By Bilal Hafeez 31-10-2019
In: post, Newsletter

Bilal’s Top Picks: China’s War / Alternative Meat / Taxing The US Rich


(total reading time: 6 mins)

The growing support for a wealth tax – now also from Nobel laureate Michael Spence – features heavily this week. But where does this antagonism against the rich come from? Our curated articles show that expensive education and power dynamics are as much the cause of wealth as skill is.

China’s major gathering of government officials at its Fourth Plenum has also started. We have articles addressing Xi’s lasting grip on power and also the growing risks of a conflict with Taiwan.

We also have McKinsey’s take on alternative proteins and meat, PIMCO’s takeaways from the annual IMF meetings in DC, a piece on why UK elections are not a foregone conclusion, and much more.

Enjoy!

Bilal

This is another tough week for big name start-ups and their major stakeholders. Are the anticipated bubbles around ‘fake’ tech start-ups finally going to bust? The outlook for the overall market is still heavily affected by uncertainties and a lack of faith, but maybe there’s an unexpected silver lining lying in the increased interest around ESG or green investing.

Exorcising Phantom FDI (VOX EU) This paper proposes a clever technique to identify the true investors behind FDI data. US companies actually account for 10% of FDI into China, rather than the officially reported 1%. Meanwhile, the EU accounts for around 30% of FDI into the UK, rather than the official 40%. [Bullish US large-cap, bullish GBP]

Alternative Proteins and the Future of Meat (McKinsey) Across different economies, health is the common driver of demand for alternative proteins. Alternative protein is a niche market, but McKinsey believes it is sizeable enough to disrupt the food industry in the future. [Bullish alt meat markets]

10 Key Investor Takeaways From the 2019 Annual Meetings of the IMF and World Bank (PIMCO) Geopolitical uncertainties such as the 2020 presidential election and the US-China trade tension were the biggest concerns. Meanwhile, ESG investing has become the trendy topic as a result of increased awareness of climate changes. [Bullish ESG stocks]

Yesterday, the Fed cut rates for the third time this year. The persistent low rate environment seems to be a cause of bubbles forming after all. The least central bankers can do is help reduce carbon emissions – ‘Green QE’ is all in.

When Yields Talk, Sectors Listen  (Advisor Perspectives) Low interest rates impact not only bonds but equity valuations too. And some sectors are more rate sensitive. Financials suffer whereas Utilities, Consumer Staples, and Healthcare outperform. [Bullish these latter sectors]

Herd Behaviour in Asset Markets: The Role of Monetary Policy (VOX) Argues against economist Robert Shiller’s findings that bubbles are random and unpredictable and instead finds they are closely linked to loose monetary policy. [Bearish stocks]

Jens Weidmann: Climate Change and Central Banks (Jens Weidmann) Discusses ways in which central banks can be involved in transitioning to a low-carbon economy. Heavy focus on green finance or ‘Green QE’, however, might distract from the main policy objectives and hinder bank independence. [Bearish green bonds]

The idea of introducing a wealth tax to solve inequality in the US and beyond has been thrown around a lot recently. Most economists frown upon it (we previously featured Timothy Taylor’s piece crunching numbers to find it makes little sense), but this week we picked an opposing view by Nobel laureate Michael Spence. He sees value in a wealth tax but with some caveats.

Which Wealth Tax? (Project Syndicate) Spence supports Democratic candidates Warren and Sanders in pledging for the introduction of a wealth tax, but only if it’s done right and the cash goes to the bottom 50%. [Bearish US stocks]

How the Rich Are Different: Hierarchical Power as the Basis of Income Size and Class (Blair Fix) A new paper on inequality claiming that the rich of the world are different not because they are more productive or can exploit workers, but because of their hierarchical power or i.e. greater command over subordinates.

The Great Gatsby goes to College: Tuition, Inequality and Intergenerational Mobility in the U.S. (Damien Capelle) Finds that unequal access to higher education in the US has led to increases in returns to human capital, heightened income inequality, and has increased tuition fees and stagnated the enrolment of low-income students.

