Why Is Gold Rising? (A Wealth of Common Sense, 5 min read) First, real interest rates are falling – since 2008, the correlation between gold and real rates has been -0.5. Second, we have dollar weakness – between 1974 and 2019, the dollar was down 15 out of the 26 years, and during those years, gold’s average annual return was 18%. Finally, investors could be using it as an inflation hedge – when inflation in the US was over 3%, the average return on gold was 10%. [Bullish Gold]
The US dollar comes up smiling (The Expert Investor, 3 min read) Jen reiterates his dollar smile thesis. He argues that recent dollar weakness is temporary, and US growth out-performance will mean the dollar bounces back. [Bullish dollar]
From Bond Glut to Bond Drought: A Strategic Fixed Income View (Janus Henderson, 6 min read) After the $1.2 trillion of corporate bond issuance since 2020 (up 95% versus 2019), Henderson see lower investment-grade net issuance in H2 2020. They believe companies will be more aggressive in managing their ratings and leverage levels to ensure they qualify for central bank-backed bailouts in the future. [Bullish credit]
Time inconsistency in recent monetary policy (Vox EU, 15 min read) Goodhart highlights the problems with low and negative rates such as debt traps, bubbles and financial imbalances. But he also argues that exiting negative rates may bring their own problems in terms of higher defaults. He also suggests that structural deflationary forces are about to turn. [Bullish rates in short-term]
Sovereign Debt Portfolios, Bond Risks and the Credibility of Monetary Policy (Journal of Finance, 45 page read) This paper finds that governments whose local currency debt could theoretically provide the best hedging benefits actually end up borrowing more in foreign currency. This is partly due to poor monetary policy commitments, which then requires foreign currency issuance to attract investors. [Bearish local EM]
Stock Market Evidence on the International Transmission Channels of US Monetary Policy Surprises (SNB, 25 page read) SNB finds that historically dovish Fed surprises boost foreign stock markets on lower expected real rates. More recently, QE surprises boost foreign stocks through better expected cashflows. [Bullish equities]
How to Prevent the Looming Sovereign-Debt Crisis (Project Syndicate, 8 min read) Joseph Stiglitz highlights how around 100 low- and middle-income countries have to pay a combined $130 billion in servicing debt. But with COVID, this may prove hard to do, so a global debt crisis could be looming. He argues for voluntary debt buybacks, which worked for Latin America in the 1990s and Greece more recently. [Bearish EM frontier debt]
Economic Consequences of High Public Debt: Evidence from Three Large Scale DSGE models (ECB, 26 page read) ECB wades into the fiscal debate. They simulate the effects of high public debt levels and find that economies lose more output in a crisis, spend more time at the ZLB, face a crowding out of private debt, and have less scope for countercyclical fiscal policy among other issues. Essentially, it argues for greater EU fiscal risk sharing.
Does the Commodity Super Cycle Matter? (NBER, 26 page read) It doesn’t, really, when it comes to world growth. Yet the paper does find that commodity super cycles do exist.
The Trump Record on Unemployment (CEPR, 2 min read) A short piece that argues that the improvement in employment under Trump was a continuation of the trend from the Obama years.
Brazil: Will This Emerging Market Ever Emerge? (Aberdeen Standard Investments, 5 min read) The large asset manager paints a bearish picture on Brazil. The list of reasons is long and includes slower global trade, lower commodity prices, corruption, political malfeasance, and supply weakness caused by inadequate public investment. [Bearish Brazil]
Revisiting the White Swans of 2020 (Project Syndicate, 7 min read), Nouriel Roubini re-states major risks for 2020. These include: Russia using cyber warfare to interfere in the US election, the US-China cold war turning hot, tensions between Iran and Israel as a Biden presidency revives the 2015 nuclear deal, and sanctions by Trump to seize and freeze China’s Treasury holdings. [Bearish equities, bullish bonds]
Postpone the Election? That Could Mean President Biden (Politico, 6 min read) A provocative read. In the absence of an election, Trump’s presidency would end on 20 January 2021. By statute, the person next in line would be the House speaker, but without an election, the term of every member of the House of Representatives will end on 3 January. Now, this could imply (in theory) that the Democrats who control the Senate can elect whoever they want, and Joe Biden becomes president.
Informed Trading in Government Bond Markets (BOE, 25 page read) A great paper that uses regulatory data to assess the predictive power of hedge fund and mutual fund trading behaviour. They find hedge funds’ daily trading positively forecasts gilt returns in the following one to five days – largely because they anticipate investor flows. Meanwhile, mutual fund trading positively predicts gilt returns, but over a one- to two-month horizon. Their ability to forecast changes in short-term interest rates partially explains this.
Stock-induced Google Trends and the Predictability of Sectoral Stock Returns (JOF, 16 page read) Using Google Trends as a proxy for investor sentiment can enhance stock market forecasting accuracy and outperforms a random walk model.
Tail Risk and Return Predictability for the Japanese Equity Market (JOE, 25 page read) Option market data is usable to forecast returns in the dollar-denominated Japanese stock markets. It works less well in local currency terms.
Does Joining the S&P500 Index Hurt Firms? (NBER, 26 page read) An excellent paper. It finds ‘positive announcement effect on the stock price of index inclusion has disappeared and the long-run impact of index inclusion has become negative.’
China Plays the Iran Card (Project Syndicate, 5 min read) Former senior adviser to US state department Vali Nasr and scholar Ariane Tabatabai make the case that, as the US leaves Afghanistan, China will partner with Iran to gain more control in Central Asia and the Middle East.
A Biden Victory Could Be Bullish for China (WisdomTree, 4 min read) Shows that the performance of Chinese equities and the probability of a Biden victory have been positively correlated. [Bullish Chinese equities]
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