Bilal's Top Picks

Welcome to our newly designed Top Picks tool. Every week, we sift through a mountain of content out there for you across blogs, academic papers, think tank reports, news articles and macro platforms, to bring you a refined lens on what matters most. You can filter for category, search by time period or even search by keyword to discover great content. Please note that all filters and searches work in conjunction with each other, and that you may reset the tool by clicking on ‘CLEAR ALL SEARCHES’.

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May 19, 2020 - Spillover effects of ESG implementation, and how ESG will replace shareholder primacy

The Unintended Consequences of ESG Activism (Forbes, 6 min read) One of the largest asset managers is divesting from fossil fuel stocks from their active funds to adhere to ESG criteria. Due to their sheer size, this could significantly impact stock price and hence harm their own investors within their passive funds. Since a lot of these investors are pension funds, this poses a market risk and violates social responsibility.

COVID-19 and ESG: Prepare for the New Normal (Advisor Perspectives, 3 min read) Firms that solely focused on shareholder value were exposed during the pandemic. After this crisis, a firm’s ‘preparedness’ for the next crisis would be evaluated on their ESG practices and goals.

May 19, 2020 - Bullish Chinese equities, and how China is mobilising fiscal resources

Three reasons to like Chinese stocks (BlackRock, 4 min read) First, Chinese equities are exceptionally profitable, ranking highly on the return-on-invested-capital (ROIC) minus the weighted-average cost-of-capital (WACC) metric. Second, Chinese equity has cheaper valuation – 11x FY1 earnings for (Shanghai exchange). Third, its first-in-first-out (FIFO) virus exposure means that it is “the only place in the world where manufacturing surveys are positive”.

China’s Finance Minister Signals Rise in Deficit Cap (YicaiGlobal, 3 min read) China fiscal deficit to GDP ceiling appears to have increased from 3% to 3.5% this year. China is also expected to issue CNY1 tn ($140 bn) in corona bonds.

May 19, 2020 - Macroeconomic eﬀects of ‘sudden stop’ episodes, and using investors’ psychology to predict asset return

Modelling the Global Effects of the COVID-19 Sudden Stop in Capital Flows (N.Y. Fed, 9 min read) Unusually fast outﬂows of dollar funding from emerging market economies (EMEs) leads to a contraction in their output, and local currency depreciation adversely impacts private-sector balance sheets with dollar debts. The ﬁnancial stresses in EMEs, in turn, can also spill back to the US economy, through both trade and ﬁnancial channels, and US GDP can fall up to 1.5%.

Prospect Theory and Stock Market Anomalies(NBER, 35-page read) A popular behavioural economic model can be used to predict 22 stock market anomalies ranging from value stock outperformance to post-earnings announcement drift and momentum effect.

May 19, 2020 - A case for how COVID-19 may ignite a food crisis, and how India’s Modi is moving away from China

Preventing a COVID-19 Food Crisis (Project Syndicate, 6 min read) It requires global policy coordination. Food-producing countries have resorted to food protectionism (export bans and quotas). This, accompanied by global stockpiling and shortages of animal feed, fertilisers, and pesticides (due to supply chain disruption), may drastically raise food prices and cause shortages. Mostly developing, but even some of the developed countries, are vulnerable to these food crises, which can cause social unrest and exacerbate income inequality.

Modi ramps up plan to reduce India’s dependence on China with new ‘self-reliant’ campaign (South China Morning Post, 7 min read) Modi is pushing a case for import substitution away from China and towards domestic production. Critics believe it is a political manoeuvre (a revival of the old ‘make in India campaign’) and that India neither has the fiscal space nor infrastructure to implement this successfully.

May 19, 2020 - How non-oil commodity shocks are more detrimental, and a case for automation tax

Commodity Price Uncertainty as a Leading Indicator of Economic Activity (Essex Finance Centre, 23-page read) Uncertainty shocks in agricultural, energy and metals markets have a more long-lasting dampening effect on U.S. economic activity and its components when compared to the effect of oil price uncertainty shocks. Non-oil commodity shocks are also less likely to be used within central bank information set when making predictions on future economic activity.

Which jobs are most at risk because of COVID-19? (BROOKINGS, 6 min read) “COVID-19 induced labour market pain is disproportionately borne by young, poorly educated and poorly paid workers, and by regions that are already less well-off and characterised by a greater prevalence of temporary contracts. Through its employment effects, the lockdown is bound to increase inequality.”

Does the US Tax Code Favour Automation?(NBER, 43-page read) US taxes labour heavily and favours capital significantly. While labour is taxed at an effective rate between 25.5% and 33.5%, capital faces an effective tax rate of about 5% (down from 10% in the 2010s and 20% in the 1990s and early 2000s). Reducing labour taxes or combining lower capital taxes with automation taxes can increase US employment to an optimal level.

May 19, 2020 - Inequality in global fiscal space, and how the FED is engaging in fiscal policy

Messages from “Fiscal Space” (Project Syndicate, 7 min read) “[Differences] in fiscal responses across countries can be explained by longstanding systemic inequalities in the global economy, in which developing countries must borrow in internationally accepted reserve currencies. As a result, they simply do not have the fiscal freedom enjoyed by countries that issue such currencies. That is why a new issue of the IMF reserve asset, Special Drawing Rights, has become such an urgent priority”.

Fed Is Doing Quasi-Fiscal Operations by Buying ETFs (Sounding Line, 2 min read) Mohamed El-Erian believes that via Special Purpose Vehicles, the Fed, who are now buying ETFs with credit default risk, have distorted the lines between monetary policy and fiscal action. They are potentially violating the 1913 Federal Act and creating dislocations in the markets.

Inequality Everywhere You Look (Wealth of Common Sense, 5 min read) The divide between rich and poor is broadening in all walks of life. Mega-cap companies like Disney raised $11bn on ultra-low levels of interest (1.7% to 3.8%), whereas SMEs have no funding at all. The bottom 25% of the income percentile are four times more likely to get the coronavirus relative to the wealthiest 25%. 85% of capital in the stock market belongs to just 10% of the population.

May 19, 2020 - A scenario under which COVID-19 maybe inflationary, and how the US is suffering from the ‘Japan Syndrome’

The 2020 US private saving boom: An unexpected result of COVID-19 (PIIE, 7 min read) Federal cash transfer during the crisis is projected to push the US net private saving rate to its highest since WWII. But that could mean that as restrictions on business and personal activities are relaxed in the coming months, aggregate demand will accelerate economic recovery and cause a temporary uptick in inflation.

Why Siegel Is Wrong About End Of Bond Bull Market (Advisor Perspective, 10 min read) Jeremy Siegel of Wharton, who sees rates rising in the US, is mistaken. The US is suffering from ‘Japan Syndrome’ (liquidity trap), where the current level of interest rate is “fairly valued” and represents the fundamentals of the economy (sluggish growth, low inflation, and low demand for capital).

Negative monetary policy rates and systemic banks’ risk-taking: evidence from the euro area securities register (ECB, 21-page read) Negative monetary policy rates in the euro area induce systemic banks to reach-for-yield as they do not pass negative rates to retail customers; they, in turn, invest more in risky securities and take higher risk in loans. The effects are stronger for less capitalised banks.

May 19, 2020 - How Bitcoin may be the new Oil, and why BlackRock is bullish TIPS

Bitcoin Is “Right Where Oil Was in 1890” (Advisor Perspective, 4 min read) The recent “halving” of bitcoin (a decrease in circulation and issuance of new Bitcoins) will limit supplies. Its demand is like oil in the 19^th century: no one knew its value before the emergence of automobiles. So in the future, more innovation and new application of cryptocurrency could cause a surge in demand.

Current opportunities in the TIPS market (BlackRock, 6 min read) According to BlackRock, the TIPS market is attractive for the following reasons: (i) “Liquidity deterioration has made the TIPS index cheaper”, (ii) the front end of the curve has overpriced disinflation, (iii) “TIPS provide targeted exposure to the expected real interest rate”. And without negative rates, nominals have less price appreciation potential relative to real rates.

Dud stock picks, bad industry bets, vast underperformance — it’s the end of the Warren Buffett era (Market Watch, 6 min read) From 9 March 2009, the last bear market low, through to 19 February 2020, Berkshire trailed popular S&P 500 index ETFs by more than 100 percentage points. So far in 2020, Berkshire stock has lost nearly 25%, significantly worse than peers.

May 12, 2020 - Tech outperformance on ESG metrics, and which stocks are being excluded from a popular ESG index

Some Big Names Added, Dropped from a Popular ESG Index (ETF Trends, 2 min read) The S&P 500 ESG Index is one of the strictest ESG benchmarks. And it has dropped the following names: Clorox, Twitter, Equifax, Ford Motor Company, ViacomCBS, Nordstrom, Southwest Airlines and Walmart. On the other hand, Costco, Facebook and Wells Fargo were added back due to improvements in their ESG scores.

Why Tech Funds Score Highly on Sustainability (City Wire, 4 min read) The best ESG rated funds are tech overweight. The tech sector in general battles with privacy and data issues; however, this remains less of a concern relative to the structural viability and systematic risks that other sectors face. For example, the whole energy sector could collapse if the government imposes strict climate change regulation.

May 12, 2020 - China-Russia relationship during the crisis, and why renminbi won’t challenge the dollar

The Dollar-Renminbi Conundrum (OMFIF, 3 min read) Renminbi won’t replace dollar anytime soon. The volatility caused by it will be detrimental for China. China is gradually liberalising and opening up to the world, and renminbi as an anchor right now would be impractical.

China and Russia Must Work Together to Defeat Covid-19, Xi Jinping Tells Vladimir Putin (South China Morning Post, 5 min read) Russia is standing firmly with China amid escalating political tension with the West over the handling and origins of the virus.

May 12, 2020 - Quantifying macro risk factors for currencies, and how the trade war impacted investments in the US

The Effect of the U.S.-China Trade War on US Investment (NBER, 31-page read) US-China tariff movements between 2018 and 2019 will reduce the investment growth of listed US companies by 1.9pp by the end of 2020 primarily via the stock market channel. Lower stock market returns lower the return to capital and, as a result, the investment rate.

Attention to the tail(s): global financial conditions and exchange rate risks (ECB, 20 pages) Currency portfolios classified on the basis of macro risk factors (i.e. current account balance) had a higher likelihood of substantial losses in response to a tightening of global financial conditions (rising interest rate).

May 12, 2020 - How coronavirus will affect Turkey in the long run, and George Soros’ take on the pandemic

The Crisis of a Lifetime (Project Syndicate, 11 min read) George Soros believes President Xi Jinping’s power in China will decline due to the handling of the crisis. He is also sceptical on the EU’s survival. He proposes that the EU should issue Consols (perpetual bonds) since that was successful historically and it would sidestep the legal issue currently posed at the ECB (due to the German court ruling).

Navigating Deglobalization (Project Syndicate, 6 min read) Mohamed A. El-Erian is confident that gradual de-globalization is on the cards. He believes the main drivers are national security interests (having access to strategically necessary inputs without relying on other countries) and the US-China blame game worsening the overall geopolitical landscape. His advice? Focus on minimizing the disruption rather than fighting against de-globalization.

The coronavirus has led to more authoritarianism for Turkey(Brookings, 8 min read) Like many countries, COVID forced Turkey to face a dilemma: save the economy or save lives. Since Turkey is subject to authoritarian governance, it’s recovery will be slow, with long-term damage inflicted on its institutions, democracy, the rule of law, and economic development.

May 12, 2020 - The shape of the US recovery, and how COVID 19 hinders labour reallocation

The Cost of the Covid-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending (NBER, 19 page read) A survey with a sample size of 10,000 finds that households residing in countries that imposed lockdown sooner expect the unemployment rate to be 13pp higher over the coming year, with the impact still felt up to five years from now. These participants were also inclined to close positions of foreign equities and have liquid savings.

COVID-19 is also a Reallocation Shock (NBER, 27 page read) 42% of all recent layoffs will be permanent. Current unemployment benefits offered (in cases exceeding prior worker earnings), policies to subsidise employee retention, occupational licensing restrictions, and regulatory barriers will all hinder the economy’s return to its original capacity.

What is the Shape of This Cycle as a Letter: V, L, W, J, U, or Maybe a Lazy J or Wiggly W? (Angry Bear, 5 min read) If there is a second wave of cases, recovery in the US could follow a “Wiggly W”, where, unlike the neat W, the downturn is asymmetric, and the upturn is much slower. But the most likely scenario is a “Lazy J” where there is a sharp downturn but (unlike the shape J) the recovery is prolonged (a bit like a Nike Swoosh).

May 12, 2020 - How debt is detrimental for economic growth, and how social distancing may be unfeasible for poorer countries

Growth in the shadow of COVID-19 debt (VOXEU, 9 min read) A spike in the debt-to-GDP ratios leads to a sharp contraction in GDP growth (for both developing and developed economies). The massive fiscal expenditure seen during COVID could therefore come at a cost: lower growth in the medium run.

Brazil’s Pandemic is Just Beginning (The Atlantic, 7 min read) Brazil could become the next epicentre for COVID as fatalities quickly increase thanks to a weak public health system and crowded neighbourhoods. This could exacerbate current income inequality, poverty, and potentially cause an economic breakdown (since Brazil was recovering from a recession pre-COVID).

