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

Bilal’s Top Picks: Voters Ignore Growth / Why Low Productivity / China Reduces Outflows

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(total reading time: 7 mins)

New research shows that voters are paying less attention to the business cycle, US Presidential hopeful Warren’s advisor explains why he wants to tax the super-rich and how debt-fuelled public spending may crowd out small businesses. Meanwhile, former Greek finance minister Yanis Varoufakis gives his odds on new ECB President Largarde succeeding (you can guess his answer).

On markets, yet more 2020 outlooks – most are bullish with the usual caveats of trade war escalation.  There’s been a flurry of articles trying to explain why productivity is low. For some it is related to low regional mobility, for others it is low real rates. Then some are looking at mismeasurement issues.

On China, we find that Huawei’s international sales are growing – just not in the US. Plus there appears to be some attempts by Chinese authorities to stem outflows.



More 2020 outlooks. Most are bullish on risk with the usual caveats of trade war escalation. Some are even suggesting assets to buy if a recession materialises.

There’s Always a Bear Market Somewhere (A Wealth of Common Sense, 4 min read) Three areas of the market that have been left behind during the current bull market:  energy stocks (ticker: XLE) have fallen 13% versus the overall S&P gain of 200%, precious metals & mining stocks, VGPMX is down 50% and value stocks. Excluding the tech bubble, valuations of value strategy are at their cheapest levels ever. [Bullish energy, value and precious metal/mining]

What to Watch in 2020 (Advisor Perspectives, 5 min read) Lazard analysts expect slow growth, but no recession. Their base case view is to expect the US 10-year yield to be in a 1.25%−2.25% range, though 2.25% could be breached if the US-China trade situation is resolved.  US and Europe ex-UK stocks are expensive to trend, while rest of the world is around trend. [Bullish global equity, bearish US and EU, neutral UK]

Investing in an Economic Downturn (Advisor Perspectives, 5 min Read) Investing in real estate debt investments may be a lucrative way to invest during contractionary periods. These funds locate distressed real estate assets that are in the process of getting foreclosed but which have strong ARVs (After Repair Value), allowing the buyer to benefit from a tremendous upside once the management and economic conditions are improved. [Bullish distressed real estate]

The Safety Premium of Safe Assets (San Francisco Fed, 21 Pages) Fed academic research tried to find out whether safe-haven assets have a premium for their safety or for their liquidity. Using Swiss Confederate bonds which are extremely safe but not particularly liquid, they find such assets have a significant safety premium. Therefore, safe-haven premiums are not just due to liquidity. [Bullish safe haven assets]

Already, people are tempering expectations around Lagarde’s new run as ECB President. While others lament the anemic levels of inflation around the world.

The Limits of Lagarde | by Yanis Varoufakis (Project Syndicate, 5 min read) Varoufakis argues that for every euro that Draghi’s ECB printed to buy Italian public debt, it created two euros to buy German public debt. There was no economic rationale for buying bunds. Was Draghi remiss? Of course not. He laboured within absurd political constraints imposed by institutions. Lagarde will face the same. [Bearish Eurozone]

Quantitative Easing and Exuberance In Stock Markets: Evidence From The Euro Area (De Nederlandsche Bank, 23 pages) Controlling for other improving macro conditions, this study demonstrates that QE programmes coincide with exuberant investor behaviour which tends to persist the longer the QE programmes run. The central bank argues that macro prudential measures should be used to address these risks. [Bearish Euro equities and credit]

Inflation Trends in Asia: Implications For Central Banks (ECB, 27 Pages) This paper estimates trend inflation for the 12 largest Asian economies between 1995 and 2018 and benchmarks the trends to current inflation figures They find that most of the decline in inflation in the region is explained by lower trend inflation rather than transitory shocks. [Bullish Asian bonds]

Inflation Remains in a Coma in Major Economies, Frustrating Central Bankers (Dr. ED’s Blog, 4 min read) Edward Yardeni believes Inflation is currently hibernating globally in major advanced economies. Powerful forces of aging demographics, technological disruption and large debt are responsible for this deflationary trend. Ultra low-interest rate is failing to re-ignite inflation and is driving stocks higher. [Bullish G7 bonds]

There’s no hiding from the perception of growing inequality. Clamping down on the super-rich and more public spending are some of the proposed remedies. But at least with the latter, many are question their efficacy if fuelled by higher debt.

How to Tax the Super Rich (Project Syndicate, 30 min podcast) Emanuel Saez, one of the architects behind Elizabeth Warren’s “Ultra-Millionaire Tax” plan sits down with Project Syndicate in this podcast to elucidate why a wealth tax may be key to solving some of the issues with inequality facing the US today.

