Bilal’s Top Picks: Key 46 Macro Events In 2020 / Growth To Pick Up / Top Picks On Iran & More

By now, you may have seen an email saying that we are introducing a paywall for our premium content (Exclusives and Deep Dives). It’s an important step for us to ensure we have a sustainable model. Hopefully you will all take advantage of the members only discount code (HIVEMEMBER10) and sign up!

In this letter, we include two Exclusives. First, our guide to the key macro events of 2020. These range from the US election, Iranian elections to the Fed’s new policy framework to a Bitcoin halving event. We also throw in some anniversaries (20 years since dot-com crash), sporting events (Olympics) and films (Top Gun 2). Second, we feature top global economist, Phil Suttle’s, take on global growth. He sees it turning higher over the first half of 2020.

We also have my top pick of blogs. I’ve carved out a special section for the best pieces to read on the US-Iran conflict. So much of the news on this has sensationalist – hopefully these pieces provide some balance. Then other pieces include Bernanke’s take on Fed policy, the six hundred year history of real rates and the failure of fiscal activism in Europe over the past twenty years.

Enjoy!

Bilal

Your Guide To The 46 Macro Events That Matter In 2020 (4 min read) We’ve finally entered a decade we can give a proper name to – the twenties. And we’ll soon see whether or not it will be roaring because 2020 is packed with events that could set the tone for the whole decade.

The most followed event has to be the US presidential election (3 Nov) – current polling and prediction markets are mixed on who will win. But we also have other important elections, too. The assassination of Iran’s Soleimani will bring Iran’s election (21 Feb) to the fore. Taiwan’s (11 Jan) could have significant geopolitical consequences, while a potential one in Germany could alter the course of the EU…

(Bilal Hafeez, 9th January 2020)

Global Growth Is Starting To Pick Up (2 min read) A tentative uptick in some cyclical indicators confirms our view that global economic growth will accelerate through the first half of this year. Yet the improved economic momentum comes from a weak starting point, with fourth quarter global GDP growth set to be the slowest in seven years. Japan was a key factor in the Q4 malaise, with the October VAT hike triggering an expected 3% QoQ saar contraction in growth. An inventory drag in the US and soft growth in Europe added to the weakness…

(Phil Suttle, 9th January 2020)

Here’s our selection of the best and most balanced pieces on the US-Iran conflict.

The Post-Suleimani View from Iran (Project Syndicate, 4 min read) Director of Iranian Studies at Stanford, Abbas Milani, gives insights on some of the fragile internal dynamics within Iran. Also, mentions the increasing presence of China and Russia in the Persian Gulf.

What Does Suleimani’s Death Change? (Project Syndicate, 4 min read) Former Israeli foreign minister, Shlomo Ben-Ami, gives some excellent context for the Soleimani assassination including examples of previous comparable events, especially related to Israel and Iran. In the end, he doesn’t believe in a significant escalation in the US-Iran conflict.

The Blueprint Iran Could Follow After Soleimani’s Death (The Atlantic, 5 min read) Provides good colour on how Iran tends not to lash out. Also provides deeper context including Iran and US conflicts from the 1980s.

Useful Iran/Iraq experts to follow on Twitter:

Rasha Al Aqeedi . A recent tweet “Iraq’s President condemns Iranian attack “

Amir Toumaj. A recent tweet “Unified messaging continues in [Iranian] state media: US has suffered so much casualty and is so afraid of retaliation that it would only report damage on infrastructure.”

Shadi Hamid. A recent tweet “If [Iranian foreign minister] Zarif’s comment is any indication, it suggests the U.S. may have reestablished deterrence, with Iran realizing that Trump’s threat to escalate if Americans were killed was credible”

New highs for the S&P in 2020 or a market correction as the US economy cools?

Stock Market Performance by President (macrotrends, 2 min read) Useful interactive chart that allows you add/subtract Presidents. The stock market performance of Trump’s first term is worse than Clinton and Obama’s but better than Reagan and Bush Senior.

Market Remains Overvalued (Advisor Perspectives, 5 min read) Blog provides a range of valuation measures for the US – all are showing an overvalued market. (Bearish equities)

2020 Sector Outlook: High Yield Corporate Credit (Loomis, 2 min read) The asset manager notes that corporate leverage is stretched but flows into the market are positive. They remain positive on credit on positive GDP growth, continued profit growth, steady rates and below average issuance. (Bullish credit)

As the debate around the potential side effects of unconventional monetary policy rumbles on a former Fed Chairman presents a positive assessment of the US experience.  A Yale professor reminds us that negative real rates aren’t so unusual after all.  

