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By Bilal Hafeez 12-10-2019
In: post | Newsletter

Bilal’s Top Picks: Confidence Softens / Undisclosed Debt / China Cultural Clash

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(total reading time: 6 mins)

A great selection of curated articles this week. We have Janet Yellen arguing for more stimulus, a piece on how low consumer confidence could see equity momentum falter and a critique of Thomas Piketty’s proposals to tackle social inequality.

Also, we have several analyses of China’s boycott of the NBA, how fiscal policy can curb climate change and surprising work that shows wages of the poor are increasing fast.



As we discussed more widely in our latest exclusives letter, politics and markets are becoming more and more interlinked. The impact of the impeachment process, Brexit and global unrest are likely to shake up indexes.

Would the Market Care if the President Was Impeached? (A Wealth of Common Sense) Looks at last two US President Impeachments. For Nixon, markets were already slumping before the proceedings and for Clinton, indexes barely took any notice.

Momentum Under Fire as Confidence Softens (Variant Perception) Momentum in stocks is highly correlated with consumer confidence. The latter is falling, so weakness in the momentum factor.

SP 500 “Earnings Yield” Back to 6% with New Quarter (Trinity Asset Management) Looks at upside surprise factors for the S&P 500 . Growth estimates are very subdued, so the possibility of an upside surprise looms.

Worries are emerging around the nearing end of the cycle – and the possibility that the usual tools won’t work to revive it. More and more academic work is exploring unconventional policy and offers some comfort that it’s likely to work while policy-makers keep pushing for more easing.

Former Fed Chair Janet Yellen on Why the Answer to the Inflation Puzzle Matters (Brookings) Janet Yellen explains persistent low inflation and a flattened Philips Curve. She sees plenty of room for stimulating the economy and stoking wage gains without significant inflation.

Emergency Liquidity Injections (Reserve Bank of Australia) Compares the effectiveness of different methods of emergency liquidity injections in the banking system. Secured lending via repo seems best since it curbs fire sales and reduces incentive for liquidity risk-taking. Asset purchases aren’t as effective since banks aren’t required to commit future income as collateral.

Unconventional Monetary Policy Tools: A Cross-Country Analysis (BIS) Offers evidence that supports the use of unconventional monetary policy (negative rates, asset purchase programmes, forward guidance) in dealing with a downturn. Side effects such as overdependence on Central Bank funding and compressed rate margins are likely.

A tax system overhaul – to improve inequality or to solve the climate issues – seems to be on the cards. A concrete and actionable policy plan to be followed by governments is urgent, but no one is offering it.

Thomas Piketty’s New Book: Impressive Research, Problematic Solutions (Bruegel) Critiques three of Piketty’s bold suggestions: reforming corporate governance, a tax system overhaul, and European transnational Federalism – all are appealing but Piketty offers no concrete suggestions on policy.

Fiscal Policies to Curb Climate Change (IMF) The IMF recommends the best policies to tackle climate change, given the Paris agreement has fallen short. Main points revolve around jump in carbon taxes to $75 a ton by 2030 and how to best use the generated revenue.

Undisclosed Debt Sustainability (Alfaro, Kanczuk) Undisclosed and non-transparent lending to developing markets by creditors outside of the Paris Club, most notably by China, is surging and is negatively impacting debt sustainability for traditional (Paris) lenders.

Japan’s Public Sector Balance Sheet (IMF) In-depth analysis of Japan’s large public sector balance sheet, exceeding 210% of GDP in 2017, but now decreasing in net worth. Looks at risks of crossholdings with the public sector and how pension policies for the aging population will add pressure.

Despite fears of doom and gloom across all indicators, the labour market is thriving in the US.

Initial Claims Still Positive, Negative Near term Recession (The Bonddad Blog) Debunks current predictions about a looming recession by scrutinising labour market data . The average on claims remains low and the monthly YoY% change is at the same level as last year – no worries in sight.

Predicting Recessions: Financial Cycle Versus Term Spread (BIS) Measuring the financial cycle has a better predictive power for incoming recessions than the more common measure of term spreads.

