By Bilal Hafeez 12-11-2019
In: post | Newsletter

Bilal’s Top Picks: 30 Extreme Risks / Central Bankers’ Climate Fears / China Apologies

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(total reading time: 6 mins)

Ever thought there was a bubble in people calling out bubbles in markets? Well, you’re not alone, Scott Sumner blogs on this. But for those that still like to see the more pessimistic side of the world, we have a think tank listing 30 extreme risks for the world. Central bankers are also worried and some are talking more about incorporating climate risk into their decisions.

We have a few pieces explaining falling productivity (including obesity). Widely followed European economist, Thomas Mayer, calls for a digital euro. And we feature several pieces on US and UK election dynamics. Elsewhere we show all the brands that have apologised to China, how Russia is benefiting from both China and European interest and how conflicts are easier to predict.

Enjoy!

Bilal

Despite equity markets climbing up in the past month or so and a rise in long-dated bond yields and steeper yield curves, the overall sentiment in this week’s blogs is negative. Fund managers fear a recession, the credit boom might be a predictor of an equity crash and to top it up, we have the 30 most extreme risks for the year. At least Scott Sumner says bubbles are fiction.

The Bubble in Phony Bubble Calls (EconLib) Scott Sumner claims bubbles don’t exist yet there are constant ungrounded warnings of them across the media. Canada’s housing market never crashed despite years of scary headlines.  [Bullish stocks]

Extreme Risks 2019 (Thinking Ahead Institute) Comprehensive report that lists 30 extreme risks ranging from anarchy to hyperinflation to tech singularity. [Bullish volatility]

Year-End Fixed Income Survey 2019 (Russell Investments) Survey of fund managers finds that bond managers expect only one more Fed cut, while credit managers fear a US recession and FX managers are bearish euro [Bullish rates, bearish credit]

The Leverage Factor: Credit Cycles and Asset Returns (Davis, Taylor) Credit boom periods tend to be followed by equity return underperformance in the near future, thus credit growth signals can be useful input in asset allocation. [Bearish equities]

Amidst Australia battling with catastrophic bushfires, the San Fran Fed is waking up to the need to tailor monetary policy to climate change and natural disasters. In Europe, the efforts to save the staling economy – and the euro – are surging.

A Phillips Curve for the Euro Area (Ball, Mazumder) Finds that the textbook Philips Curve largely holds for the Euro area, using a weighted median rather than core inflation rate, which includes food and energy prices.

Why Climate Change Matters for Monetary Policy and Financial Stability (Federal Reserve) After the Kincade fire in California destroyed homes and businesses alike and the ongoing Australian bushfires, monetary policymakers are waking up to the need for incorporating how disasters such as hurricanes, wildfires, and flooding affect labor markets, spending and output. [Bullish rates]

A Digital Euro to Save EMU (VOX EU) Thomas Mayer argues for the idea of relaunching the Euro as a digital bank central currency, suggesting it may be beneficial for the Eurozone economy in the long run and increase its competitive advantage on a global scale. [Bullish euro]

We continue our discussion on wealth inequality, a heavily featured topic in the US Presidential run. Harvard’s Taehoon Kim finds that the role of the US as the “banker of the world” contributes to wealth concentration there. The IMF came out with a handy map to use when targeting regional inequality with fiscal policy.

The World’s Banker: On the Rise in U.S. Wealth Inequality (Harvard University) Harvard researchers have developed an equilibrium model to show that global financial integration contributes significantly to income inequalities and the current economic environment in the US exemplifies that. [Bearish global banks]

A Map of Inequality in Countries (IMF Blog) Regional income inequalities in developed economies are increasing over time and have created mobility issues. IMF researchers urge governments to introduce geographically-targeted policies to address this problem.

We focus on the much-feared trend of declining productivity and find surprising reasons behind it, such as obesity. Technology might also be hampering growth long-term. We also look at ways the US can learn from Australia’s mild and short-lived recessions.

