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By Bilal Hafeez 26-11-2019
In: post | Newsletter

Bilal’s Top Picks: Risks for 2020 / China’s Trade Deficit / When Protests Turn to Revolutions

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(total reading time: 6 mins)

For some reason, this week has seen a flurry of bearish views being published. Some are citing a drop in temporary hiring as a factor – others declining corporate credit lending. Then there are likes of Nouriel Roubini who sees risks like a China slowdown, Middle East conflict and trade tensions as clouds in 2020. One enterprising author has even classified the bears into six different categories including “Armageddonists”, the “perma-bears” and “overdramatic financial reporters”.

Elsewhere, we find out when social protests turn into revolutions, whether wealth inequality will narrow and when China’s trade balance will turn into deficit.



Many are calling for weak markets in 2020, including Nouriel Robini. But there’s now names for such bears from Armageddonists to perma-bears. There are some who bullish too who cite higher US wages as a factor. One view that is becoming more common is that the dollar will weaken.

Two Reasons US Equities May Keep Climbing into 2020 (Franklin Templeton) Cites two factors to support further US equity upside. First, higher wage growth will boost consumer spending. Second, US corporates will benefit from a rebound in global growth (40% of profits for multi-national companies comes from overseas) [Bullish US stocks]

Why Financial Markets’ New Exuberance Is Irrational (Project Syndicate) Nouriel Roubini lists nine bearish factors for 2020. These include weak Chinese growth, the risk of a hard Brexit and trouble in the Middle East. [Bearish equities, bullish bonds]

Dollar to Come Under Growing Pressure (Variant Perception) Cites 3 reasons for dollar weakness: foreign central banks to ease less than the Fed, foreign investors buying fewer US assets and investors are already long USD (vs DM FX) [Bearish USD]

The 5 Types of Market Crash Predictions (A Wealth of Common Sense) Fun piece that categorises people who call market crashes. Meet the “Armageddonists,” the perma-bear market crash callers, the overdramatic financial reporters, political market crash callers and marketers who feel smarter by calling for a market crash.

There’s still a raging debate as to whether QE has inflated asset prices or whether policymakers should care about international developments. This week, we have pieces arguing ‘no’ in both cases.

A Tale of Two Financial Cycles: Domestic and Global (Bank of International Settlement) Big macro thinker Claudio Borio distinguishes between a domestic cycle (local fundamentals-driven, mainly affects property and credit ) and a global cycle (US monetary policy-driven, affects cross-border equity and bonds flows). He believes policymakers should focus on the domestic cycle, not the global cycle. [Bearish bonds]

Are Central Banks Manipulating Asset Prices? (Marginal Revolution) Argues that QE has driven asset prices – the average annual return of the Vanguard Total World Index is 8.9% on average over the period of QE which is in line with the 35-year average. [Bullish equities]

Notes from an Inter-planetary Monetary Anthropologist (Moneyness) JP Koning fantasies a planet “Zed” with a religious craze of setting a minimum interest rate of 2%  on deposits. With the planet’s economy slowing down, its inhabitants enter a debate to justify the need (or need not) for a lower interest rate.

Consumption, Credit, and the Missing Young (Boston Fed) The US now has a record number of young adults without sufficient credit history since the “CARD” Act was introduced in 2009. This portion of the population could drag down consumption growth on a state level. [Bearish US growth]

It’s clear wealth inequality is a big issue and new research suggests it could get worse. Yet some policies like rent control could make it worse, while others like putting workers on company boards could actually make a difference.

Heterogeneity and Persistence in Returns to Wealth (Equitable Growth) Using micro data from Norway to show that the wealthy actually earn higher returns in similar asset classes than the less wealthy. This perpetuates wealth inequality. [Wealth taxes are coming]

Who Benefits from Rent Control? Evidence from San Francisco (Microeconomic Insights) Stanford University study finds that rent-control policy actually contributes to even more unaffordable housing.

Ownership and Productivity (Stumbling and Mumbling) Argues that UK Labour Party’s proposal to reform corporate governance – by putting workers on boards – may actually increase the UK’s overall productivity as a country.

