that distorted their true debt position, and lead to the crash of Enron in late 2001.

Imagine a bank for which a 30BP (Basis Points: 100 PB = 1%) move in the OBS book would wipe out the bank's capital. Imagine wiping out a bank's capital with a .07% move (7 basis points). Imagine any entity leveraged 8000:1.

Note too that the relatively small GS has a notional OBS derivatives book of more than $41 trillion, almost as large as that of Citi and JPM.  More alarming, a move of just 7bp in the smaller bank’s OBS derivatives exposures would wipe out the capital of Goldman’s subsidiary bank. This gives GS an effective leverage ratio vs its notional OBS derivatives exposures of 8,800 to 1.

Worried yet?

Jumping forward to this week, and he has nothing comforting to say about Europe (or again, the American situation). This the following is not a surprise, the clarity of statement leaves no doubt:

Zero rates and QE a la Yellen, Draghi and Abe is not about growth so much as it is about subsidizing debtors, especially governments and other public obligors who are beyond the point of recovery in terms of ability to repay debt.

Meanwhile we continue to see the Rape of Greece, with bailouts primarily intended to subsidize European banks and governments, with Germany seeming to take the lead. All this as European banks continue to record interest "income" against non-performing loans. Many of those loans will never be repaid, and a haircut is inevitable. Chris points out that "more public sector debt has been incurred and the banks – which admit to some €850 billion (6%) in non-performing loans – are essentially insolvent as a group."

The big question will be whether Cyprus becomes the model for Europe, and if so, how long can the banking sector survive a run, or at least a slow walk, on deposits by individual savers. So far, QE in Europe has been used to avoid this, but not forever.

Europe is drowning in debt and there are a number of large EU banks that are demonstrably insolvent.

This continued pretense by the Europeans, coupled with the CDO & OBS situation in the US points to two of the three major economic blocks (counting China & ROTW {Rest of the world} as the third) piling on higher and higher levels of systemic risk. And not matter what anyone says, it will not be different this time.

Chris is being scary again. and again, we should listen to him.

Reputation v Reality - Panama and Banking

Opening a bank account in a Tax Haven is supposed to be easy. All hush hush, sly winks, funny bank account numbers. Or as the British might say - "Nudge, nudge, wink, wink, say no more, say no more". I would not say that was my expectation when opening a bank account in Panama, but I certainly was not ready for the level of Customer Due Diligence, KYC (Know Your Customer) and AML (Anti-Money Laundering) checks that were required. And here I were thinking, I'll hand over some cash and we'll open a bank account.

Still the (new) bank insisted the checks they insisted on making were completely normal, and that there had been no change in their process. The printed and many-times photocopied forms certainly appeared to support their position.  This in contrast to my experience opening a bank account in the UK with nothing more than a Belgian identify card. I walked in, sat down, handed over my Belgian identify card and a letter from my employer (which, frankly, I could have typed and printed from my own computer). With little other than asking me for my address, I had a UK bank account, with a debit card in the mail.

At this stage let me say that this was all above-board, as we were in the process of actually moving to Panama from the UK. I'll also confess that this was a month after the world wide splash of the "Panama Papers" and the sudden spotlight that this had shown on Panama in general, and on banking and legal services in particular.

Opening a bank account is one great example of just how the stereotypes of Panama simply are not accurate. Not only did they require identification (and a Belgian identify card was not sufficient, thank you), they required a letter of introduction from our UK bank. A letter that could never touch my hands, but that had to be sent from Bank to Bank. Imagine the humor when I asked for a letter of introduction from my bank. The conversation went something like:

"I need a letter of introduction for my new bank."
"We don't usually issue those."
"This isn't a UK bank."
"Oh, okay, in what country?" said as the service representative was looking up the procedure online.
"Umm, Panama."
Big smile from the service representative "Really? Panama, like, the Papers?" Big smile.
"Yes, really. You didn't need one, but they do."
"Really?"
"Yes, really, and it must go directly from this bank to that bank."
"Oh, so I can't just print it and give it to you?"
“No, and it must be mailed to them, on UK bank’s letterhead, and from the bank’s office. I cannot touch the letter.”