The value of social distancing is not equally distributed (VOXEU, 9 min read) Lockdown is less feasible in poorer countries. It is estimated that the advantages of social distancing and suppression policies are different across countries. Countries with younger demographics are less susceptible to the disease and less eager to trade-off economic wellbeing for risk reduction.

May 12, 2020 - A contrarian view on the airline industry, and PIMCO’s outlook for Fixed Income

Why Buffett Was Wrong to Dump Airlines (Advisor Perspectives, 3 min read) Historically, air travel has proved resilient to external shocks ranging from the Oil Crisis to 9/11 and SARS. The number of daily US commercial air passenger has also begun to recover slowly from its lows as the lockdown eases (we are past the bottom). Q1 of 2020 also saw record inflows into airline stocks from value investors.

Low-Interest Rates and the Outlook for Fixed Income (PIMCO, 3 min watch) PIMCO Group CIO Dan Ivascyn believes that in the short run interest rates will remain low and range-bound. He thinks there are attractive opportunities in the corporate segment (both public and private markets) where there are attractive yields and higher total returns.

The 5 Types of Investors in This Market (A Wealth of Common Sense, 4 min read) A combination of the following investors are driving the current sentiment; i) Tech, long only, ii) Non-participants in the market (due to the disconnect between the market and the economy) iii) Long only investors, iv) Tail risk strategies and stocks that are benefiting from lockdowns (Peloton, Zoom, Slack, Netflix), v) Those uncertain about portfolio allocation.

May 12, 2020 - A case on how the current decline in real yields is toxic for the economy, and how current CB action is not a helicopter drop

Helicopters to the Rescue? (Money and Banking, 8 min read) Euro area and US central bankers are not resorting to helicopter money. Policymakers have retained monetary control and are still independent (they decide what, when, and how much to buy).

The Decline and Fall of Real Yields… Again (The Capital Spectator, 5 min read) Inflation-adjusted interest rates in the US have been negative before (i.e. in 1970). But this time the situation is complicated by a global economic collapse with a lot of uncertainty. The most significant risk posed by negative real rates is deflation which, accompanied by rising debt level, is ‘toxic.’

May 05, 2020 - Avoiding a W, and the spectre of stagflatiton

How to Avoid a W-Shaped Recession (Mostly Economics, 7 min read) History lessons from the previous crisis. 1918 Spanish flu shows relaxing social distancing too early led to a devastating second wave. President Roosevelt’s administration in 1936, pleased with recovery from depression, introduced austerity. This caused the economy to contract into another recession in 1937. To avoid a W-shaped recession, remove public health measures and/or economic stimulus slowly.

Welcome to the World of Stagflation (OMFIF, 3 min read) The column argues that we will face 1970s style cost-push inflation due to massive debt levels. Policymakers will face a dilemma: reduce inflation by allowing higher unemployment, or let inflation run higher but save jobs and reduce the cost of debt. The author believes the latter would prevail.

Labor Demand in the Time of COVID-19: Evidence from Vacancy Postings and UI Claims (NBER, 15-page read) Job vacancies in the US have crumpled (in the latter half of the March) and are now 30% fewer than at the start of the year. The collapse in the job market has affected all US states, irrespective of the intensity of the virus spread or the timing of the lockdown. However, essential retail and nursing jobs are significantly sought after.

May 05, 2020 - Explaining asymmetric fiscal multipliers

When a Pandemic Collides With a Leveraged Global Economy: The Perilous Side of Main Street (VoxEU, 18 min read) To ensure the CARES program delivers as promised, it should target businesses at risk of limited financing from the private market. The government should also alleviate the moral hazard that stems from bailing out highly levered corporates.

Why Are Fiscal Multipliers Asymmetric? The Role of Credit Constraints(McManus, Ozkan, Trzeciakiewicz, 33-page read) This study finds fiscal effectiveness can vary across the business cycle. Higher spending and lower taxes are more productive during an economic downturn compared with during an expansion.

May 05, 2020 - Not all ESG funds are green

How Chinese Asset Managers are Leveraging ESG to Gain Alpha (The Asset, 4 min read) Chinese ESG-focused stocks have outperformed their peers from June 2013 to June 2019 and now also during the pandemic. Their ability to generate excess returns and reduce tail risk has meant that the leading Chinese asset managers are now increasingly applying ESG research and frameworks to pick stocks.

ESG Funds Can Have a Net Negative Impact, Report Claims (City Wire, 3 min read) ESG funds do not always have a positive impact on society. For example, one popular ESG fund omits 10% of companies with the lowest ESG scores but still has an investment in oil and the alcoholic beverage sector, which negatively impact society.

May 05, 2020 - The COVID crisis, and the changing face of politics

The Fascist Politics of the Pandemic (Project Syndicate, 7 min read) Political leaders of some of the largest democracies in the world, namely the USA, India and Brazil are using the pandemic to impose their political beliefs and ideology further. Whether it’s maltreatment of ethnic minorities in India or a ban on immigrants in the USA, an uncanny resemblance to fascism is emerging.

The Populists’ Pandemic (Project Syndicate, 7 min read) Populists could gain politically from the pandemic if the crisis worsens, leading to greater distrust in democratic institutions. However, if society is able to navigate this crisis successfully it would restore confidence in political establishment and institutions.

May 05, 2020 - BIS on FX swaps during COVID, and Stiglitz on the doom loop

Dollar Funding Costs During the Covid-19 Crisis Through the Lens of the FX Swap Market (BIS, 6-page read) Dollar funding cost in the FX market has increased during Covid-19. Reasons are twofold: increasing demand (hedging needs of firms and asset managers to pay back dollar-denominated obligations); and reduction in supply (financial intermediaries find it risky to lend). However, the cost has narrowed after central banks set up swap lines.

Optimal Bailouts and the Doom Loop with a Financial Network (NBER, 31-page read) Joseph Stiglitz, Agostino Capponi and Felix C. Corell examine interbank network structures and banks’ exposure to domestic government debt. They find that rescuing banks is an optimal strategy if they have sizeable sovereign exposure and are vital within the network even if this requires a larger bailout package.

May 05, 2020 - The disappearing trade surplus

Why China Isn’t Sending Money to Everyone (Andrew Batson’s Blog, 5 min read) The worst of the crisis is over in China, unlike in the West. China has practised fiscal conservatism since on per capita basis its budgetary space is still limited. It can also be argued that it tends to prioritize production over consumption due the prevalence of socialism.

China’s Vanishing Trade Surplus (Milken Review, 13 min read) China’s trade surplus is trending lower and could potentially turn into a deficit in the future. This is because demand is transitioning towards domestic consumption and demographics are ageing rapidly (saving rate will decline which will, in turn, have significant repercussions for the US to run a budget deficit at low-interest rates).

May 05, 2020 - Lane on the latest ECB stimulus, and Rogoff on the case for deely negative rates

The Monetary Policy Response to the Pandemic Emergency (ECB Blog, 12 min read) ECB executive board member Phillip Lane writes that the ECB estimates a contraction of GDP between 5 and 12% this year. To boost demand and protect the productive capacity of the economy, they deemed further easing of the interest rate on TLTRO III (from June 2020 to June 2021) to be essential.

The Case for Deeply Negative Interest Rates (Project Syndicate, 6 min read) Kenneth Rogoff argues this would prevent defaults (with less need of debt structuring, too), increase aggregate demand, lower unemployment, and help EMs with their current economic distress stemming from capital flight. He believes significant measures would have to be taken first to ensure no cash hoarding, which in effect prevents the policy transmitting smoothly.

International Spillovers of Quantitative Easing (VoxEU, 7 min read) QE policy in an advanced economy can transmit internationally. In the short term, QE can reduce the competitiveness of other economies via exchange rate adjustment; but in the long run, it can stabilize and boost an economy via demand channel.

May 05, 2020 - Krugman on why stocks are not the economy, and earning forecasts during COVID

Crashing Economy, Rising Stocks: What’s Going On? (NY Times, 4 min read) NYT columnist Paul Krugman believes there is no disconnect between the stock market and the economy. It is the lack of viable alternatives available to investors, primarily due to a weak economy, that has driven stocks higher.

Why Value Died (A Wealth of Common Sense, 5 min read) Japanese and European stocks have performed poorly not because of low rates but because they are weighted towards value stocks, and value stocks underperform when inflation is low (and vice versa). US stocks have overperformed in a low interest rate environment because they are geared towards growth.

Earnings Expectations in the COVID Crisis (MIT, 16-page read) Downward analyst revisions in earning growth can explain a large portion of the recent decrease in stock prices.

April 28, 2020 - How employee welfare is now taking centre stage of ESG criteria, and how is ESG attracting more flows amid a broader sell-off

COVID-19 Shines Spotlight on Employee Welfare as ESG Issue (Karma Impact, 3 min read) Before the coronavirus outbreak, climate change dangers had prompted an upsurge of interest in ESG. Now, investors are pressuring companies to ensure that social responsibility and the proper treatment and safety of employees are priorities.

European ESG Funds Attract €30bn Amid Wider Sell-off (City Wire, 3 min read) Europe’s sustainable funds showed resilience during the Covid-19 downturn, with €30bn of inflows recorded over Q1 2020, while the wider European funds universe shed €148bn.

ESG Performing Positively: MSCI (Financial Standard, 5 min read) MSCI compared four global MSCI ESG indexes to their parent indexes during the COVID-19 sell-off. The four selected indexes outperformed the parent index in Q1 2020, with the SRI index showing the most substantial outperformance. However, it noted some underperformance in EM countries (ESG Universal and SRI Indexes).

April 28, 2020 - U-shaped recovery in China, and how China’s CBDC could be a game-changer

Macro Outlook 2Q2020: No Swift Recovery as Demand Remains Weak (Macro Polo, 11 min read) Weak consumer demand, liquidity shortage in the private sector, and export drops will weigh on Q2 growth, with the recovery resembling more a ‘U’ than a ‘V’. Beijing is likely to take more time to consider a medium-term strategy for making growth more sustainable; consequently it has been more conservative on stimulus in the short-run (as that may be a waste of ammunition).

The End of the US-China Relationship (Project Syndicate, 7 min read) Both are trapped in a blame game with no easy escape. The relationship ending could lead to adverse economic and geopolitical consequences. Both economies are deeply codependent. China will lose its largest source of foreign demand and the US a significant supplier of low-cost goods. Politically, the fight for global power may usher us in a new cold war.

Peking University Professor Says Launch of China’s Central Bank Digital Currency Will Be History-Defining Event (China Banking News, 3 min read) Launching the CBDC will help China transition to a cashless society. Compared to paper cash, digital cash can reduce transaction costs and the usage costs of enterprises and residents in other countries. This will promote the internationalisation of the renminbi.

April 28, 2020 - The role of Skewness in factor investing, and how individual transaction-level data can be used in tracking consumer behaviour during COVID-19

Low‐Risk Anomalies? (The Journal of Finance, 42-page read) This paper shows that low‐risk anomalies in the CAPM and traditional factor models arise when investors require compensation for co-skewness risk. It also confirms that the returns of beta‐ and volatility‐sorted portfolios are primarily driven by a single principal component, which in turn is explained mainly by skewness.

Crisis Dashboard: Big Data Helps Paint the Big Picture (Advisor Perspectives, 4 min read) A crisis dashboard that includes signals from three areas: public health, households/consumers and financial markets. It was constructed by using big data from traditional sources (e.g. earnings growth and GDP) and non-traditional sources (e.g. Google Trends and Glassdoor). In essence, the current state does not signal any improvement.

Tracking the COVID-19 Crisis Through the Lens of 1.4 Billion Transactions (VOXEU, 11 min read) Individual transaction-level data can be used to map real-time tracking of economic consumer behaviour in response to the COVID-19 lockdown measures. The authors find evidence sizeable anticipatory spending (stockpiling) and a positive relationship between the prevalence of the pandemic and the degree of economic collapse in Spain.

April 28, 2020 - After Covid, international cooperation or anti-globalisation? And what will happen if Kim Jong-un dies?

Few States Are Prepared To Switch To Voting By Mail. That Could Make For A Messy Election (FiveThirtyEight, 12 min read) Mail voting is one solution to conducting the US election safely amid COVID. But switching to mail voting may be hard for most states: it will be expensive, drain states resources, and create logistical problems and legal challenges.

The International Order After COVID-19 (Project Syndicate, 7 min read) The COVID crisis could either deepen international cooperation (i.e. faster the treatment is created via shared knowledge, the quicker the pandemic will be defeated) or create anti-globalist nativism (i.e. open borders create vulnerabilities to viruses). Whichever narrative prevails will have far-reaching consequences for the future of world governance.

What If Kim Jong Un Dies? (Defense One, 3 min read) U.S.-North Korea relations won’t change should Kim Jong-un die. North Korea will not surrender its nuclear deterrents even in a post-Kim world. Further, new leadership – just like the old – will still be dependent on China for political cover, trade, and supply chains.