The new tools of monetary policy (Brookings, 11 min read) Ben Bernanke makes a strong defence for using QE and forward guidance – arguing that it provided the equivalent of 3% in short-term rate cuts. He argues that the Fed could use yield curve control, private asset purchases or even negative rates. But he is against raising the inflation target. He also doesn’t see Fed policy as contributing to financial instability or growing inequality. (Bullish stocks)

Negative Interest Rates Aren’t Such a Departure After All (Bloomberg, 4 min read) Yale professor Paul Schmelzing finds that real rates have declined for the last 600 years, falling about 1% every 60 years to near zero today. Moreover, significant portions of history saw developed economies operating under negative real rates. The only extended period without negative IR is 1983–2008 (“the Great Moderation”). (Bullish  rates)

Europe’s past lack of fiscal stabilisation plus another estimate on the cost of the US bailout.

Fiscal activism in the euro area and in other advanced economies: new evidence –  (ECB, 53 pages) The ECB finds that discretionary fiscal policy hasn’t helped to stabilise European economies over the past 20 years. Generally, policy is pro-cyclical and often counteracted by higher long-term interest rates and debt-to-GDP ratios. (Bearish European growth/stocks)

Measuring the Cost of Bailouts (Annual Review of Financial Economics, 23 pages) The paper calculates that the total direct cost of the 2008 crisis-related bailouts in the US at around $500 billion, or 3.5% of 2009 GDP. So the bail-outs were not fully repaid, but also it didn’t run into the trillions of dollars. (Bullish banks)

CEOs still consider recession to be the biggest business risk in 2020 (CNBC, 3 min read) Corporate CEOs for the second year in a row cite recession as their biggest worry amid “continued uncertainty around global trade, increasing competition, global political instability and tightening labour markets”. (Bearish equities)

Will Recession Strike in 2020? – (The Dangerous Economist, 3 min read) Studies the reliability of the US Conference Board’s LEI indicators in predicting recessions or stock market corrections. Good news is that it did predict the past eight recessions, but the lead time was often as high as 18 months. Plus there were many false signals. (Bullish equities)

Can Latin America Avoid Another Lost Decade? (Project Syndicate, 4 min read) The region has faced a multitude of problems, both from an unfavourable global environment and domestic factors resulting in anaemic growth in the past five years. The region can nevertheless foster re-industrialization and invest in science and technology, together with active social policies to help regain economic footing.  (Bearish Latam)

BoE quantifies the effect of political shocks on economic output, the threat of a cyber attack is ranked as the top security concern for the second consecutive year by the CFR’s foreign policy experts.

Macroeconomic effects of political risk shocks – (Bank of England, 34 pages) The BoE finds that increased polarisation and partisan conflict in US politics does negatively impact growth and asset markets. Their study looked at the period 1980 until today.

Conflicts to Watch in 2020 – (Council on Foreign Relations, 5 min read) Among the top risks to watch for this year are “disruptive cyberattacks on US critical infrastructure, including electoral systems”, “an armed confrontation between the US and Iran”, and “a severe crisis between Russia and Ukraine following increased fighting in the contested areas / Eastern Ukraine” according to the CFR’s annual Preventive Priorities Survey.

Obama, Trump Tie as Most Admired Man in 2019 – (Gallup, 2 min read) President Trump, got 1^st place for the first time. He was joint first with former US President Obama (12 years at #1). Results partly reflect the significant party divide in the U.S. Michelle Obama won the female spot for the second year in a row.

New insights into fx reserve composition using more granular central bank data. Does a “don’t know” response on Japanese inflation expectations actually contain useful information.

The currency composition of foreign exchange reserves – (BIS, 38 pages) The BIS uses new data across 60 economies and finds that the choice of currency in FX reserves is affected by the correlation between the local currency and G3 FX and also the invoice currency in trade.

“Don’t know” Tells: Calculating Non-Response Bias in Firms’ Inflation Expectations Using Machine Learning Techniques – (Bank of Japan, 24 pages) The Bank of Japan tried to determine whether firms that say they “don’t know” in the Tankan survey’s questions on inflation expectations, actually do “know” something. They use some clever machine learning techniques and find that some do “know”, but it doesn’t impact the overall results of the Tankan survey.

The cost of clearing fragmentation – (BIS, 47 pages) The inability to net trades across exchanges and clearing houses can distort market prices. This study finds that US dollar swap contracts do trade with price differences across US and UK exchanges. This suggests there is a collateral cost issue.

Opportunities for growth in a year of ongoing trade tensions, a structural economic shift and financial sector measures. Plus a look at overseas lending under the Belt and Road initiative.

What can we expect in China in 2020? (McKinsey&Company, 20 min read) McKinsey expects more bankruptcies, regulation, unpredictable risks to reputation and more selective consumer spending patterns. But opportunities exist. Economic growth will continue to be led by domestic consumption creating opportunities for companies to increase activity. Government spending on priority sectors should also boost business in 2020.  (Bullish China consumer)

Does China’s overseas lending favor One Belt One Road countries? (Munich Personal RePEc Archive, 24 pages). Beijing’s launch of the Belt and Road initiative in 2013 boosted China’s lending towards the roughly 70 countries involved, in particular those along the continental route. Lending promotion continued over a period of 3 years according to the paper’s findings with the effects strengthening over time.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)