Where Is That Confounded Recession? (Nevins Research) Daniel Nevins argues against the general market sentiment about an upcoming recession by conducting examinations on the housing sector, public policies and real spending capacity. [Bullish equities]

Why Does Australia Have Mini-Recessions? (EconLib) Scott Sumner argues that Australia’s recessions have been much milder than in the US, as they do monetary policy more efficiently. They track the price of money (exchange rate) rather than the rental cost of money. It is far more powerful and unambiguous.

What are the Real Reasons for Declining Productivity? (Mish Talk) Some of the Top 10 reasons include wrong measurement of productivity, time wasted on Facebook and surging obesity levels. [Bearish equities]

Is Rising Concentration Hampering Productivity Growth? (San Francisco Fed) The increase in productivity brought by the IT revolution for large firms in the US has caused lower profit margins across other businesses and a decrease in market competition. In the longer term, this phenomenon will lead to weaker growth in productivity. [Bearish small caps]

Trump is casting a shadow of uncertainty on markets – he hasn’t yet signed an agreement to roll back trade tariffs on China and his impeachment proceedings can fly in either direction. Similarly, across the pond in the UK, Conservatives are scrambling for support in the North.

Did Trump’s Trade War Impact the 2018 Election? (Blanchard, Bown, Chor) Academics find trade war accounted for one-tenth of the observed nation-wide decline in Republican House candidates’ vote share between 2016 and 2018. Largely driven by retaliatory tariffs on agricultural products.

The 7 Ways Impeachment Could Shape The 2020 Election (Fivethirtyeight) Things could go in a number of directions – Trump could lose everything, but outcomes can also lead to utter chaos and destruction for the Democrats.

Can the Conservative Party Win in the North of England? (The Conversation) The Conservative’s strategy of appealing to the “Workington Man” in North England oversees the demographic complexity of this region and may not be as effective in the face of the upcoming UK election. [Bearish GBP]

We Are Finally Getting Better at Predicting Organized Conflict (MIT Technology Review) Shows the anatomy of “conflict models” and how it computes a “risk score” to assess the probability of social conflicts in a region. Such models successfully forecast the September 2018 conflicts in Ethiopia.

Not all stock market losses have been created equal – there is a clear hierarchy and we feature Ben Carlson from Ritholtz exploring it. Also, a great piece on what the next trends in asset management are and why nearly 90% of U.S. stock market funds failed to beat their indexed benchmark over the past 15 years.

Trends That Matter in Asset Management (A Wealth of Common Sense) It’s not all about fundamentals – professionals overtaking amateurs, a surge in target-date funds and quants replacing star managers now matter too.

Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds (NBER) This working paper examines empirical evidence to explain how mutual fund managers could misclassify their holdings, and how such misreporting behaviours are more incentivised after continuous periods of large negative returns.

The Hierarchy of Stock Market Losses (A Wealth of Common Sense) Ben Carlson explains how people may lose money in the stock market differently – this depends on if they’re in developed markets, emerging markets, or just individual stocks.

Facing slowing economic growth, Chinese President Xi Jinping is willing to offer some concessions in the short-term to limit the trade war damage – it seems as though both sides have notes how harmful it all is. China is now also seeking partners elsewhere and hopes to grow warmer to Russia before Europe does.

How The iPhone Widens The US Trade Deficit With China (VOX) The iPhone case unambiguously demonstrates that conventional trade statistics significantly inflate China’s trade imbalance with the US. Importing one iPhone X from China generates a $330 trade deficit for the US. [Bullish CNY]

Masayoshi Amamiya: Japan’s Experience and Its Implications For China – Monetary Policy And Financial System (BIS) Japan has already “been there, done that” when it comes to issues facing China – aging population, slowdown, struggle with policy. As the economic and financial ties between the two countries grow stronger, there are increasing opportunities for the two central banks to cooperate e.g. last year they signed a currency swap agreement.

China’s Growing Presence on The Russian Market and What It Means For The European Union (Bruegel.org) Europe and China are competing against each other to become Russia’s biggest trading partner. However, Europe has competitive advantages in certain sectors that China aims at. [Bullish Russia]

All the International Brands That Have Apologized To China (Sup China) Sup China drafts a list of high-profile brands that have given in under the Chinese governmental pressure after stepping over the “red lines” of certain sensitive issues.