April 28, 2020 - How forecasting recession is a hit and miss exercise, and how a V-shaped recovery followed the 1918 pandemic

Forecasting Recoveries is Difficult: Evidence from Past Recessions (VoxEu, 6 min read) Forecasters have little ability to predict whether a recession will end in a rebound or continue for another year.

What Happened to the US Economy During the 1918 Influenza Pandemic? A View Through High-Frequency Data (Chicago FED, 34-page read) The 1918 pandemic caused a mild recession from which the economy rebounded quickly (V-shaped). Output was affected mainly through a negative labour supply shock, demand picked up quickly, and there was little damage done to the balance sheets of both the nonfinancial and financial sector.

April 28, 2020 - Why coronavirus will exacerbate existing inequalities in the US, and how capital flows can lead to income inequality in EM

5 Lessons from the Coronavirus About Inequality in America (The Conversation, 5 min read) Only 12% of workers with a high school degree can work from home, 40% of Americans cannot cover a $400 emergency expense, and a large portion of low-income communities have no health insurance. Coronavirus will exacerbate existing inequalities in the US and lessons learned will help solve it.

CAPITAL CONTROLS AND INCOME INEQUALITY (FRBSF, 32-page read) Increases in EM private capital inflows raise income inequality, while rising outflows reduce inequality. However, in the long run, liberalisation of either inflows or outflows reduces inequality.

BIG G (NBER, 31-page read) New research into the fiscal transmission mechanism (assuming some particulars about government spending) finds fiscal shocks hardly impact inflation, there is little crowding out of private expenditure, and the multiplier is much larger (factor of four) than previously thought.

April 28, 2020 - How central banks have lost their independence, and why inflation can make a comeback

What Role Does the Housing Market Play for the Transmission Mechanism? (DIVA, 23-page read) A study modelling Sweden’s economy finds that interest rates have both a direct effect on housing prices and an indirect impact through the bank lending channel. Over time, the importance of the interest rate channel has been stable. However, the role of the bank lending channel has increased. On aggregate, this implies interest rate sensitivity has increased.

End of Myth of ‘Independent’ Central Banks (OMFIF, 3 min read) The Fed and other central banks of leading advanced countries have been working closely with finance ministries on joint monetary and fiscal packages, their main aim being to offset the enormous hit on incomes and output from the shutdowns. If they are collaborating and serving the same state – are central banks really independent? Sir John Redwood thinks not.

High Inflation is Unlikely But Not impossible in Advanced Economies (PIIE, 6 min read) Inflation return has a low probability (3%) but should not be dismissed. Fiscal dominance of monetary policy, a large increase in the debt-to-GDP ratio, and the possibility of an increase in the neutral rate of interest can all bring back inflation.

April 28, 2020 - How Bitcoin is not a safe haven like gold, and making sense of the recent stock market rally

Grandpa, Grandpa, tell Me the One About Bitcoin Being a Haven: Evidence from the COVID-19 Pandemics (Arxiv, 7-page read) A study using quantile correlations of Bitcoin against S&P500 and VIX – and comparing the currency with gold as a safe-haven asset. It finds that Bitcoin fails to function adequately as a tradition safe haven like gold.

Effects of MiFID II on Stock Price Formation (Arxiv, 26-page read) This paper compares the properties of European stocks before and after the introduction of MiFID II – turns out regulation has made stock prices more efficient.

Making Sense of a Stock Market That Doesn’t Make Any Sense (Wealth of Common Sense, 4 min read) The stock market showed substantial gains through both world wars, which were possibly the most uncertain of times. We could see new all-time highs even as the economy is experiencing the worst of the current crisis. That’s simply because economic data is backwards-looking, and the stock market is forward-looking.

April 21, 2020 - How unawareness is stopping sustainable investing and ESG outperformance.

EU picks BlackRock to advise on ESG integration for banking (1 min read, Financial Advisor) The advisory role of the firm might create a backlash, given that it is considered as one of the worst asset managers at climate engagement.

Investors Know Little About ESG Investing, and FAs Aren’t Helping (1 min read, Financial Advisor) Among investors who don’t engage in sustainable investing, 47% say a major factor is that they don’t know enough about it. But when presented with an explanation of sustainable investing, 52% of U.S. investors became interested.

ESG Ratings Could Predict Outperformers (Morning Star, 4 min read) S&P 500 plunged 26.9% between February 19 and March 26, companies with a high Fidelity ESG rating (those rated A or B) outperformed. while those measured C to E endured more significant falls relative to the S&P.

April 21, 2020 - How space can provide useful hints and what is the forecast for the 2020 Presidential election

Monitoring the COVID-19 Crisis From Space (Sloan Review, 8 min read) Studies show light emissions can successfully quantify local economic activity, local levels of income, and electricity usage. These methods in real-time can track changes in economic activity, monitor conflicts and natural disasters. Impact of COVID on China was noticeable from Jan onwards with these methods even before official lockdown.

Treasury Market Liquidity During the COVID-19 Crisis (Liberty Street Economics, 8 min read) A column compares how market liquidity of Treasury securities in March 2020 with the past fifteen years, (including 2007-09 financial crisis). Current Bid-Ask Spreads were at their widest, order book depth was comparable to 2007-2009 period, price volatility was also higher and so was trading volume.

What the Index of Leading Indicators Tells Us About the 2020 Presidential Election (Angry bear, 2 min read) A column applies econometric to predict 2020 election. In all of the recent head-to-head match-ups with Joe Biden, Trump trails. Current Index of leading Indicators stands at -6.7% – this favours Biden.

April 21, 2020 - Political crisis by the end of 2020 and how growth in trade reduces the probability of conflicts

Preparing for the Crisis After the Crisis (ASPI, 6 min read) China is using the virus to position itself strategically by claiming that authoritarianism did a better job in beating the virus than Western democracy.This comes after its aggressive military positioning around Taiwan. There is a potential regional security risk brewing, which can lead to a global political crisis by year-end or early in 2021.

The Grim Truth About the “Swedish Model (Project Syndicate, 6 min read) Those inspired by the Swedish model of low-scale lockdown should understand that it comes with a higher death toll per capita basis (136 deaths/million people relative to 49 in Germany).

Atlantic Trade and the Decline of Conflict in Europe(VOX EU, 4 min read) This column examines the relationship between Atlantic trade and war in Europe between 1640 and 1896 (a period in which intra-European conflict decreased dramatically). It finds that the growth in Atlantic trade lowered the probability of intra-European conflict by 15%.

April 21, 2020 - Global labour market in grim condition

Labor Markets During the COVID-19 Crisis: A Preliminary View (NBER, 6-page read) Study finds job loss has been significantly more substantial than implied by new unemployment claims with around 20 million lost jobs by April 6 (far more than jobs lost over the entire Great Recession). Second, many of those losing jobs are not actively looking to find new ones. Third, participation in the labour force has declined by 7% relative to the 3% cumulative decline that occurred from 2008 to 2016.

Japan’s Job Security Put to the Test (OMFIF, 3 min read) It is estimated that if the 30% decline in sales continues for more than six months, there will be no difference in the fall in cash reserves between global and Japanese companies. This could threaten the country’s corporate culture which usually protects workers from layoffs.

How Do We Think the COVID-19 Crisis Will Affect Our Careers (If Any Remain)? (IZA Institute of Labour Economics, 15-page read) Survey of Belgian employees reveal 21% of them fear losing their jobs due to the crisis—14% are concerned that they will even lose their jobs soon. Also, 26% expect to miss out on promotions. This fear of a negative impact is higher in vulnerable groups, such migrants.

April 21, 2020 - Three ways on how Fiscal Policy can help tackle coronavirus recession and how there is inequality even in illness

The Three Ways Fiscal Policy Can be Used to Fight COVID-19 and the Coronavirus Recession (Washington Center for Equitable Growth, 5 min read) First, it can give the right incentives to firms, as well as funding for federal agencies, to produce tests, explore drugs, and develop vaccines. Second, disaster relief—aiding the people and businesses affected by the economic shutdown. Third, it can support help support aggregate demand.

The Coronavirus Pandemic Highlights the Importance of Disaggregating U.S. Data by Race and Ethnicity (Washington Center for Equitable Growth, 4 min read) Policymakers should pay special attention to how race and poverty creates disparities. The outcome of economic crisis, illness, and death affect some community more than the other, and current data doesn’t not adequately captures that.

April 21, 2020 - No full-fledged defaults and how interest rates will remain lower for longer

WHAT CDS MARKETS ARE DISCOUNTING (Variant Perception, 1 min read) CDS pricing could be reflecting the expectation that central banks will ultimately monetise recent fiscal stimulus. Hence, CDS pricing demonstrates the probability of a traditional credit event occurring (failure to redeem or pay coupons, debt restructuring ) rather than a full default.

Post‑Pandemic Interest Rates: Lower for Longer (Advisor Perspectives, 5 min read) A combination of a large private sector saving glut and implicit or explicit nominal yield curve control by central banks will keep interest rates lower even after the pandemic is over. The history of pandemics, interest rates over the past seven centuries and previous recessions all support this thesis.

Understanding Helicopter Money(MPRA, 7-page read) Article emphasis that helicopter money should be directed to affected firms to be more effective. This type of monetary policy should be avoided in normal times, but it might yield beneficial results in the current state of the European economy to stabilize unemployment rates in short-run.

Central Banks Can “Magically” Prevent Disinflation (Econ Lib, 6 min read) Article highlights how inflation in 2021 and 2022 is also likely to be weak and stand below 2%. Primarily due to the supply shock. NGDP level targeting or price level targeting (along a positive 2% trend line) should be adopted by the Fed to avoid deflation within the economy.

April 14, 2020 - Why companies will fail to fulfill their ESG goals and how ESG funds got lucky

Putting the Me in ESG (Politico, 2 min read) As we head deeper into the pandemic, companies will not be able to keep up with their ESG goals (primarily environmental commitments). Companies may ditch their sustainable investment plan altogether or reallocate capital for these strategies due to liquidity concerns and reduced profitability.

How Sustainable Investing Really Did in This Bear Market (24/7 Wall ST, 4 min read) ESG outperformance is due to luck. The exclusion of the oil sector and tilt towards the large-cap and value stocks helped generate better returns. But over the last ten years, these factors have underperformed. There is no free lunch, can funds be both highly rated in sustainability rankings and outperform the market consistently going into the future?

April 14, 2020 - Tesla gains momentum in China and Chinese space data shows weaker recovery

China Issues Coupons to Stimulate Consumption (China Daily, 2 min read) Fifty cities have issued coupons with a cumulative value ranging from millions to hundreds of millions of yuan via WeChat and Alipay platforms. Over 80% of coupons are related to the catering industry, and 42.5% are related to the tourism industry.

Tesla’s China Shipments Surge as Shanghai Plant Ramps Up (CX TECH, 1 min read) Wholesale shipments by Tesla climbed to 10,160 units in China last month, more than doubling February figure. Suggesting, Tesla has been gaining momentum at the new Shanghai facility, its first vehicle-assembly plant outside the U.S.

The View From Space: China Hasn’t Started to Rebound (Barrons, 5 min read) Alternative data from space such as pollution, infrared data across supply and night light from the city – shows deep, ongoing contraction in business activity. Raising doubts about optimism and accuracy of recent PMI data.

April 14, 2020 - Bullish S&P and how US senators are bad stock pickers

62% of SP 500 Market Cap Might Have Better Earnings Than You Think (Fundamentalis, 7 min read) Some of the most substantial market cap sectors, technology (25% of SP 500), healthcare (15%), financials (11%), and communication services (11%), are poised to experience less adverse EPS growth due to their fundamentals or nature of their industry.

My New Theory About Future Stock Market Returns (Wealth of Common Sense, 5 min read) Markets have become macro inefficient due to repetitive Fed’s interventions to smooth market crashes. This has made the stock market (artificially) safer and valuations to rise over time. Creating a potential trade-off – the magnitude of future crises will be lower, but the frequency will be higher

The Emerging Emerging-Markets Crisis (Advisor Perspective, 8 min read) Investors have ignored the vulnerabilities faced by emerging market (EM) countries; synchronized global slowdown, EM debt risk, falling reserves, capital flight risk and COVID cases rising in EM. Proof of investor complacency is visible in the largest emerging markets bond exchange-traded fund. Currently, this ETF yields 5%, similar to the beginning of the year.

Relief Rally: Senators As Feckless As the Rest of Us at Stock Picking(NBER, 14-page read) The study examines the stock trading behavior and returns of U.S. Senators from 2012 to 2020. Stocks purchased by senators on average underperform stocks in the same industry and size (market cap) categories by 11 basis points, 28 basis points, and 17 basis points at the 1, 3, and 6-month time horizons.

April 14, 2020 - Economist criticism of epidemiologist and why pandemic trilemma doesn’t exist in reality

A New Indicator of Bank Funding Cost (BIS, 24-page read)Rollover risk is usually measured by the spot IBOR-OIS spread, to estimate expected funding stress- forward IBOR-OIS spreads (FFS) can be constructed. FFS are better predictors of economic and banking activity than alternative spreads on rollover risk and credit risk.