The Myth of Income Stagnation, Again (Dr. Ed’s Blog) Further analysis on the state of the labour market – this piece maintains that productivity growth is increasing and consequently results in a rise in wages. Thereby, undermines theories of income stagnation.

The Best Economic News No One Wants to Talk About (The Atlantic) Looks at why neither politicians nor the media want to highlight the healthy labour market – wage growth for low-income earners has doubled poorest workers are now paid more.

The Surprising Decline of Entrepreneurship and Innovation in the West  (The Conversation) Observes various indicators of entrepreneurship such as the ratio of new firms to total firms and concludes that they all point to a decline in overall innovation.

Geopolitics has taken a centre stage recently, especially with the climate movement across major cities. A few insightful pieces exploring how to try and respond to it.

High Finance is Wrecking the Economy and the Planet – but it Won’t Reform Itself (Prospect Magazine) Criticizes FT’s new campaign that aims at resetting rentier capitalism as meaningless and toothless. It does agree, however, that capitalists are searching for new ways to revamp capitalism as political insurgencies, protectionism and authoritarianism all threaten globalisation.

Free Trade is Expanding, Just Not With the US (Council on Foreign Relations) Highlights that despite countries accounting for more than a third of global output signing more than a dozen trade agreements in the last two years, the US chooses to stay on the sidelines

The Climate Risk You May Not be Thinking About (McKinsey Global Institute) Argues that the most significant risk of the current climate change predicament is not weather itself but our lack of adaptation to today’s volatility. Plenty of examples of one extreme event such as a storm significantly disrupting output.

Greta Thunberg’s Moment (Project Syndicate) Explores the mass movements of civil disobedience started by Thunberg and criticizes the failure of Governments to react.

We feature a paper looking at utilising machine learning in predicting crisis and why oil modelling remains robust.

Predicting Bank Distress in the UK with Machine Learning (Suss, Treitel) Looks at the benefits of machine learning techniques for providing regulators with a warning of firm distress. This gave an approach that is better aligned to help intervene ahead of failure.

Refining the Workhorse Oil Market Model (Zhou) Paper makes adjustments to previous work which has a model considered as the go-to for analysis of global oil markets. The 5 refinements he tries  had no effect on the substantive conclusions made – so the original model is still the one to use.

Value, Momentum and Carry – Is It time for Equity Investors to Switch? (In the Long Run) For the active investors, value factors may offer a better risk reward profile, but, given the individual stock volatility dispersion, a market neutral defensive factor model, along the lines proposed by AQR, may deliver the best risk adjusted return of all.

Controversies around Hong Kong remain, and we look at how the recent undertaking of the NBA is a wider warning sign to the rest of the World. China is often scrutinised as benefitting of a developing country status so we explore the potential of change.

China Bends Another American Institution to Its Will (The Atlantic) By taking on the wildly popular NBA, and especially the even more popular Rockets, China’s leader, Xi Jinping, is blowing a whistle on companies and countries around the world that he can easily be destructive using no weapons.

Myth Busted: China’s Status as a Developing Country Gives it Few Benefits in the World Trade Organization (The Conversation) Donald Trump and Australian PM Scott Morrison argue that China is effectively a developed economy that receives unfair benefits by joining the WTO as a developing economy.

The China Cultural Clash (Stratechery) China’s boycott of the NBA is about more than the pro-Hong Kong tweet from the Houston Rocket manager Daryl Morey. The way that the Chinese government influences public opinions from social media apps and the Great Fire Wall is creating an even wider division between the country and the West.

With the US and China, Two Types of Capitalism Are Competing with Each Other (Stigler Center, University of Chicago Booth School of Business) Branko Milanovic’s new book argues against China’s view as a socialist state. The state-led authoritarian capitalism model has hugely contributed to China’s rapid economic growth in the past few decades, and China’s economic success undermines the West’s claim that capitalism and liberal democracy must be linked with one another.

For more information: Mapped: The World’s Largest Exporters in 2018