Today’s letter revolves more around future growth given the end of an eventful year. We feature a piece that cleverly suggests for an acceleration in the US economy in 2020. From another article, we find a plausible argument that the frequency of recessions has reduced, partially attributed to more effective monetary policy. Perhaps the term ‘cycle’ may no longer be appropriate to explain the dynamics of an economy.
From a market’s perspective, we look at how this business cycle unpredictability translates into difficulties in predicting the stock market. We also feature an article which explains how the cash pile of PE firms work differently from other investment vehicles.
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(total reading time: 5 mins)
2019 has been a busy year so far. We’ve published 119 Hive Exclusives and so, alongside our usual Top Picks from around the web, we thought we’d highlight five of our own most popular pieces to round out the holiday season. Here they are, in no particular order:
Fed’s Challenge To Administer Liquidity Into Year-End And Beyond (George Goncalves)
Oil’s Existential Crisis? (Virendra Chauhan)
The Macro Hive 10 Grey Swans For 2020 (Bilal Hafeez)
China’s True Growth Could Be Half What You Think (Dominique Dwor-Frecaut)
Central Banks Could Trigger a Crisis Unless THEY Get Fiscal (Juliette Declercq)
Now onto our Top Picks. Today’s letter revolves more around future growth given we’re at the end of an eventful year. We feature a piece that cleverly suggests an acceleration in the US economy in 2020. From another article, we find a plausible argument that the frequency of recessions has reduced, partially attributed to more effective monetary policy. Perhaps the term ‘cycle’ may no longer be appropriate to explain the dynamics of an economy.
From a market perspective, we look at how this business cycle unpredictability translates into difficulties in predicting the stock market. We also feature an article that explains how the cash pile of PE firms works differently from other investment vehicles.
On another note, we released an end-of-year letter yesterday sharing Macro Hive’s journey so far and celebrating the community that our members, our contributors, and our team have built. We’re excited to continue this journey into 2020 and hope you’ll join us.
Happy Holidays!
Bilal
Why It’s Tough to Make Stock Market Predictions (Econ Life, 2 min read) The article argues that the stock market fluctuations echo the business cycle and that it is impossible to predict the business cycle in a timely manner (e.g., NBER confirmed the 2007-2009 recession in 2010). Both notable economists John Maynard Keynes and Irving Fisher’s investment strategy based on the business cycle failed because it was impossible to forecast the trajectory of the economy. [Bearish momentum, timing the market]
Putting Private Equity Dry Powder Into Perspective (A Wealth of Common Sense, 4 min read) This article highlights how PE firms’ cash pile works differently from other investment vehicles. This cash pile is not invested in the money market nor held in an account of PE firms. In fact, it resides in the portfolios of the investors (i.e., endowment, pension funds, soverign wealth funds). This, in effect, hammers their ability to exploit cheaper valuation during downturns. [Bearish PE]
The Business Cycle Is Dying (Econ Lib, 4 min read) The frequency of recessions has reduced. This could be attributed to monetary policy becoming more effective. It is further argued that if the US avoids recession in few next years, the term ‘cycle’ will no longer be appropriate to explain the dynamics of the economy. [Bullish US]
Negative Nominal Interest Rates Can Worsen Liquidity Traps (Kansas City Fed, 22 min read) Andrew Glover, a senior economist at the Federal Reserve Bank of Kansas City, finds that negative interest rates (NIRP) would likely deepen a recession in a liquidity trap (self-fulfilling pessimism about aggregate demand). Regardless of whether NIRP cuts are large or small, it is always contractionary for the economy.
Tackling Inequality from the Middle (Project Syndicate, 4 min read) The increased scarcity of stable jobs is a convincing argument for policy makers to start looking at inequalities. But the fundamental question has received relatively little attention: what type of inequality should these measures tackle? Public agendas on inequalities were historically shaped by either taxing the rich or providing direct help to those at the bottom, however economists now rightly seem to put more weight on reinvigorating the economy’s capacity to generate good jobs.
Europe’s Green Deal (Project Syndicate, 4 min read) ‘Europe’s Green Deal’ is the first comprehensive plan to achieve sustainable development and forms a global benchmark for the transformation of the economy into one that is prosperous, socially inclusive, and environmentally sustainable economy; and all with a citizen-based approach. For the deal to be effective, three challenges must be addressed: first, overcoming status quo interests; second, financing R&D, infrastructure, etc.; and lastly, diplomacy. [Neutral Euro area, Bullish ESG]
The European Green Deal Needs A Reformed Fiscal Framework (Bruegel, 4 min read) For green policies to work, EU companies and citizens will need a stable fiscal framework that will allow rising costs of green transition to be offset by favorable treatments. Even if the current clause already allows for deviation from MTO to finance such initiatives, the whole system still needs several more refinements to reach its maturity stage.
Will The US Economy Accelerate In 2020? (Capital Spectator, 4 min read) A series of forecasts and graphical illustrations arguing that the recent downshift in the economic growth of the US will stabilize by early 2020 (with acceleration in output and consumption). Note that industrial production will continue to remain weak. [Bullish US Equities excluding Industrials, Bullish US Growth]
Is Growth Moral? (Democracy – A Journal of Ideas, 12 min read) In modernizing America, where wealth had become the ‘conventional basis of esteem’, American economist Thorstein Veblen saw that it was the rich who determined ‘what scheme of life the community shall accept as decent or honorific’. In this piece, Stuart Whatley provides an overview of Veblen’s views and contrasts his theory with a selection of other prize winning ones. He also covers the intersection between society’s net benefits and individual net gains. An excellent read.
Is the Fall of Unemployment Good? (Econ Lib, 4 min read) You could argue that the reduction of unemployment in the US might have been driven by an increase in the number of individuals necessary to produce the same or lower GDP per capita (meaning there was a fall in productivity or a fall in consumption expenditures per capita). This piece argues that this is not the case. In fact, Trump policies such as the reduction of tax rates and easier regulation have lowered unemployment. [Bullish US Growth]
Economic Growth Is the Answer (Project Syndicate, 5 min read) Rising inequality has led to political extremism (on both the left and right). One way to alleviate this is by tackling the sluggish economic growth; this will improve living standards among all groups and, it is argued, improve the redistribution of wealth. In turn, this will reduce political extremism.
Banks Do Not Create Money Out of Thin Air (Vox EU, 5 min read) It’s a widely held view that banks create money at will, but this article asserts that money creation stems from the assets of both parties in a transaction. For example, when using a credit card, the assets stem from the individual using the bank card, which are the individual’s future payments. The private bank in return must hold healthy assets and the local currency reserves issued by the central bank in order to be trusted. If there are doubts about either of these things, it will lead to a run on the banks. [Bullish banking sector]
Winning The Race: China’s Auto Market Shifts Gears (McKinsey, 4 min read) A concise strategy framework applicable for auto markets in general but focusing on China. To maintain their relevance, market players need to adapt to four redefining trends of the industry: autonomous driving, connected vehicles, electric vehicles, and shared mobility. China’s highly fragmented model based on dealership networks needs to transition to an online sales system, like Tesla, NIO, and Mercedes. [Bearish China auto sector short term, Bullish long term]