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By Bilal Hafeez 19-11-2019
In: post | Newsletter

Bilal’s Top Picks: 2020 Predictions / Science Slowdown / Economic Winter

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(total reading time: 6 mins)

2020 outlooks are starting to get published. Morgan Stanley highlights their favourite tech trends, Barclays writes on insect protein and others are generally bullish on (conventional) stocks. Meanwhile, Deutsche Bank expects higher corporate tax rates. And former RBI governor and current Chicago Professor Raghuram Rajan expects politics to be the make-or-break factor for 2020.

On the policy front, the Fed is making the case for lower real rates. More research is finding that scientific innovation is slowing, which may hinder thoughts of great returns from investment. And how Europe does better than the US on inequality due to factors other than tax. Finally, don’t forget about China’s various credit problems.



It’s that time of the year, when analysts start pontificating about the year ahead. Most seem cautiously bullish. And the interest in shiny new investment themes continues whether in the internet of things or insect protein.

Intermarket Gauges Suggest Recession or Risk-On (Variant Perception) Over past 12 months, markets have behaved defensively (high-yield credit underperforming investment-grade, small cap stocks underperforming large cap stocks, copper underperforming gold and equities underperforming bonds). Variant believe an unwind of these could see a risk-on move. [Bullish US stocks]

2020 Predictions – The Avalanche Begins (Fundamentalis) By examining S&P 500 data that goes back to 1928, Brian Gilmartin argues that after a 25% return in S&P in 2019, the next year is unlikely to do as well. [Neutral US stocks]

What’s Ahead for Tech, Media and Telecom in 2020? (Morgan Stanley) Advertising on streaming platforms, 5G network sharing, fintech-infused smarter payments, fibre networks and the internet of medical things (IoMT) – are the ones worth expecting. [Bullish tech]

Insect Protein: Bitten by The Bug (Barclays) Confronted with challenges around the sustainability of our food production, especially with respect to meat, Barclays believes insect protein could disrupt the food industry landscape in the future. They estimate that the insect protein market could be worth up to US$8bn by 2030 (+24% CAGR).  [Bullish alt meat markets]

It’s clear that economists have got a lot wrong, but mainstream thinking isn’t changing much. Moreover, the Fed seems reluctant to try anything new when it comes to inflation targeting but is happy to support banks.

Against Economics – Book Review of “Money and Government: The Past and Future of Economics”  (The New York Book Review) David Graeber argues that the mainstream economic thinking and policy is broken yet continues to be used. [Bearish economists!]

Learning and Misperception: Implications for Price-Level Targeting (Fed Board of Gov) Fed argues against adopting a temporary price-level targeting strategies during a recession. [Bearish rates]

The Global Equilibrium Real Interest Rate: Concepts, Estimates, and Challenges (Fed Board of Gov) Fed argues that they may have overestimated how high real rates should be as they didn’t correctly incorporate global trends. [Bullish rates]

Fed’s Push into Funding Markets Stirs Fears of Widening Role (Politico) Questions whether the FED’s latest effort to intervene in the funding market can lead to the Fed becoming the whole U.S. money market. The expectations that the FED will protect banks in volatile markets that are inconvenient to monetary policy, can potentially lead to adverse risk-taking by the banks. [Bullish banks]

Populism is affecting all dimensions of policy. A less discussed but very likely shift will be clamping down in corporate tax dodges. Underlying much of the shift in sentiment is growing inequality. Yet, we may be measuring wrong and we may picking the wrong tools to fix it.

2020: An Inflection Point in Global Corporate Tax? (Deutsche Bank) Jim Reid argues that populism will see higher corporate tax rates across the world.  [Bearish big tech]

Declining Labor Shares of GDP Are Not the Story of Inequality (CEPR) Argues that using declining labour shares of GDP as an indication of inequality is incorrect. This is partly because of the way depreciation of capital is accounted for.

Why US Inequality Is Higher Than Europe’s (Project Syndicate) The pre-income of the US bottom-half has only gone up by 3% since 1980 compared to 40% for Europe. This is due to Europe’s national minimum wages, greater worker protections, free public education and free healthcare. [Bullish Europe]

There’s growing awareness that we may be experiencing decreasing returns to scientific research – this has major implications for policy and companies. Better then to rethink the work week, perhaps. In the short-term, though, politics will continue to be a big risk for economies.