Germany’s Energy Transition at a Crossroads (Mckinsey) Despite Germany’s transition toward a low-carbon energy system, it will still miss most of its energy-transition targets for 2020.

More negative economic trends are coming to the surface. Credit growth appears to be faltering, temporary hires are declining and trade restrictions are on the up.

Slouching Towards a Producer-led Recession? (Seeking Alpha) The often ignored US Senior Loan Officer Survey is showing contracting demand for commercial loans in Q3. Typically such dynamics are seen before recessions. [Bearish equities]

A Yellow Flag from Temporary Hiring (Angry Bear) Temporary hiring in the US is now showing a 7% y/y decline as of November. Only in 2007-2008 have we seen a worse number. This could be a harbinger of negative payrolls. [Bearish equities]

Does Intergenerational Mobility Increase Corporate Profits? (Fed Working Papers) Fed finds that companies based in areas with high intergenerational mobility move up and tend to see greater profitability. This likely reflects greater equality of opportunity.

Trade Restrictions Among G20 Economies Remain at Historic Highs (WTO) Latest WTO report for G20 economies finds that from mid-May to mid-October 2019 new import-restrictive measures covering USD 460.4 billion worth of traded goods were introduced. This represents a 37% surge over the previous period. [Bearish global companies]

The hype around social media caused right-wing populism could be overstated. Meanwhile, the lefts big plans for healthcare spending could lead to less military spending. And ever wondered when protests turn into revolutions?

Why Elizabeth Warren’s Foreign Policy Worries America’s Allies (The Atlantic) It appears that Warren’s “Medicare for All” campaign will come at the expense of defense spending. This move is making foreign allies nervous.

Do Social Media Drive the Rise in Right-wing Populism? (Marginal Revolution) A recent research shows that in France, the UK and the US, increased use of social media did not contribute to the increase in popularity of right-wing candidates. [Bullish social media]

We Live in a World of Upheaval. So Why aren’t Today’s Protests Leading to Revolutions? (The Conversation) History professor Peter McPhee concludes six key characteristics for social movements to become revolutions. The major unrests we see in 2019 don’t check all the boxes as it’s hard for all parties involved to remain united around their core objectives.

In the topsy-turvy world of negative rates, there are likely to be many unintended consequences. One is that IT systems may not actually be able to process negative rates. Bank regulation may also have negative effects too. For example, new research has found that stress tests have led to lower lending than would otherwise be the case.

Negative Interest Rates Threaten to Choke Bank IT Systems (itnews) Negative interest rates can strangle banks’ IT systems. Australia’s and New Zealand’s top banks confess they are struggling to make their transactional and mortgage systems cope with a switch to negative interest rates. [Bearish bonds]

Correlations, Value Factor Returns, and Growth Options (SSRN) Finds that looking at implied correlations could improve the profitability of value-based trading strategies. [Bullish value factor]

The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets (Fed Working Papers) Fed finds that banks reduced their credit supply because of the stress tests. Also, finds that lending to emerging markets would have been higher had the US not introduced stress tests for their banks. [Bearish EM]

China cannot escape its structural drags. Policymakers are trying to mitigate the impact of an aging population. China will soon become a trade deficit country, which has implications for global bonds. And we can’t forget the festering issue of HK unrest which could end up restricting Chinese access to foreign capital.

Why Has China’s Trade Surplus (Just About) Gone Away? (Conversable economist) Timothy Taylor reviews IMF forecasts that China will run small trade deficits rather than surpluses in coming years. The three compelling factors for this are a services deficit (partly due to tourism), greater domestic consumption and an incomes deficit on net foreign assets. [Bearish US bonds]

China’s Desire to Control Hong Kong Will Not End Well – for China, Hong Kong or the Rest of the World (George Magnus) Hong Kong is China’s bridgehead to the international capital market and vice versa. A further deterioration in the Hong Kong situation may lead to financial sanctions against China, which could backfire. [Bearish HK, bearish China]

China Unveils Plan for Tackling Population Aging (Xinhua net) Chinese government has unveiled a medium- and long-term framework for tackling China’s aging population by 2022. Measures include reforming income distribution, steadily raising pension reserves, and increasing medical and nursing care for the elderly. [Bullish Chinese Health Care]