Navigating the Pandemic Trilemma (Project Syndicate, 6 min read) Pandemic has revealed a trilemma: it is impossible to have a medically healthy society, a healthy economy, and a healthy democracy at the same time. In the real world (unlike theory), these trade-offs are not absolute; rather negotiable. For example, widespread testing and contact tracing entails a partial loss of privacy but would be acceptable to save lives.

What Does this Economist Think of Epidemiologists? (Marginal Revolution,4 min read) Epidemiologists fail to account for: long-run elasticities of adjustment ( in the long run you learn which methods of social distance protect you the most), public choice considerations (policy moves from impatient politicians), Lucas critique (agents within a model, knowing the model, will change their behavior) and selection bias (early models were calibrated from Italy data hence more pessimistic).

April 14, 2020 - Economist criticism of epidemiologist and why pandemic trilemma doesn’t exist in reality

April 14, 2020 - Why 2020 US elections will be Polarised and rise Pandenomics

The COVID-19 Blame Game Is Going To Get Uglier (FiveThirtyEight, 7 min read) The 2020 election will be the COVID-19 election. Voters are polarized on how President Trump’s handled the pandemic. Not only the US Health care system and the economy will be tested, but its democracy too.

Pandenomics – Policymaking in a Post-pandemic World (VoxEu, 6 min read) Divisive nationalism, increased risk aversion and the need to build resilience will weigh on economic growth years ahead. But resilience will also call for accelerated use of digital technology and harnessing societal pressure which will present opportunities for smarter and more far-sighted governments.

Fresh Tests for ECB after Easter Accord (OMFIF, 4 min read) Pressure on Italian bonds may intensify the take-up of the ECB’s emergency €750bn bond-buying facility. This could become increasingly targeted on Italian purchases, leading to political and legal controversy ahead of the next EU leaders’ meeting on 23 April.

April 14, 2020 - Why US consumption will squeeze and what is depression?

What Coronavirus Means for the Global Economy(TED, 53 min listen)Ray Dalio discuss in Ted Connects that the current crisis is worse than 2008 and is similar to that of the 1930s. He thinks the economy will take longer than a typical recession to recover due to the current levels of debt (not the virus ) and will require years of financial restructuring, economic reconfiguration and human innovation for the economy to get back on trend growth.

Back-of-the-envelope Estimates of Next Quarter’s US Unemployment Rate (VoxEU, 6 min read) By combining different types of statistics on industry and occupation composition. The study finds that over 52 million people could be unemployed in the US, with a 32.1% unemployment rate 2Q of 2020.

The Coronavirus Pandemic and US Consumption (VoxEU, 20 min read) In the US, consumption is less volatile than income. But this column argues, it is now likely to fall even more than household income. Reasons include: negative shock originates from consumption itself, jump in income insecurity as the unemployment rate rises, fall in asset prices and a contraction in credit availability. It estimates consumer spending in 2Q could fall by 20%, for every 16% fall in household income.

The Human-Capital Costs of the Crisis (Project Syndicate, 6 min read) Unlike natural disasters, the pandemic causes no damage to physical capital stock (economy’s productive capacity). But firm-specific skills of labor loses value when the firm that uses them goes bankrupt. This loss of human capital is why productivity, wages, and economic growth are likely to be affected for years to come.

What is a Recession? What is Depression? (CalculatedRisk, 2 min read) Depression is a prolonged slump with a 10% or more decline in real GDP. The market can only expect a depression if the economic slump in Q2 is prolonged years ahead without recovery. If we try to open the economy too soon without the proper preparedness (testing, masks, guidance) – then the economic damage will be more prolonged.

April 14, 2020 - The case against austerity but for higher taxes and debt

Beware of Austerity Demands Once the Immediate Crisis Passes (The American Prospect, 5 min read) Cutting spending to address the rising deficit and debt concerns will fail. Taxes are the best way to reverse this. The failure to tax those at the top—not only due to the 2017 tax cuts but also due to decades of supply-side tax policies since the 1980s—has lowered federal revenue (as % of GDP) over time and contributed to income inequality.

Putting Swiss Public Debt to Good Use (VoxEU, 8 min read) Since the adoption of a debt brake rule in the late 1990s – Switzerland has taken less than optimal debt. More appealing options right now are moderate fiscal deficits (handle the challenges of health costs and aging population) and building sovereign wealth fund (deliver a source of revenue higher than the real yield on government debt).

5 Lessons from World War II for the Coronavirus Response (Vox, 12 min read) Most important lesson – policy should focus on relief now (as long as the crisis last) and stimulus later (till the economy rebounds). Centralizing government purchases of medical equipment, repurposing existing institutions availability of materials being constraint and crisis itself creates strong incentives for manufacturing firms to produce critical equipment are other lessons to learn.

April 14, 2020 - What policies can help EM and why inflation will make a comeback

The Making of Hawks and Doves (JME, 42-page read) Personal experiences of inflation influence the hawkish or dovish leanings of all members of FOMC since 1951. The resulting experience had a statistically significant impact on FOMC voting decisions, tone of their speeches and differences in their semi-annual inflation projections. Accounting for FOMC experiences yields better predictions of the fed funds rate.

Exchange Rate Policy in the COVID-19 Pandemic (PIIE, 9 min read) Economies with significant foreign-currency debt, sharp depreciation could be more inflationary than any benefit from greater exports (amid the crisis). Policies to help these economies include: providing access to central bank swap lines, increasing lending capacity, keeping markets open for exports from these countries and coordinated direct FX intervention by reserve-currency countries.

Even As We Dive Into Recession, Some Worry About The Return Of Inflation (David Smith Economics, 6 min read) Boost in money supply growth (monetary financing of government spending and QE), rapid post-crisis rebound in the economy and supply shortages (as international borders open only gradually) could be inflationary.

April 07, 2020 - FX reserves can benefit from green bonds and why ESG funds are outperforming.

Reserve management and sustainability: the case for green bonds? (BIS, 23-page read) BIS study finds sustainability objectives can be integrated into reserve management frameworks. Including green bonds within foreign exchange reserves, they found it improved reserves risk profile without sacrificing the return (due to diversification benefits).

April 07, 2020 - Lessons in Yield Management from 1940s and why CPI measures are biased.

How the Fed Managed the Treasury Yield Curve in the 1940s (Liberty Street Economics, 7 min read) Two key Lessons in Yield management from 1940 include; the shape of the yield curve cannot be fixed independently of the volatility of interest rates and debt management policies and, large-scale open market operations may be required, from time to time.

What drives inflation in advanced and emerging market economies? (BIS, 14-page read) Inflation expectations, output gaps, exchange rates, and oil prices impact inflation of individual economies differently. However, after the GFC, expected future inflation has become an important driver of inflation for both the advanced and emerging market economies.

The Responses of Consumption and Prices in Japan to the COVID-19 Crisis and the Tohoku Earthquake (JSPS, 14-page read) A study compares the responses of consumption and prices to the COVID-19 shock and the Tohoku earthquake in March 2011. The YoY CPI rose by 0.6% vs 2.2 percentage points in the wake of the earthquake. Consumer expected higher inflation after the earthquake, and lower in response to COVID 19. This difference in inflation expectations implies that the economic deterioration due to COVID-19 could be viewed as driven mainly by adverse aggregate demand rather than aggregate supply.

The True CPI Just Jumped (Econ Lib, 2 min read) There exist a CPI Bias. CPI calculation does not account for: a variety of available goods (loss of product variety due to shortages) and quality of goods (disruption of the international supply chain means using a substitute). During this crisis, CPI bias means that we fail to appreciate how much we’ve lost hence its effect is inflationary but may not be captured.

April 07, 2020 - Why money multipliers are now useless and how random sampling can tackle COVID-19

Multiplier misconceptions (Econlib, 4 min read) Money multiplier models taught in the textbook are not as useful as they change over time. Before 2008 the interest rate was controlled by adjusting the number of reserves. Today, it also includes adjusting the interest rate paid on reserves.

Data Needs for Shutdown Policy (VoxEU, 5 min) To decide when to ease lockdown would require calculation on how widespread the virus is. Current testing for the virus is focused on those showing severe symptoms or at high risk due to resource constraints. One potential solution – random testing of the population to identify the true infection rate.

Repo market and leverage ratio in the euro area ( Banca D’ ITALIA, 17-page read) New evidence on the effect of the leverage ratio (LR) on repo market activity in the euro area. Banks are found to exert market power towards non-bank financial institutions by applying lower rates and larger bid-ask spreads.LR is not a significant factor in the widening of bid-ask spreads. This evidence lessens the concern of additional LR reporting and disclosure requirements.

April 07, 2020 - COVID-19 may lead to self-sufficiency and deglobalization.

What Explains The Bump In Trump’s Approval Ratings? ( FiveThirtyEight, 4 min read) Heightened national unity triggers the rally around the flag effect. This short-term effect usually gets triggered during outbreaks of war, terrorist attack or natural disasters. Other major world leaders have experienced a much higher increase in their approval rating. The bigger question is whether Trump can sustain this higher rating?

The Coronavirus Pandemic Has Opened the Curtains on the World’s Next Economic Model (Naked Capitalism, 10 min read) The US’ inability to produce basic medical gear amid pandemic revealed a strategic vulnerability of being dependent on multinational supply chains. The new economic era will be dominated by countries who are self-integrated. Recent advances in technology such as AI computing, Automated Manufacturing, nanotechnology and highspeed data transfer will quicken this transition

Stretching the international order to its breaking point (Brookings, 14 min read) COVID-19 is the fourth major geopolitical shock in as many. In each of the previous three, analysts and leaders underestimated the long-term impact on their society and world politics. A crisis will make the government focus on the national economy and lead to de-globalization.

April 07, 2020 - Alternative Business Cycle and how 34% of jobs can be done from home.

How Many Jobs Can be Done at Home? (NBER, 5-page read) COVID-19 has raised this question. The study finds that 34% of all US Jobs can realistically be done from home.

The Impact of COVID-19 on Gender Equality (NBER, 26-page read) The study finds that current social distancing measures will have a large impact on sectors with high female employment shares, such as schools and daycare centers. After the immediate crisis, there are drivers which may promote gender equality in the labor market. For example, the adaptation of flexible work arrangements’

Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period (St Loius Fed, 7 mins) St Louis Fed President James Bullard argues for a “National Pandemic Adjustment Period” (NPAP) as an alternative to the traditional business cycle during the pandemic, as a focal point for many policymakers and Americans to understand the current situation.

The macroeconomic spillover effects of the pandemic on the global economy (BIS, 8 Page read) BIS study finds that the reduction of GDP due to lockdown is likely to drag on over several quarters. The total GDP shortfall could be as much as twice that was initially thought due confinement measure. Risks of uncoordinated confinements lead to repeated virus outbreaks and spillover across the globe could drag growth further.

April 07, 2020 - Savings of rich fuels government spending and why huge fiscal deficits is and isn’t a bad idea.

The Macroeconomic Implications of the CARES Act (Ed Dolan’s Econ Blog, 7 min read) US debt to GDP ratio could accelerate to 170% in the coming years. However, as the interest rate on the national debt remains lower than the growth rate of GDP, the ratio of debt to GDP will have a finite ceiling (default or hyperinflation scenario is avoided as debt wouldn’t explode). Provisions like loans to small businesses will mitigate supply-side constraints.

“Whatever it takes.” Getting into the specifics of fiscal policy to fight COVID-19 (Peterson Institute for International Economics, 7 min read) Olivier Blanchard argues that roles for fiscal policy in the COVID-19 crisis are crucial for; fighting infection disaster relief and supporting aggregate demand. He believes even if the fiscal deficit for advanced economies rises by 30% – the low-interest rate would make welfare cost for future generations small. However, the Emerging market wouldn’t have this fiscal liberty and would require grants.

The Saving Glut Of The Rich And The Rise In Household Debt (NBER, 47-page read) The study finds saving glut of the rich has been linked to a large accumulation of debt by the non-rich (household debt). Since the Great Recession, the saving glut of the rich has also been significant in financing government deficits.

March 31, 2020 - Coronavirus to boost ESG mandates

Sustainable’ funds a safer harbor in coronavirus market meltdown (Financial Post, 2 min read) Investors who were overweight ESG performed better than their non-ESG peers. In cases, the top 50 most overweighed stocks by ESG funds had outperformed the most underweighted by more than 10%. Some of this outperformance is due to the aversion of sectors that score less on ESG metrics including airline and oil stocks. Coronavirus Will Trigger ‘Skyward Surge’ in ESG (Markets Media, 3 min read) Increased awareness of the need to protect all stakeholders due to the coronavirus should accelerate the shift towards ESG and see funds continue to outperform. Sustainable’ funds a safer harbor in coronavirus market meltdown (Financial Post, 2 min read) Investors who were overweight ESG performed better than their non-ESG peers. In cases, the top 50 most overweighed stocks by ESG funds had outperformed the most underweighted by more than 10%. Some of this outperformance is due to the aversion of sectors that score less on ESG metrics including airline and oil stocks.

March 31, 2020 - How to increase IMF resources and stress in the non-bank sector

The IMF Will Need More Resources to Fight the COVID-19 Pandemic (Peterson Institute for International Economics, 5 min read) As only half of the IMF’s $1.2trn is available for lending the fund must mobilise resources through either; asking members to increase bilateral lending, expanding central bank swap lines with some IMF role in triggering their use, using repos to put country holdings of foreign government debt to use or the IMF issuing $500bn in SDR.