There is little question that the Panama Papers scandal has been a trauma for the country and the legal and financial services industry. Regardless of how many times people are reminded that "offshore havens" are rife, and that certain US States effectively replicate the functions of offshore tax shelters and money laundering havens, the stigma now sticks to Panama. A recent estimate says that 10% of global GDP is held in "off-shore" havens. Trust me, that money is not in Panama.

The Panama Papers have already toppled the government of Iceland, and last month, the Prime Minister of Pakistan was dismissed by the Supreme Court on the grounds of corruption exposed by the papers. numerous politicians and celebrities have been exposed as having "businesses" in off-shore havens, not all in Panama, but all exposed by the release (hacked theft or internal theft, this still remains to be confirmed one way or the other) of files from Mossack Fonseca, a Panamanian law firm that operated in at least 9 countries at the time.

Multi-national corporations with regional headquarters in Panama have considered relocating, and at least one appears to be on the brink of doing so. While that organization does not have significant operations in Panama, it is the Latin America and Caribbean administrative hub.

Meanwhile, Panama has, over the past decade, maked real, tangible progress in the area of Corporate Governance, lead by the IGCP (Instituto de Gobierno Corporativo-Panamá) and various financial supervisory regulators, and the OECD. The first Corporate Governance Code was introduced in 2010, and is enshrined in the Corporate Law.

In relation to the effectiveness of banking supervision, in 2006 the IMF reported: "Panama is largely compliant with the majority of FATF Recommendations for anti-money laundering and countering the financing of terrorism (AML/CFT), reflecting the efforts of the authorities and industry to put in place an effective AML system. Nevertheless, staff makes several recommendations..." Panama has since updated its legislation in line with the IMF recommendations.

In the associated area of Risk Management, the Panamanian banking supervisor requires all banks to provide a statement that they have an effective system of Risk Management. Further, this statement must be signed by the Board of Directors. This is included in the detailed in Chapter IV of Rule 7-2014 (August 2014).

So while Panama has been making serious progress on corporate governance, anti-corruption and banking supervision for many years, still the country has a bad reputation. Having the previous president sitting in a US jail awaiting extradition for corruption does not help. Nor does a culture in which the police regularly request bribes, and in fact give lessons on how to pay those bribes.

Clearly there is a long way to go, both in actual implementation of effective corporate governance, and in inculcating a culture that rejects corruption at the grass-roots level as well as at the most senior levels of government. But the country is not the Wild West, and if anything can be learned from the Panama Papers, it is a reminder that reputation made in years, but destroyed in seconds. Panama has been spending the years demonstrating that it plays by the international rules, and in fact enshrines those rules in law.

Going through the processes of getting a bank letter of introduction was not the end of their due diligence. My employer in the UK received a telephone call from the bank in Panama. Do I actually exist, and do I really work for this company? Could they confirm by email please, from a company email address?

Remember that this is required by a bank in an off-shore tax haven. All I can do is quote the UK bank service representative: "Really?"

"The Zone" is more than just a place

Once upon a time there was a special place. So special, that the people of the land and country on both sides of the place were not allowed to go there, unless invited or to work. The only people who could live there were aliens from another land. And they brought that other land with them, right down to mowed lawns, schools and supermarkets, bowling alleys and cinemas. But only the aliens were allowed to send their sons and daughters to the schools, and only the aliens were allowed to shop in the stores. This special place, we'll call it "The Zone" contained the single most valuable national infrastructure asset in the country. An asset so huge and costly to build, that it became one of the single most important strategic assets of the aliens, and of the world; more important than almost any infrastructure asset in the aliens own land. Now imagine that this asset could generate, directly, or enable up to 20% of the country's GDP, if it could be exploited by the country it sat in. Imagine also that this asset could, but did not, generate a continual revenue stream to the national government, that could be used for development, roads, education, rural electrification, ports, healthcare systems, the list goes on.