Public Debt and Private Investment (VOX CEPR, 6 min read) Public debt doubled from $35 trillion in 2007 to $70 trillion by 2018. 70% to 102% of GDP in advanced economies and from 35% to 50% of GDP in developing economies. Massive increases in public debt has a crowding-out effect for firms looking to expand via debt financing. The ones hardest hit are credit-constrained, small unlisted firms. [Bearish SME]

Fiscal Policy Cannot Save The ECB (VOX CEPR, 7 min read) The problems of low inflation and negative interest rates cannot be addressed by expansionary fiscal policy, which provides temporary salves at best and which cannot be implemented on a scale large enough to make any real dent on the issues. [Bullish bunds]

How Long Will US Foreign Net Income Dark Matter Continue?(ECONOSPEAK, 2 min read) Despite the mounting foreign debt, the US still has a positive capital flow. Data suggests that US-owned assets abroad are earning far higher rates of return than what foreigners are earning from their assets in the US. This has for quite a long time been labelled the “dark matter” phenomenon. The question arises: how long can this odd situation continue? [Bullish US dollar]

There’s a wave of articles trying to explain why productivity is low. For some it is related to low mobility, for others it is low real rates. Then some are looking at mismeasurement issues.

Fast Locations and Slowing Labor Mobility (Philadelphia Fed, 45 Pages) This study posits that home attachment is to blame for the declining rates of internal migration within the United States, suggesting that fewer people are willing to relocate for a job that would take them outside their preferred home destination. [Bearish productivity, bearish stocks]

The Circular Relationship Between Productivity Growth and Real Interest Rates (VOX CEPR, 5 min Read) The prevalence of low real interest rates allows for a weak productive companies and projects to continue to exist and remain moderately profitable. The fall in real interest rates since the ‘90s explains why we’ve seen decelerating productivity over that time range. [Bearish stocks]

Are We Under Measuring Productivity Gains from The Internet? Part II (Marginal Revolution, 2 min read) Productivity growth in the US is much lower than historical standards. New research argues that this is NOT due to mis-measuring tech innovation. [Bearish stocks, bullish bonds]

Does Recession Risk Rise as The Expansion Ages? (The Capital Spectator, 4 min read) Econometric evidence and the analysis of experts argues that economic expansion is not duration dependent. For example, the US is growing for 125 months, does not mean the likelihood of a downturn has increased. [Bullish equities]

Voters are paying less attention to the business cycle and many politicians aren’t following the scripted path of earlier leaders.

How the Economy Affects Our Vote (econlife, 2 min read) Recent paper that analyses voting patterns in the US and Europe shows that voters are influenced by more than Inflation, GDP and unemployment. The variables that hold more sway over voters’ behaviour are automation, globalization and housing prices. [Bullish populism]

Macron Alone (Project Syndicate, 4 min read) Macron’s recent Russia-centric actions may risk alienating him from his core pro-EU allies, specifically Germany, which favour a more measured and restrained approach to diplomacy rather than Macron’s off-the-cuff style.

Crunching the numbers, oil may not impact the dollar as much as people think. There’s growing scepticism around ESG and what’s the best US indicator to look at?

Oil Prices, Exchange Rates and Interest Rates (Dallas Fed, 32 Pages) This study attempts to disentangle oil prices, US interest rates, and the value of the dollar in an attempt to clarify the simultaneous relationships interlinking them. Essentially finds less than 10% of the variability of the dollar is due to oil prices.

Regression to Trend: Another Look at Long-Term Market Performance (Advisor Perspectives, 4 min read) A regression trendline of the S&P Composite Index indicates that current equity prices are 125% above their long-term trend. The last time this happened was in 2000 when the index overshot by 137%. Mean reversion implies that the current strong equity figures can’t sustain for too much longer. [Bearish US Equity]

When Can We Stop Talking about ESG? (CFA Blogs, 3 min read) ESG analysis may be a redundant part of standard investment valuation because many of the ideas driving it are already incorporated in the long-term strategies of successful non ESG businesses. Further, many corporate executives resist ESG discussions and find them to be overly focused on moral concerns, which is causing ESG proponents to rethink their messaging. [Bearish ESG]

The Most Important & Overlooked Economic Number (Advisor Perspectives, 5 min Read) The Chicago Fed National Activity Index is a forward-looking metric that forecasts economic conditions in the coming months, with specific focus to production, employment, personal consumption, and inventory levels. The index currently forecasts weaker employment numbers and increasing layoffs in the next few months. [Bearish US]

China’s growth inevitably meant that HK would suffer, perhaps current protests reflect that. Meanwhile, China is making headway outside of the US in tech sales, while internally China is clamping down on outflows.

How China’s Rise Has Forced Hong Kong’s Decline (NY Books, 5 min Read) In light of the protests in Hong Kong, an argument is put forward that China’s explosive growth over the past few decades has shifted attention and resources from Hong Kong to mainland China, explaining part of the city’s woes. [Bearish HK, Bullish China]

Huawei Chips Away at US ‘Security’ Ban (Asia Times, 3 min Read) Chinese smartphone giant Huawei shows no sign of slowing down in the months following the Trump ban. They recently signed 65 new commercial deals, nearly half of which are with European customers, in a bid to increase participation in 5G infrastructure projects. [Bullish Huawei]

US Dollar Transfers Cut Back by Chinese Bank as Beijing Steps Up Scrutiny of Capital Outflows (South China Morning Post, 3 min read) Beijing has tightened rules on overseas transfers by individuals in recent years to ensure control of capital outflows. China Merchants Bank announced the entire “Overseas Remittance Programme” will be shut down by the end of the month before reversing its position amidst customer protests. The bank’s public reason was to upgrade the system, but many suspect this to be regulatory pressure influenced by the trade war.  [Bullish CNY]