A Cost-effective Way to Help Emerging Markets Fight COVID-19 (FT, 3 min read) An IMF-funded scheme to guarantee fx-denominated debt service in EM (ex China) is needed to counteract looming BoP crises given unprecedented capital outflows from EM, collapsing commodity prices and the economic disruption triggered by quarantines.

Non-banks Failing Coronavirus Stress Test (OMFIF, 3 min read) Regulators must reassess the risks from leverage in the non-bank financial sector and its interconnectedness with the wider economy to determine why the Fed has had to resort to its GFC crisis toolkit despite a more robust banking system.

March 31, 2020 - How Sunak will dominate in Johnson’s absence and why US states should preparing now for postal voting

Boris Johnson’s Coronavirus Diagnosis: What History Teaches Us About Prime Ministers and Illness (The Conversation, 3 min read) Boris Johnson is not the first British PM to continue with his duties despite illness, in his case the coronavirus, and the UK’s parliamentary system means that Dominic Raab, the first secretary of state is the next in line. But in reality Chancellor Rishi Sunak will dominate over Raab.

This Isn’t The First Time America Has Weathered A Crisis In An Election Year (FiveThirtyEight, 7 min read) Past US elections have been disrupted by disease (in particular the Spanish flu in 1918), war and natural disaster with turnout lower than normal. States should start preparing legal and logistical challenges now to ensure more people can vote by mail.

March 31, 2020 - The case for non-pharma interventions and some projections for US unemployment

Fight the Pandemic, Save the Economy: Lessons from the 1918 Flu (Liberty Street Economics, 6 min read) Areas implementing early and extensive non-pharmaceutical interventions during the Spanish flu saw no medium-term economic damage from the pandemic. By contrast, areas badly hit saw a large and persistent decline in activity.

Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate (St Louis Fed, 4 min read) US unemployment could hit 32% (or almost 53mn) by the end of Q2 based on assumptions using data on the number of workers in jobs which are in close proximity to others and on those in jobs deemed to be at high risk.

This Time Truly Is Different (Project Syndicate, 4 min read) The current health crisis is likely to have a bigger economic impact than the global financial crisis and could yet have systemic consequences. Both corporate and EM sovereign balance sheets are weaker than in 2008 and Fed rate cuts are not helping to ease financial conditions in EM given risk aversion and collapsing in oil prices.

Europe’s COVID-19 Crisis and the Fund’s Response (IMF, 3 min read) Most of the nine non-EU emerging economies of CEE have sought IMF help as limited access to capital markets, underdeveloped local markets and less developed banking systems makes it difficult to finance large increases in budget deficits.

March 31, 2020 - The case for YCC in the UK and ex-post fiscal targeting

COVID-19 Crisis: Fiscal Policy Should Lead and the Bank of England Should Follow for the Duration of the Crisis (VoxEU, 5 min read) With the UK’s conventional monetary policy space limited the BoE can support the government’s ‘whatever it takes’ pledge through Yield Curve Control or by temporary monetary financing of the deficit. Permanent money creation through a helicopter drop is another option.

A Proposal for Social Insurance During the Pandemic (Greg Mankiw, 2 min read) As targeted fiscal support takes time one solution is to provide everyone with monthly payments now and tax it later contingent on how much income has fallen. Where earnings don’t fall this will amount to a loan which will be fully repaid.

Sicken Thy Neighbor Trade Policy (Marginal Revolution, 2 min read) Export bans on health equipment are misguided as both the globalised production process means equipment relies on imported parts and such bans can lead to lower domestic production.

March 31, 2020 - The ESF backstop and why ECB action is not enough

Olli Rehn: Economic Effects of the Corona Crisis and Measures by the Central Banks (BIS, 10 min read) The ECB’s timely and targeted stimulus can help the European economy withstand the COVID-19 crisis, according to the Bank of Finland governor, but a coordinated European fiscal response is also vital for small open economies like Finland.

The Fed Has Announced Unlimited QE to Include Many Asset Classes (Credit Writedowns, 2 min read) The Fed is now “buyer of last resort” for all investment grade assets and with the Treasury, via the ESF, backstopping this lending the government and central bank are now acting together.

Did the Fed’s Term Auction Facility Work? (Liberty Street Economics, 3 min read) An old blog but nevertheless relevant as the Fed reactivates much of its crisis toolkit, but not yet the TAF. This facility was found to work as intended with the announcement of term loans triggering a decline in banks’ liquidity premium.

March 24, 2020 - ESG in the time of COVID-19

Can Companies Score ESG Points Under Pandemic Pressure? (Wealth Professional, 2 min read) Companies’ response to the coronavirus will be a key test of commitment to stakeholder value. Microsoft and Alphabet are scoring well by continuing to pay staff while several airlines are doing the opposite.

One Month in, Sustainable Funds Show They Can Handle a Bear Market (ESG Advisor, 4 min read) ESG funds have so far outperformed during the market sell off based on several different metrics. They are also the companies most likely to help us through the current crisis.

March 24, 2020 - Why current funding stress differs from 2008 and COVID’s impact on cash use

The COVID-19 Cash Out (Project Syndicate, 4 min read) The high likelihood of banknotes transmitting the coronavirus will push faster adoption of card payments, particularly in Asia which already has well developed cashless infrastructure. Cultural and technological factors have kept cash dependency higher in the West but COVID-19 could well change this.

USD Funding Stresses Rise But This Is Not Like 2008 (Variant Perception, 1 min read) A less leveraged, more highly capitalised and tighter regulated banking system leaves the financial system more robust than in 2008. Moreover, today’s funding pressures are concentrated in offshore USD markets.

March 24, 2020 - A roadmap for the G20 plus two centuries of large-scale official lending during crises

What the G20 Must Do (Project Syndicate, 4 min read) The G20 must step up with a coordinated fiscal effort, which could provide twice the impact of individual stimulus done in isolation, it should formally bring the WHO into its discussions, establish a fund to support WHO monitoring and research, lead by example and cancel all remaining in-person meetings scheduled for this year.

The Coronavirus Could Reshape Global Order (Foreign Affairs, 10 min read) China’s dominance in producing masks, respirators and other needed equipment combined with its decision to help countries such as Italy and Iran could shape foreign policy once the virus has been defeated. But the US could yet turnaround what has so far been an inadequate response, both domestically and globally.

Coping With Disasters: Lessons From Two Centuries of International Response (VoxEU, 6 min read) Data covering the past two centuries show that official lending generally spikes in times of crisis (war /natural disaster etc) with 1940-44 seeing 10% of US GDP extended annually, or $2trn in current terms. Large scale cross-border lending may therefore be a hallmark of COVID-19.

March 24, 2020 - A worst case scenario from COVID-19 and Frenkel on his recession call

Why Odds of a Coronavirus Recession Have Risen (The Harvard Gazette, 10 min read) Jeremy Frankel discusses his February (and at the time early) call for a rising likelihood of global recession. Lack of fiscal space in the US won’t help and the economy is likely to face parallels with the financial crisis and the 2001 terrorist attacks.

The Coronavirus and the Great Influenza Epidemic: Lessons from the “Spanish Flu” for the Coronavirus’ Potential Effects on Mortality and Economic Activity (American Enterprise Institute, 25 page read) A worst case scenario for COVID-19 based on the Spanish flu of 1918-1920 could mean some 2% of world population, or 150mn people, may lose their lives, economic contraction of around 6% and real returns on assets falling sharply.

The Coronavirus World Recession (George Magnus, 4 min read) The current economic contraction is a four-fold hit from; a wealth effect from the stock market declines, a demand shock from the quarantine measures, a supply shock from the inability to work and exacerbated credit and default risk. Fiscal support will help but may not be fully able to support spending and borrowing until confidence in public health systems return.

March 24, 2020 - Rajan on the need for global leadership to flight COVID-19 and the case for higher sick pay in the US

Creative Economic Solutions Could Help Us Avoid the Next Great Depression (Washington Centre for Equitable Growth, 5 min read) More generous sick pay would help the economy recover more quickly and reduce hardship for those affected. A universal income floor for the duration of the crisis would work better than a one-off payment and Denmark’s example of paying 75% of workers’ salaries for the next several months should be replicated.

Rich Countries Cannot Win the War Against Coronavirus Alone (FT, 4 min read) Raghuram Rajan argues that while rich countries may have the wealth and administrative capacity to respond to the coronavirus without strong global leadership to facilitate assistance to those less well able to respond the virus cannot be fully defeated. The IMF, WHO and easing in trade restrictions can all play an important role.

How to Get to a UBI (Crooked Timber, 3 min read) Australia’s decision to increase welfare benefits within the existing system for those unemployed due to coronavirus is a first step to introducing a universal basic income.

Why Such a Large Difference in Fatality Rates Across European Nations? (Marginal Revolution, 1 min read) Countries where the young and old are more likely to live together, those with a larger share of smokers and those more tactile could be a way to explain the higher fatality rates in countries such as Italy.

March 24, 2020 - Former Fed chairs on monetary policy and Lamont on helicopter money

Bernanke and Yellen: the Federal Reserve Must Reduce Long-term Damage From Coronavirus (FT, 5 min read) With the underlying cause of the current crisis very different to 2008 reviving parts of the GFC toolkit cannot fully counteract current economic stress. Policymakers must employ measures to ensure the economy can rebound quickly – such as ensuring credit is available for healthy businesses – part of which is by purchasing corporate bonds (article from 18 March and therefore before the latest Fed measures).

Why We May Need Helicopter Money (OMFIF, 3 min read) With the self-employed accounting for 15% of Britain’s labour force the UK should, according to former Chancellor Normal Lamont, turn to helicopter money to avoid further hardship. Universal credit and statutory sick pay do not go far enough.

A Proposal for a Covid Credit Line (VoxEU, 5 min read) Using the ESM for a new long-term Covid Credit Line would circumvent the problem of no joint debt issuance in the EU while allowing the worst effected economies access to credit, the cost of which would not be linked to individual fiscal positions.

March 17, 2020 - A new carbon emissions index and how big data and ESG can fit together

ESG, Big Data and the Future of Work (Worcester Business Journal, 2 min read) Mid’ sized companies facing challenges to attract workers are using big data to guide resourcing decisions as well as ESG strategies. Efficiency gains and improved long-term sustainability should prove beneficial for profitability.

S&P Dow Jones Indices Launches ESG Commodity Index (ETF Stream, 1 min read) A new S&P GSCI Carbon Emission Allowances index will, for the first time, give investors a benchmark index for European carbon emissions allowances based on the ‘cap and trade’ system.

March 17, 2020 - A black swan with a permanent impact and an analysis of travel bans and virus transmission

The Impact of COVID-19 on the Housing Market: A Wake Up Call to Markets (Dr Housing Bubble, 3 min read) Ongoing uncertainty due to the virus will significantly impact the housing market. Real estate is a lagging indicator to stocks and as job losses mount a correction will start to become clear.

Is the COVID-19 Outbreak a Black Swan or the New Normal? (MIT Sloan Management Review, 9 min read) Putting people before profits, introducing resilience and risk reduction as integral parts of a business model and embracing reduced travel as a component in the fight against climate change are ways that the current black swan event will have a permanent impact on business.

Tracking Coronavirus in Countries With and Without Travel Bans (ThinkGlobalHealth, 3 min read) Despite 88 countries imposing travel bans with China COVID-19 continued to spread. Nevertheless, it did delay the spread of the virus, particularly in countries which took measures to reduce community transmission.

March 17, 2020 - Biden consolidates his lead in the race for the Democratic presidential nomination

Biden’s Surge and the Power of Fear (Official Monetary and Financial Institutions Forum, 3 min read) Joe Biden is the “least bad choice” for the Democratic presidential nominee with vast foreign policy experience and fairly mainstream economic views. But his sometimes-confused manner and his son’s perceived links to corrupt practices in Ukraine are just a few of his meaningful weaknesses.

Who Won The Biden-Sanders Debate? (FiveThirtyEight, 2 min read) Joe Biden came out ahead after Sunday night’s TV debate, gaining 3 points in support versus a decline of 2 points for Bernie Sanders. Biden remains the candidate viewed as most likely to beat Trump with around two-thirds of respondents projecting him to win the November election.

March 17, 2020 - Severe recession now the consensus plus Europe’s need for a catastrophe relief fund

A Coronavirus Recession? A New Survey of Top US & European Economists (IGM Forum, 6 min read) Leading US and European economists now expect a severe recession due to COVID-19 although uncertainty remains over the expected length of the downturn. More than two-thirds of European experts think the Eurozone lacks the necessary tools to response, particularly given the absence of co-ordinated fiscal policy.

COVID-19: Europe Needs a Catastrophe Relief Plan (VoxEU, 12 min read) Europe should immediately develop a catastrophe relief fund to cover both needed healthcare spending and indirect costs from school closures and other containment measures. All temporary spending related to the crisis should also be deducted from SGP budget measures.