Oil is one of the only natural resources that is able to generate that kind of benefit for a country, but then only if the global oil market is delivering a price point that exceeds the extraction and committed costs associated with that oil. But as oil is fungible and (relatively) plentiful, too often countries have created spending commitments based on a oil prices at their peak, and not at their trough or even average price. The price of oil jumps, then crashes, then crashes and jumps again, and now is relatively stable at a level below the cost of production for many countries that rely on oil revenues.

Imagine instead a resource that is limited, stable, non-fungible, with a clearly definable economic break even point for consumers and users of that resource. And where was that special resource? In "The Zone" of course, out of reach of the country in which it sits, and completely under the control of the aliens with their supermarkets and schools and mowed lawns.

To make matters worse, the aliens were giving it away! Access to the resource was mandated to be provided at an operating break even price, not at a economic break even price for the user of the resource. This means that the users effectively gained a massive windfall at the expense of the country. Restricted access to that infrastructure and asset, and the inability to influence the pricing of the asset (or use of the asset) and inability to access a revenue stream for the government, was holding back economic development of the rest of the country.

So economic development outside "The Zone" progressed at a crawl, with the host country unable to enter "The Zone" without permission, unable to set the price of the resource, and unable to economically benefit from that resource.

The Panama Canal is that resource, and it sits in the middle of "The Zone", a strip of land 10 miles wide, which since the end of 1999 is once again Panamanian national territory. Before the handover, the Panama Canal was mandated to run as a break-even proposition, owned by the United States government. As much at $10 million per year in profit could be provided to the Panamanian government, if the Canal ran a surplus. $10 million on annual revenues of $350 million is not a very good return on the asset, and this was the maximum that was authorized to be paid.

 

Panama Canal Revenue; 1980 - 1989

In 1989, the Panama Canal Authority had revenues of US$329 million. With inflation, that $329 million in 1989 would equate to $638 million in 2017 dollars. Current, 2016, Panama Canal revenue was $1,933 million, based on traffic volumes; total tonnage has almost doubled, while total transits remains comparable to 1989. So for decades, the equivalent of $1.3 billion in national revenue was effectively being distributed to shipping companies in the form of subsidized low-cost canal transits.

"Including the passage of neopanamax ships by the new locks, the Canal recorded between October 2015 and September 30th, a total of 13,114 transits and 330.7 million CP-UMS tons (volume measurement of the Universal Systems Tonnage of the Canal of Panama), said the official information."

Today "The Zone" remains, but is now Panamanian national territory, and while most of the land was converted into, and remains a national park, development does encroach.

Most importantly though, the Canal now runs as a profit making infrastructure, delivering over $1.5 Billion into the Panamanian treasury every year. In addition to the direct revenue to the Panamanian government, the very existence of the Canal creates and enables a massive logistics and transport industry, accounting for over 20% of the GDP of the country.

That increase in national revenue is remarkably stable. While traffic volumes fluctuate, the swings are in no way as wide, up or down, as the price of oil. Nor is the price of transit fungible. There is only one Canal, and the options are quite limited if you want to avoid rounding the South American continent, or if transporting across the North American continent by train is too expensive and time consuming. Therefore the Canal is able to price its service based on the economics of transporting goods by any other method or route. This creates a very steady revenue stream, and the country has been able to put that to good use for national infrastructure development.

There is a long way to go for Panama, and as with all developing countries, the challenges are huge, not least education, health, infrastructure and employment (although official employment figures are health with an official unemployment rate in the 4% - 5% range for a number of years). Corruption is rampant, and while Panama is a major offshore financial center, the "Panama Papers" scandal of 2016 dented its reputation.

If anything positive can be said about the 85 years during which the Canal was under US control, it is that the administrative and operational systems were put in place and a level of discipline inculcated that has carried over to Panamanian administration. The Canal is efficient, profitable, and well maintained, and functions as smoothly under Panamanian control as it did under American.

"The Zone" remains, but is now an artefact. But also remaining is the question of just how developed could this country be if it had access to price and profit from the Canal for the 100 years that it has been in operation, and not for the 17 years that it has been under the control of the country in which it is located.