This week we see a series of pessimistic signals around the future of the workforce. Automation could be a dehumanizing force, real wage growth has been sticky, and ageing populations create more than just financial problems.

My Favourite Job Market Paper So Far This Year (Marginal Revolution) Professor Tyler Cowen of George Mason University flags a recent MIT Paper about wage rigidity, finding that the real wages for the same position at the same establishment decrease over time. So stable jobs lead to lower wages. The solution would be reallocating similar jobs across firms.

Intergenerational Mobility of Immigrants in the US over Two Centuries (Abramitzky, Boustan, Jacome, Perez) Finds that the ‘American Dream’ rings true: children of immigrants from nearly every country have higher rates of upward mobility than US-born children.

What is the Problem with Rising Dependency Ratios in Japan – Part 1? (Economic Outlook) Japan’s rising dependency ratios result from its ageing and shrinking population. MMT advocate argues that these dynamics lead to real reductions in productivity and social resources, but do not cause fiscal issues. [Bearish rates]

Yesterday, the Fed cut rates for the third time this year. The persistent low rate environment seems to be a cause of bubbles forming after all. The least central bankers can do is help reduce carbon emissions – ‘Green QE’ is all in.

When Yields Talk, Sectors Listen  (Advisor Perspectives) Low interest rates impact not only bonds but equity valuations too. And some sectors are more rate sensitive. Financials suffer whereas Utilities, Consumer Staples, and Healthcare outperform. [Bullish these latter sectors]

Herd Behaviour in Asset Markets: The Role of Monetary Policy (VOX) Argues against economist Robert Shiller’s findings that bubbles are random and unpredictable and instead finds they are closely linked to loose monetary policy. [Bearish stocks]

Jens Weidmann: Climate Change and Central Banks (Jens Weidmann) Discusses ways in which central banks can be involved in transitioning to a low-carbon economy. Heavy focus on green finance or ‘Green QE’, however, might distract from the main policy objectives and hinder bank independence. [Bearish green bonds]

A number of uncertain macro factors are weighing down on equity valuations while at the same time value stocks are making a comeback, riding the volatility and possible undervaluations.

Tracking Macro Factors In Portfolio Strategies (The Capital Spectator) Runs a number of regressions to estimate the impact of different macro factors on diversified ETF portfolios. Finds that influence of such factors varies by market and over time.

The Revival In The US Equity Value Factor Rolls On (The Capital Spectator) Explores the recent revival in value stocks. It’s likely caused by heightened concern over slowing economic growth refocusing the market’s attention on undervalued assets. [Bullish value factor]

Using Payment System Data to Forecast Economic Activity (Aprigliano, Ardizzi, Monteforte) Models large amounts of retail payments data in Italy to show that tracking such transactions more closely helps make better GDP predictions.

Last week we looked at China’s growing laundry list of troubles. This week has been big for the CCP, and its Fourth Plenum is sending out mixed signals regarding the changes in the power structure within the Party. These changes are going to affect China’s next steps in addressing its urgent diplomatic and economic concerns.

Has Xi Jinping’s War Countdown Begun? (Project 2049/Taipei Times) Taiwan’s military defences and diplomatic outlets are heavily outsized by mainland China’s. Regional expert Ian Easton describes how recent changes in China’s military structure could foreshadow a conflict with Taiwan. [Bearish Taiwan markets]

Xi’s in Charge: What the Fourth Plenum Tells Us about Xi Jinping’s Hold on Power (CSIS) The CCP has recently initiated its Fourth Plenum of the Nineteenth Party Congress. The convention focuses primarily on strengthening CCP capacity and governance. Notably, it has a specific session on ‘Xi Jinping Thought’, showing the president’s firm grip on power. [Bullish Chinese SOEs]

An Economics Book for Your Coffee Table