Trump’s Trade Policy is Hampering the US Fight Against COVID-19 (Peterson Institute for International Economics, 8 min read) US tariffs on medical imports from China could mean delays and higher costs for needed equipment. Trump has in the past week temporarily reduced some of the tariffs but this does not go far enough with many medical products still affected.

March 17, 2020 - Buiter on Piketty and the coming debt crisis

COVID-19 is an Opportunity for Europe (Project Syndicate, 4 min read) With no appropriate EU-wide fiscal tools currently available to response to the current crisis the EU should use this opportunity to pool resources and create an “insurance fund”. Europe has a history of coming together in difficult times, it should do so again.

Piketty’s Latest Charge (Project Syndicate, 12 min read) Piketty’s idea of “participatory socialism” is, according to Willem Buiter, wishful thinking lacking in any basic economic analysis. It also ignores incentives and assumes global cooperation on fiscal and regulatory issues.

The COVID-19 Debt Deluge (Project Syndicate, 4 min read) The huge run-up in debt since the financial crisis could now expose significant financial vulnerabilities as growth and profits collapse. High stocks of FX-denominated corporate debt in EM and upcoming repayments on sovereign Eurobonds alongside declining reserves stocks point to an imminent debt crisis.

March 17, 2020 - Lane repairs Lagarde’s blunder and the case against OMT for Italy

The Monetary Policy Package: An Analytical Framework (ECB, 6 min read) In an effort to reverse the damage from Christine Lagarde’s blunder during last week’s press conference Phillip Lane’s blog noted that, the ECB “stand(s) ready to do more and adjust all of our instruments, if needed to ensure that the elevated spreads that we see in response to the acceleration of the spreading of the coronavirus do not undermine transmission” of monetary policy.

Why OMT is Not the Solution for Italy Right Now (Bruegel, 2 min read) OMT light, with minimal conditionality and a commitment to roll back stimulus once the crisis is over, could be a way to contain spread widening and financial contagion. But since it would require Italy to give up some of its economic sovereign at a time of national crisis and does little to protect the wider Euroarea, this is not the instrument to use.

The Fed’s Actions Sunday: All in on Monetary Policy; Partly in on Liquidity Support (Brookings, 6 min read) The Fed’s actions on Sunday will not end the worsening disruption from COVID-19 but they will nevertheless ease pressure in the financial system and leave the economy more able to rebound quickly when the health crisis subsides. Further actions could include more specific forward guidance and a resumption of both the Term Auction Facility and lending to non-banks.

Monetary and Financial Stability During the Coronavirus Outbreak (IMF, 3 min read) A co-ordinated effort to offset tightening financial conditions via rate cuts and liquidity injections is the optimal use of monetary policy in the current environment. Other crisis instruments such as targeted SME lending can also help. Banks can look to restructure loans temporarily, but financial stability risks must be monitored closely.

March 10, 2020 - European companies more green than elsewhere and Blackrock defends its dirty investments

Where Are the World’s Most Sustainable Companies? (Visual Capitalist, 4 min read) Europe is home to 49% of the world’s most sustainable companies with North America in second place with 29% and Asia just 16. Denmark’s Orsted comes out on top.

How Green is ESG? (Politico, 2 min read) BlackRock’s focus on climate change earlier this year has exposed it’s investment into non-green companies such as refiners, chemical companies and oil and gas companies. These companies have “a unique ESG” profile according to BlackRock which each pillar of ESG deemed to be equally important.

ESG Factors More Significant For Developed Market Sovereign Credit (Pensions&Investment, 1 min read) Higher ESG scores are associated with tighter CDS spreads in developed markets. Some impact is also seen between credit spreads and ESG scores in EM but this remains less robust.

March 10, 2020 - What the Fed can do a rates continue to decline and how QE and act as a substitute for rate cuts

The Decline of the 10-Year Treasury: Implications for Fed Policy (Macro Musings Blog, 6 min read) The ongoing decline in the 10-year UST yield leaves the Fed with reduced options within its current policy toolbox. To counteract this the Fed can use a dual reaction function where the money base is used as a target when rates are below zero, target nominal GDP and incorporating helicopter money.

Are QE and Conventional Monetary Policy Substitutable? (International Journal of Central Banking, 36 page read) Doubling the size of a central bank’s balance sheet is equivalent to a 3pp cut in the policy rate. But QE can only substitute effectively for rates cuts when LT rates have room to fall.

The Information Channel of Monetary Policy Has Disappeared in the US (VoxEU, 3 min read) Improved Fed communication (including release of FOMC minutes) and forward guidance on policy has removed the Fed’s ‘information advantage’ and led to the information channel on monetary policy – changed behaviour after an unexpected policy announcement – disappearing.

March 10, 2020 - Ending dollar dominance and deciphering term premia during hiking cycles

The Rise and Fall of International Currencies (Project Syndicate, 8 min read) Two new books, Currency Stagecraft and How Global Currencies Work, offer insights into the history, politics and economics of global currencies. Both see ending dollar dominance as a much-needed and inevitable outcome.

Do Treasury Term Premia Rise Around Monetary Tightenings? (Liberty Street Economics, 5 min read) There is no evidence that term premia increase sharply when the Fed shifts to a tightening cycle with rising LT rates instead attributable to upwardly revised expectations for ST rates. But a consideration going forward is that expectations over the Fed’s balance sheet policy will impact term premia.

March 10, 2020 - Sanders’ last chance and Saudi’s leadership shortcomings

Can Sanders Make Up Ground In Tuesday’s Primaries? (FiveThirtyEight, 8 min read) Tuesday’s primaries are the last chance for Bernie Sanders to remain in the race for the Democratic presidential nomination. Michigan is key with the largest number of delegates and his chances here look slim. Bu this state had a huge polling error in 2016.

Bloomberg’s Money Bought Him Something — Just Not the Nomination (FiveThirtyEight, 2 min read) The $500mn spent by Bloomberg on ads saw him gain recognition and rise sharply in the polls, peaking at 16.5% last month. But unsurprisingly it did not translate into votes.

What COVID-19 Means for International Cooperation (Project Syndicate, 4 min read) The coronavirus, like climate change, highlights the need for more international cooperation. Both have uncertain consequences, albeit undoubtedly negative, and both need a coordinated approach despite the initial and required de-globalisation.

In Saudi Arabia, the Virus Crisis Meets Inept Leadership (Brookings, 5 min read) The holy cities of Mecca and Medina have been closed due to fears over COVID-19 and the hajj is no longer certain to go ahead in July/August. Saudi has already changed for the worst under Crown Prince Mohammed bin Salman and with the virus outbreak things could deteriorate further.

March 10, 2020 - Why containment and mitigation doesn’t work and Hong Kong’s ill-defined fiscal stimulus

Covid-19: A Macroeconomic Plague (JDI research, 8 page read) The strategy of containment and mitigation outside China has not worked due to the high number of individuals needing hospital care. This makes mitigation unworkable and the need for extra hospital beds is likely to outstrip supply in Europe by the end of this month.

Downsides to Hong Kong’s Untargeted Cash Handout (Bruegel, 3 min read) Hong Kong’s cash handout is both untargeted and regressive and may leak out in the form of capital outflows. Diverting these resources to SMEs in sectors hit hardest from COVID-19 could better protect jobs and household incomes.

Women Have Been Hit Hard by the Loss of Routine Jobs, Too (Liberty Street Economics, 5 min read) Job losses for women aged 25-54 in “routine” roles in production and admin are three times greater than for men over the past two decades. Women have moved into jobs in healthcare and into low skilled service sector roles. The share of women not working has also increased.

March 10, 2020 - Why fiscal policy is the better tool to offset the impact from coronavirus and global health care rankings

The Fiscal Fight Against COVID-19 (Project Syndicate, 4 min read) Fiscal policy can have a more direct impact on the sectors hurt by the coronavirus and should be deployed quickly. Low interest rates and excess savings in Japan and elsewhere make deficit levels less relevant than in the past.

Ranking Health Care Systems By Country (Econospeak, 3 min read) The US scores poorly in these health system rankings although the results are admittedly quite mixed. The UK performs well on some metrics, it comes top of the international insurance 11-country rankings, fourth in the Cigna ranking and ninth on Health Care tracking.

March 03, 2020 - How to model carbon pricing and Apple investors vote against ESG-linked comp

The True Price of Carbon (Project Syndicate, 4 min read) By treating carbon as an asset (with an increasingly negative payoff) and treating the discount rate as an output, a new carbon-economic model suggests a carbon price of at least $100 per ton.

Apple Investors Say No to ESG-comp Proposal (Corporate Secretary, 4 min read) Apple

shareholders voted resoundingly against a proposal to link executive pay directly to ESG metrics at the recent AGM. The Board had recommended the proposal be voted against on the basis it already issues annual supplier and environmental responsibility reports.

Catching The First U.S. Wave Of ESG Investment: Lessons Learned And Challenges Ahead (Jones Day, 2 min read) A drive for innovation, greater need for public-private partnerships, too much focus on limitations from unstandardized ESG metrics and a clash with passive investing are the main trend in the fast-growing ESG investment.

March 03, 2020 - Lane on monetary policy under low rates and core PCE versus core CPI

Philip R Lane: Monetary Policy, Low Interest Rates and Low Inflation (BIS, 4 min read) Incremental, sustained easing is needed in a low interest rate environment while pre-emptive easing can also act against an engrained downward shift in inflation expectations. Fiscal policy is a powerful tool in this lower-for-longer environment.

Two Measures of Inflation and Fed Policy (Advisor Perspectives, 3 min read) The more stable measure of core PCE explains why it is the Fed’s preferred measure of inflation, but its disinflationary trend (currently at a below-target 1.63%) suggests Fed policy has not been effective.

March 03, 2020 - Modelling market-implied RWA and yield curve inversion under an accommodative policy stance

Variability in Risk-weighted Assets: What Does the Market Think? (BIS, 55 page read) A new measure of market-implied RWA shows significant differences in RWA between banks / countries prior to 2016 due to; shares of less transparent assets, capital constraints and country-specific factors. Basel III reforms have reduced the RWA variability.

Predicting Recessions Using the Yield Curve: The Role of the Stance of Monetary Policy (Boston Fed, 18 page read) Yield curve inversion during a period of “unusually accommodative” monetary policy such as Q3 2019 overstates the likelihood of recession.

March 03, 2020 - Analysing the fastest market correction in history

Should I Be Concerned About The Correction In U.S. Equities? (JPMorgan AM, 2 min read) Corporate profits will be hit harder than the wider economy from COVID-19 given the S&P500’s reliance on overseas revenues and international supply chains. With valuations now less stretched investors looking to add risk may see this as a good buying opportunity.

What Happens to Stocks After a Big Down Month? (Advisor Perspectives, 2 min read) Equities rebounded within a one-year horizon more than 50% of the time following previous months of large loses and by nearly 75% of the time three-years later. Most of the outliers were around the Great Depression.

Market Correction: What Does It Mean? (Advisor Perspectives, 3 min read) Only four of the 22 market corrections since 1974 have turned into bear markets, and even when bear markets have occurred they have lasted around 17 months on average.

March 03, 2020 - US media treating Sanders like Trump in 2016 and how COVID-19 is immune to spin

The One Way Sanders is the New Trump (Colombia Journalism Review, 4 min read) Rather than focusing on what Bernie Sanders’ rising popularity tells us about American voters US journalism is once again dismissing the front runner in a similar way to Trump in 2016.

The Coronavirus and How Political Spin Has Worsened Epidemics (New Yorker, 6 min read) Suppressions of information has, throughout history, worsened pandemics and hindered the response. How the Trump administration manages the coronavirus will be a key test of how it functions after three years of downsizing and dismissing the importance of experts.

March 03, 2020 - Peak supply chain disruption imminent plus PIMCO on why it gets worse before it gets better

How Coronavirus Could Impact the Global Supply Chain by Mid-March (Harvard Business Review, 4 min read) Peak supply disruption from COVID-19 is likely by mid’ March as the pre-Chinese New Year manufacturing shipments arrived in the US/Europe in late February.

COVID‑19: Repercussions Could Worsen Before They Improve (PIMCO Blog, 3 min read) As a combined demand and supply shock COVID-19 will cause a meaningful, but temporary, hit to economic growth. The Fed will likely cut rates by 50bps to counteract the tightening in financial conditions, the ECB may cut too.

A Pandemic of Deglobalization? (Project Syndicate, 4 min read) COVID-19 could reinforce the deglobalisation trend already underway, reminiscent of how the Black Death in Europe brought an end to the Middle Ages.

March 03, 2020 - How business cycles impact inequality plus evidence on basic income schemes

Shocks, Frictions, and Inequality in US Business Cycles (VoxEU, 7 min read) Business cycles, and the associated policy response, account for half of the increase in US wealth inequality between 1980 and 2015 and almost all of the increase in income inequality. More expansionary fiscal policy following the financial crisis would have lowered wealth inequality.

Is Basic Income a Good Idea? Here’s What the Evidence From Around the World Says (The Conversation, 4 min read) A review of studies on past basic income schemes in North America shows reduced working by women and single parents but little change for men. Health outcomes were little changed.

February 25, 2020 - Europe’s climate stress tests and ESG branches into derivatives

The Next Boom in Sustainable Finance: ESG Derivatives (IFR, 4 min read) ESG-linked derivatives are becoming big business, but like all ESG investing data limitations make the process slow and the derivatives need to be tailor made for each deal.