On the Decline Of R&D Efficiency (VOX EU) The empirical evidence of Japan following the Great Recession suggests that the marginal benefits of R&D spending may not be sufficient to drive growth in developed economies. [Bearish high investment companies]

Is the Rate of Scientific Progress Slowing Down? (Marginal Revolution) In-depth review of different strands of literature and metrics such as total factor productivity, patent measures, researcher productivity, crop yields, life expectancy and progress of computing power, shows some evidence that the rate of scientific progress had indeed slowed down. [Bearish high investment companies]

Is Economic Winter Coming? (Project Syndicate) Former RBI governor and current Chicago Professor, Raghuram Rajan, argues that the biggest risk factor for a recession is the White House, not the Fed or any one sector of the economy.

Economics of A Four-Day Working Week: Research Shows It Can Save Businesses Money (The Conversation) Several businesses that adopt this scheme report an annual saving of GBP 92 billion and an experiment carried out by Microsoft Japan shows a 40% increase in productivity.

Trade wars are the obvious source of geopolitical tensions. But we should add conflict over water and also over mobility – remember the Chile protests were triggered by rising costs of public transport.

The Growing Threat of Water Wars (Project Syndicate) More geopolitical conflicts are about access to water resources. However, most of these conflicts take place between developing economies, and many advanced economies still maintain water-consumption habits that won’t alleviate the global water stress.

Quantifying the Unemployment Effects of Trump’s Protectionist Policies (VOX EU) Researchers conclude that repealing NAFTA and the bilateral tariffs between the US and Mexico would reduce welfare by 0.31% in the US and by 6.6% in Mexico. However, evidence also shows that Canadianworkers are slightly better off as a result. [Bearish Mexico]

When Markets and Mobility Collide (Project Syndicate) Harvard Professor Ricardo Hausmann reflects on the recent Chilean protests over an increased metro fare. He concludes that this “market adjustment” on access to public goods and services – i.e. public transportation – is unfair to the economically disadvantaged population.

Congress, Nord Stream II, and Ukraine (The Brookings Institute) Steven Pifer argues that sanctioning parties that are involved in the construction of the Nord Stream II pipeline doesn’t make much difference. But the Congress could still amend legislation to help Ukraine take advantage of its position as a transit country for Russian gas. [Bullish gas]

US national accounting suggests companies are using offshore investments to hide income from taxes. Shadow banks could be harming liquidity. But in the new world, we could see the rise of digital currencies.

A Big Borrower and a Giant Corporate Tax Dodge? How Best to Describe the U.S. External Balance Sheet (Council on Foreign Relations) Brad Setser argues that the US is analogous to a household that can borrow indefinitely at a very low rate, as the US’s financial assets can barely cover the US debt liabilities. The equity side is seen as a corporate tax dodge for US-based multinationals.

The High Stakes of the Coming Digital Currency War (Project Syndicate) Harvard Professor Kenneth Rogoff suggests that Facebook’s proposal of Libra has intensified the competition of digital currencies between countries. He also warns how state-sanctioned digital currencies may disrupt the scene. [Bearish bitcoin]

The Side Effects of Shadow Banking on Liquidity Provision (Liberty St Economics/ NY Fed) Since the mid-1990s, shadow banks have started eating into traditional banks’ share in the term loan business. The increasing presence of shadow banks also has an indirect, negative impact on the liquidity insurance that credit lines provide to corporations.

You can’t get away from the credit problems of China. Small banks are suffering, and policymakers are struggling with financial stability.

Upbeat Outlook from Chinese Banks’ Profits Masks Growing Problems for Small Banks ( Higher balance of local government bonds and lower funding costs help smaller Chinese banks with their performances, but small banks still lack competitive advantage in attracting savings. [Bearish China small banks]

The Afterlife of Marx’s Footnote on Chinese Currency (Andrew Batson) The only Chinese monetary thinker cited in Das Kapital, Wang Maoyin,was an advocate of market independence. Beijing’s approach today over this subject matter seems to deviate from this path.

As The 2020s Dawn, China’s Search for Financial Stability Isn’t Getting Easier (George Magnus) Underperformances of smaller banks and lenders, an acceleration in the amount of foreign debt and an increasingly large amount of under-reported, non-performing loans are giving China a headache over its financial stability problems. [Bearish china credit]