These Are the Most Popular Stocks of the Emerging ESG Investing Movement (CNBC, 2 min read) Microsoft, Apple and Alphabet are the most widely held stocks in US ESG funds while in Europe the list includes LVMH, Sanofi and Nestle. Companies focused directly on renewables and climate change were, surprisingly, barely represented.

Climate Risks to European Banks: a New Era of Stress Tests (Bruegel, 5 min read) Establishing European-wide climate stress tests requires balancing banks’ own risk assessment to meet the needs of investors, and devising a standard cross-country methodology to determine any additional capital requirements.

February 25, 2020 - Clarida on the Fed’s reaction function plus Riksbank starts e-korona trial

Financial Markets and Monetary Policy: Is There a Hall of Mirrors Problem? (Federal Reserve, 7 min read) Vice Chair Clarida states that the Fed does not react to moves in asset markets in isolation, but instead considers them alongside various surveys and model-based estimates to conduct forward-looking monetary policy.

All You Need is Cash (Bank of England, 6 min read) Firms that retain access to cash can continue to invest during a financing crisis providing a long-term competitive advantage versus those who rely on credit markets. Young, small firms are those which can benefit most.

Sweden Starts Testing World’s First Central Bank Digital Currency (Reuters, 3 min read) The Riksbank has launched an e-korona trial whereby digital central bank currency can be used for everyday payments, albeit in a test environment. The results of the one-year trial will be watch by various other central banks studying the possible introduction of CBDCs.

February 25, 2020 - Are we in an expansionary or contractionary phase?

No Sight of Next Recession: Business Cycle Index Update (iMarket Signals, 2 min read) This BCI using readily available economic and market data would have predicted the last seven recessions with a 20-week leading signal. The current signal is comfortably in expansionary territory.

February 25, 2020 - Sanders’ big win in Nevada and Trump and the coronavirus

Why Bernie? (Project Syndicate, 4 min read) In the context of wide swings in US election outcome elections over the last 50 year a switch from Donald Trump to Bernie Sanders does not seem inconceivable. Worsening income inequality has hurt moderate Democrats and with voters on both sides increasingly fed up Sanders’ presidential bid should be taken seriously.

Sanders’ Democratic Rivals Seek to Slow His Momentum After His Big Win in Nevada Caucuses (Reuters, 6 min read) Bernie Sanders’ Nevada win has failed to convince his Democratic rivals to drop out, rather the centrists are instead splitting the anti-Sanders vote, making it potentially more difficult to defeat him for the Democratic nomination.

The Coronavirus Outbreak Could Bring Out the Worst in Trump (The Atlantic, 7 min read) Trump’s disregard for experts, institutions and hard facts could prove problematic if the coronavirus takes hold in the US. The US decision to ban entry to foreign nationals who have recently travelled to China comes against WHO guidelines and risks sparking racism against Chinese people.

February 25, 2020 - Japan’s economy shrinks while India moves up the global rankings, for now anyway

Japan isn’t Headed for Recession, it’s in Recession (Money Maven, 4 min read) Japan’s 6.3% QoQ annualised GDP decline in Q4 was the deepest contraction since the last VAT hike in 2014. Given this came before the hit from the coronavirus the country is already in the midst of a severe recession.

Growth, Inflation, and the Potential for Disruption (PIMCO blog, 4 min read) Global growth will slow then rebound ahead of the US with global PMIs already improving, particularly in EM, while business sentiment in Europe has started to improve. Meanwhile, the US faces a hit from the Boeing production cut and political uncertainty ahead of the presidential elections.

India is Now the World’s 5th Largest Economy (World Economic Forum, 2 min read) India has now overtaken the UK and France to become the world’s fifth largest economy (in nominal USD terms). But with growth slowing sharply in recent quarters and the country still accounting for 25% of the world’s poor India faces huge challenges ahead.

February 25, 2020 - Skidelsky on fiscal policy and automatic stabilisers plus the US fiscal shortcomings

The Monetarist Fantasy Is Over (Project Syndicate, 4 min read) Robert Skidelsky views the recent forced resignation of UK Chancellor Sajid Javid as part of the wider shift from monetary to fiscal policy, with Javid seen as standing in the way of the Prime Minister’s spending ambitions. This increasing shift towards fiscal policy needs strengthened fiscal stabilisers.

Good U.S Monetary Policy Can’t Fix Bad U.S. Fiscal Policy (Washington Centre for Equitable Growth, 11 min read) Historically low levels of US unemployment with muted inflationary pressures points to an appropriate stance for monetary policy. Fiscal policy, by contrast, is hampering the US economy with needed investment into infrastructure and research absent.

Is the US an Outlier on Health Care Spending? (Library of Economics and Liberty, 2 min read) The 17% of GDP in US healthcare spending partly reflects inflated costs related to the insurance system rather than higher spending compared with other rich countries.

February 25, 2020 - Reinhart & Rogoff on euro underperformance plus opportunities in EM

Buffett Talks Investing, Takeovers and ‘Dancing with the Stars’ in Letter (CNBC, 7 min read) Berkshire Hathaway’s CEO remains upbeat about the long-term prospects for equity markets, assuming rates remain around current levels, but urges shareholders to focus on company earnings rather than quarterly price gains. Full letter can be accessed here.

A Multi-Asset Approach to Assessing Risk and Opportunity in Emerging Markets (Advisor Perspectives, 5 min read) Franklin Templeton’s multi-asset team are constructive on EM, favouring local currency debt over hard currency due to better liquidity in times of stress and in particularly short-dated Mexican paper.

Why is the Euro Punching Below its Weight? (CEPR, 62 page read) Reinhart, Rogoff and Ilzetzki determine the absence of a safe Eurozone asset, the lack of unity on monetary policy and no European capital markets union as the main factors preventing the euro from rivalling the US dollar as the international currency of choice.

What Do You Like More, Value Or Growth? (JPMorgan Asset Management, 2 min read) Growth stocks have tended to outperform value stocks in moderate growth environments like the current period, or in high growth >5.5% expansions. But with increasingly stretched valuations investors continuing with a growth strategy should analyse each stock individually.

February 18, 2020 - Effective Fed funds under different liquidity conditions plus the leftward shift in inflation distribution

How Did the Fed Funds Market Change When Excess Reserves Were Abundant? (New York Fed, 15 page read) The switch to significant excess liquidity following the financial crisis and introduction of renumeration on excess reserves (IOER) changed both the main players in the fed funds systems and their motivation. But the effective fed funds rate remained within the target range and in line with other overnight funding rates.

Inflation at Risk (Federal Reserve, 65 page read) Fed researchers find that tight financial conditions create “substantial” risks of low inflation with rising credit spreads shifting the distribution of inflation to the left. This adds to earlier explanations of anchored inflation expectations and liquidity constraints as the drivers behind low and stable inflation.

Forward-Looking Monetary Policy and the Transmission of Conventional Monetary Policy Shocks (Federal Reserve, 30 page read) Incorporating Fed forecasts and the introduction of forward-looking policy provides more consistent results of the impact of monetary policy on output and prices than has been modelled before.

February 18, 2020 - Linking large datasets and how to predict high yield returns

The Promise of Automated Historical Data Linkage (VoxEU, 6 min read) Using automated techniques to link historical data is no worse than using “hand links” providing a practical solution to linking multiple large datasets.

A Simple Introduction to Neural Networks (Less Wrong, 24 min read) A introductory guide to machine learning focusing on neutral networks. Designed as a stand-alone although the earlier nine chapters are also available.

Are High-Yield Returns Predictable? Key Metric Suggests Yes (Advisor Perspectives, 1 min read) High yield corporate bonds exhibit predictable returns over time with the starting yield the key driver, even during the financial crisis.

February 18, 2020 - US pollsters try to correct for 2016 errors and history repeats itself in the UK’s Treasury power grab

Bernie Sanders Isn’t a Socialist (New York Times, 2 min read) Paul Krugman describes Bernie Sanders as more European social democrat rather than true socialist. Sanders’ chosen misnomer will, however, make him an easy target for Republicans.

Pollsters Got it Wrong in the 2016 Election. Now They Want Another Shot (MIT Technology Review, 12 min read) Large numbers of undecided voters, shy Trump supporters, poor sampling and correlated errors were among the factors behind the 2016 polling miss. Errors have since been corrected but pollsters still cannot account for the impact election forecast have on individual’s likelihood of voting.

As Rishi Sunak Cecomes UK Chancellor, a History of Battles Between No 10 and 11 Downing Street (The Conversation, 4 min read) Boris Johnson’s efforts to control the UK Treasury have been tried by various prime ministers before him and have never proved successful. Given the manifold risks facing the UK economy it is unlikely to work this time either.

February 18, 2020 - How to add unemployment into business cycle dating and why subprime auto delinquencies are at all-time highs

Reading the Tea Leaves of the U.S. Business Cycle—Part Two (Liberty Street Economics, 6 min read) Using a “threshold rule” for the unemployment rate provides a good fit with the dates of NBER-defined business cycles. With limited revisions to the unemployment data it also provides a stable and timely gauge of the cycle.

The Accuracy of Long-term Growth Forecasts by Economics Researchers (VoxEU, 4 min read) Real and nominal GDP growth forecasts for Japan show an upward bias over the past 10 year even when excluding the 2008-09 crisis. Government forecasts have a larger upward bias than those made in the private sector.

Subprime Auto Loans Explode, “Serious Delinquencies” Spike to Record. But There’s No Jobs Crisis, These Are the Good Times (Wolf Street, 4 min read) Nearly one quarter of all subprime auto loans are more than 90 days overdue, yet delinquencies on prime auto loans are at historic lows. The divergence reflects aggressive subprime lending and investor demand for high yielding auto loan ABS.

February 18, 2020 - A new fiscal Taylor rule and big pharma’s transfer pricing

A Model-based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance (IMF, 36 page read) Assesses the fiscal stance, defined as the change in the structural primary balance, by using public debt, output gap and primary balance in the preceding period as the starting point. The model points to G7 primary balances below the recommended levels.

Tax Games: Big Pharma Versus Big Tech (CFR, 6 min read) In contrast to profit shifting by US tech firms that lower US exports, pharma profit shifting raises US imports. The US trade deficit on pharma is now bigger than the surplus on aircraft and comes from Ireland, Singapore and Switzerland, all of which have favourable tax treatment for multinationals.

February 18, 2020 - Negative real yields and the impact of Tesla’s eventual stock correction on national security

Treasury Market Flashes New Warning As Real Yields Go Negative (The Capital Spectator, 4 min read) From inverted (nominal) yield curves last year to sub-zero real yields in 2020, the US bond market is again signalling looming economic weakness. But the debate over the current power of these signals continues, especially for the less liquid TIPS market.

Why Bonds Are Still a Good Hedge (Blackrock, 2 min read) Despite UST yields below 1.6% bonds remains a good insurance against equity risk. The correlation remains negative and during any pronounced spike in volatility long duration bonds significantly outperform.

Central Bank Dovishness and Good Fundamentals Create Opportunity in Spread Sectors in 2020 (Advisor Perspectives, 3 min read) Both spread products and emerging markets should outperform government bonds this year with the Fed keeping rates firmly on hold and the global economy picking up pace.

How a Stock Bubble Could Unwind America’s National Security (Defense One, 8 min read) The eventual reversal of Tesla’s meteoric stock price rise will bring many other stocks crashing down with it and leaves the potential for higher interest rates (and government financing costs), a weaker dollar and stepped up deglobalisation.

February 11, 2020 - Biasing growth strategies under ESG and standardising ratings

Central Banks and Climate Change: from Black to Green Swans (Money Maven, 5 min read) Direct macroeconomic costs, financial risks and mitigation policies bring climate-related challenges into the remit of central banks. Both physical risks and transition risks (as the economy adapts to cleaner technologies) can generate financial risks, but opportunities also exist from eliminating climate costs and switching to more efficient energy.

Who Will Be the Moody’s of ESG Investing? (Money USA, 5 min read) Lack of relevant data and an absence of an accepted framework for measuring ESG compliance has left wide disparities in the ESG ratings currently available. Better company disclosures are needed before ESG ratings can become more standardised.

The Unintentional Biases of ESG Portfolios (Advisor Perspectives, 4 min read). ESG portfolios based purely on risk scores can favour growth strategies over value, as well as developed markets and large caps.

February 11, 2020 - The banks benefiting most from forward guidance to more Philips curve research

Inflation in a Changing Economic Environment (VoxEU, 6 min read) From choosing an appropriate measure of inflation, decomposing inflation expectations and understanding drivers of labour costs and the wider pricing chain, ECB conference participants shed light on the disconnect between inflation and economic slack in the Euro Area.

Operational Issues for Countries with Evolving Monetary Policy Frameworks (IMF, 57 page read) Monetary policy transmission in low and middle-income countries with volatile overnight rates and weak monetary policy frameworks can benefit from targeting short-term interest rates rather than reserve money.

Forward Guidance and Corporate Lending (Munich Personal RePEc Archive, 66 page read) Reduced borrowing costs and increased willingness to lend can be directly attributed to forward guidance from the Fed following the financial crisis. The impact is most pronounced for highly capitalized banks.

February 11, 2020 - The Fed and CBDCs

The Digitalization of Payments and Currency – Some Issues for Consideration (BIS, 14 page read) Lael Brainard points to concerns over data privacy and lack of financial protections for consumers as big tech rather than banks dominate payment systems. For any sovereign digital currency the Fed must consider the impact on the payment system, how resilient it would be, the intermediaries needed and the cross-border implications.

February 11, 2020 - The importance of healthcare costs in Trump’s re-election bid and investing in a stronger Europe

Embracing Europe’s Power (Project Syndicate, 4 min read) EU countries must invest in a stronger Europe by reaching internal agreements (and avoiding vetoes), and by concentrating action where it aligns with the bloc’s goals and capabilities. Action should be based on common values and interests.

Trump’s Biggest Vulnerability (The Atlantic, 5 min read) Rising healthcare costs could prove more important in Trump’s re-election bid than the economy or stock market performance. This matters most for the “next cluster of voters”, or those not immediately drawn to Trump’s policies in other areas.

Unintended Consequences: Can the Rise of the Educated Class Explain the Revival of Protectionism? (IZA Institute of Labour Economics, 40 page read) A rising share of skilled workers who generally benefit globalization, but leave reduced support for redistribution, can foster resentment and a protectionist push from those left behind.

February 11, 2020 - Leveraged loans and the next US recession plus how to avoid an empty planet

Corporate Credit, Housing, and the Next Recession (PIMCO Blog, 3 min read) Corporate credit is one possible trigger for the next US recession, in particularly from leveraged loans, high yield debt and private credit. By contrast, the housing market is seen as an area of strength rather than weakness.

The End of Economic Growth? Unintended Consequences of a Declining Population (Stanford University, 43 page read) Negative population growth can result in a stalling of living standards and population decline towards an “empty planet”. Waiting too long to shift to a higher optimal population growth risks still being stuck in the empty planet outcome.

A Roadmap for Digital-led Economic Development (VoxEU, 7 min read) Developing countries can use digital technology to improve efficiency through automation, lower transaction costs and better system design. But conditions must also be put in place to ensure technology is inclusive.

February 11, 2020 - Another take on the size of fiscal multipliers and quality versus size in government functions

Understanding the Size of the Government Spending Multiplier: It’s in the Sign (Barcelona GSE, 48 page read) The fiscal multiplier is above 1 during austerity, and larger if the economy is operating with spare capacity. Expansionary fiscal policy, by contrast, has a multiplier of less than one and does not vary with the economic cycle. A contrasting view from the research we included previously on fiscal multipliers from VoxEU.

Quality Of Government Matters More Than Size Of Government For Human Development, Education And Life Expectancy (Then Do Better, 6 min read) Health, education, peace and human development are more dependent on the quality of government, rather than its size.

February 11, 2020 - Why stock splits are a thing of the past to an end to the earnings recession

Corporate Debt: Where is the Danger? (Munich Personal RePEc Archive, 66 page read) Authors perform debt sustainability analysis for US corporates. Based on liquidity needs and embedded leverage, rather than net repayments, shows some sectors are more resilient that often assumed. The utilities sector is, however, significantly exposed through interest rates and profitability shocks.

Stock Splits – What Happened to Them? (Trinity Asset Management, 2 min read) Whether it’s less rich valuations compared to the 1990s (and reduced need for perceptions of cheaper valuation), the growth of passive funds or fewer companies compelled to keep shares available to loyal fans, the accounting exercise of stocks splits is increasingly rare.

Regression to Trend: Another Look at Long-Term Market Performance (Advisor Perspectives, 2 min read) The inflation-adjusted S&P reached 133% above its long-term trend at the end of January, an all-time high and more than three standard deviations above trend. The 2007 peak was around two standard deviations above trend.

Earnings Recession Set to End, as S&P 500 Earnings Growth Turns Positive (Fidelity, 1 min read) Fourth quarter earnings are on track to eek out a positive performance ending three consecutive quarters of contraction in corporate earnings. But only once earnings season is complete can the earnings recession be fully assessed.

February 04, 2020 - The ESG funds that outperformed last year plus what’s missing in the EU’s green taxonomy

The Biggest ESG Funds Are Beating the Market (Bloomberg, 3 min read) Nine US ESG funds outperformed the S&P last year and seven have outperformed over five years. Companies that can help reduce inequality and those with a long-term competitive edge are some of the factors used to determine ESG investment in the top ranked funds.

ESG Challenges and Solutions (Morningstar, 3 min read) The UN’s Principles for Responsible Investment (PRI) should consider; consistency and clarity in the definition of ESG, the limitations of tracking error and changing ESG rating methodologies. PRI should encourage collaboration as well as education on ESG.

The EU’s Risky Green Taxonomy (Project Syndicate, 4 min read) The EU must consider where financing gaps exist in green activities and which investment products are efficient. By focusing only on which activities are sustainable the EU risks both mis-selling, creating barriers and slowing down the energy transition.

February 04, 2020 - Action points for the ECB’s strategic review and what drives FOMC dot plots

What the ECB’s Strategy Review Must Do (Project Syndicate, 4 min read) Former Director of Research at ECB, Lucrezia Reichlin argues that the review must determine whether policy mistakes, poor coordination between fiscal, monetary and financial policies or structural factors are behind the persistent failure to meet the inflation target.

What Drives the FOMC’s Dot Plots? (Journal of International Money and Finance) Labour market data are key drivers of FOMC interest rate projections at all time horizons, while for longer horizons trade and markets news also matter. Inflation is not found to make much difference.

Inflation and Public Debt Reversals in Advanced Economies (IMF, 23 page read) Higher inflation will have a limited impact in reducing DM debt ratios. A 1pp increase in inflation would knock just 0.5-1pp off the debt/GDP ratio, with a higher and more persistent impact under longer debt maturities.

February 04, 2020 - Financing constraints for intangible assets and liquidity risks from large CCPs

Central Clearing and Systemic Liquidity Risk (Federal Reserve, 39 page read) Large central counterparties create procyclical liquidity risks despite their role in improving financial stability. Macroprudential stress tests focused on liquidity are needed to determine the impact of shocks to central counterparties on system wide liquidity.

Productivity and Finance: the Intangible Assets Channel (OECD, 61 page read) Firms with higher intangible assets face tighter financing constraints due to difficulties in measuring and valuing such assets, with a detrimental impact on productivity growth.

On Socially Influenced Preferences (Stumbling And Mumbling, 3 min read) The case for a progressive consumption tax rests on the basis that other people’s spending makes us spend more. Behavioural and informational externalities also influence spending.

February 04, 2020 - How demographic changes could impact the US election and Europe after Brexit

Europe Can’t Afford to Alienate the UK (Spiegel International, 7 min read) Europe’s future is more a confederation of states rather than a true union. But that future still needs the UK on side as a key ally with a permanent seat on the UN security council. Trade negotiations must avoid pushing the UK further from Europe’s influence.

The Demographic Shifts Disrupting the Political World (Axios, 3 min read) The growing number of older voters, more states with non-white majorities, and a less rural, less religious country will all influence the 2020 US Presidential election.

As Congress Talks Climate Policy, Carbon Price Gets No Love (Axios, 4 min read) Despite the focus on climate change and the environment carbon pricing is yet to get much support in the US Congress from either side.

February 04, 2020 - The risks from slower global trade growth and global unemployment linkages

A Global Economy Without a Cushion (Project Syndicate, 4 min read) Former Chairman of Morgan Stanley Asia, Stephen Roach, points out that global trade growth last year was the fourth weakest since 1980, and the three weakest were all associated with global recession. Global growth is already close to stall speed leaving significant risks from the much-reduced buffer from trade growth.

Tracking Long-run Growth in the Euro Area With an a-theoretical Tool (VoxEU, 6 min read) During the past 30 years institutional integration, competitiveness and monetary policy all supported long run growth. Equity cycles, debt ratios and sovereign stress all have a negative or mixed impact on growth.

Forecasting Unemployment Rates with International Factors (Munich Personal RePEc Archive, 22 page read) A global unemployment series is constructed to show linkages between unemployment rates in seven OECD countries. Migration and common business cycles are possible explanations.

February 04, 2020 - Two contrasting views on inequality

Inequality and Economic Growth (Project Syndicate, 4 min read) Former Chief Economist of IMF, Simon Johnson, argues for a wealth tax, refocused antitrust policies and changes to campaign finance rules to achieve a more equal society, and to sustain economic growth.

The Truth About Income Inequality (Reason, 15 min read) Not all income inequality is bad nor has inequality risen to the extent often cited. Global inequality is falling and both the poor and middle class in the US are now better off than in the past. And using a more complete definition of income the top 1% have seen incomes rise more slowly than Piketty suggests.

February 04, 2020 - EM benefitting from ongoing balance sheet expansion and Azerbaijan’s oil comeback

Fed’s Printing Press Favors Emerging Markets (Blackrock blog, 2 min read) Emerging market equities have outperformed since the Fed restarted its balance sheet expansion late last year. With the Fed, ECB and BoJ all committed to further asset purchases in 2020, EM equities should continue to benefit, with China looking particularly cheap.

The U.S. Dollar and Emerging Market Assets (Blackrock blog, 2 min read) The US dollar is poised for a stable-to-weakening trend in the next 6 to 12 months as interest rate differentials move in favour of EM, and the trade truce reduces the safe haven demand for the dollar. Geopolitics and an unexpectedly hawkish Fed are the risks to watch.

The Oil Boom You Haven’t Heard of (OZY, 3 min read) Azerbaijan once accounted for half of all global oil output. Three oil booms later the country no longer ranks among the world’s top producers but Baku is looking to position itself back on the oil map. If previous transformations are anything to go by, don’t rule them out.

January 28, 2020 - Investors already positioning for green QE

Investors Who Don’t Embrace ESG Will “Underperform Dramatically” (ETF Trends, 2 min read) Repricing and reallocation of assets due to ESG considerations could mean significant underperformance for those not invested, according to MSCI CEO Henry Fernandez. ESG investing is currently directional but will become more metrics-driven over time.

Vanguard: OCIO Clients Want More Info on ESG (pionline, 2 min read) The transition to ESG investment strategies remains in its early stages with clients continuing to request information, rather than actively adjusting investment portfolios. Exclusionary versus inclusionary strategies, and depth of screening are the two main questions.

ESG To Dominate European ETF Issuance In 2020 (Markets Media, 4 min read) Franklin Templeton expects another strong year for ESG-focused ETFs after a bumper 150% increase in European AUM in 2019. Many investors are already positioned for the possibility that the ECB extends its asset purchases to ESG-focused ETFs.

January 28, 2020 - Emerging markets central banks forge ahead with digital currency

Impending Arrival – a Sequel to the Survey on Central Bank Digital Currency (BIS, 19 page read) Rapid development of CBDCs in emerging markets could see around 20% of the world’s population with access to digital CB money in the next few years. Sweden is among a handful of countries already running a pilot project.

The Interest Rate Puzzle (Stumbling and Mumbling, 3 min read) Lower interest rates have boosted house prices more so than equities because either; housing was previously under-priced, both markets are concerned over distributional risks between profits and wages, or housing is now over-priced. [Bearish housing]

January 28, 2020 - Exchange rates moves reconnect with risk and what we have in common with algos

Exchange Rate Reconnect (VoxEU, 4 min read) Since the financial crisis movements in the US dollar can be explained by changes in global risk metrics and (net) foreign bond purchases, pointing to a structural break in the earlier disconnect between exchanges rates and risks.

Financial Trading Bots have Fascinating Similarities to People (The Conversation, 4 min read) Anticipating others and concealing their true identity are two common characteristics between humans and algorithms. Understanding how algorithms interact could develop the next stage of AI, think self driving cars.

January 28, 2020 - America’s polarisation of news and education divides

Election Update: Sanders Is On The Upswing (FiveThirtyEight, 3 min read) The Iowa caucus is coming up on Feb 3^rd. Sanders has gained ground and is now tied with Biden for the vote. Meanwhile Sanders is leading in New Hampshire.

Republicans and Democrats Live in “nearly inverse news media environments,” Pew finds (Nieman Lab, 3 min read) Democrats overwhelmingly trust CNN while Republicans trust Fox News. But while Democrats also trust a variety of other sources including The New York Times and PBS, Republicans trust little else. Sean Hannity’s radio show is the one exception.

Michael Lind, College-Educated vs. Not is the New Class War (Supply Side Liberal, 3 min read) A college education defines the political and cultural divide in the US and other rich countries according to Lind’s new book. Rising populism in Europe and elsewhere is the result of alienated, and mostly native, working-class voters standing up to the educated elite.

January 28, 2020 - Roubini’s pessimistic view on global growth and avoiding Japanification of East Asia

How to Prevent the Japanification of East Asia’s Economies (Project Syndicate, 4 min read) Productivity-enhancing investments to raise potential growth, alongside increased labour force participation rates for women and older cohorts are needed in East Asia to avoid the entrenched low growth-low inflation experience of Japan.

Dr. Nouriel Roubini: Global Economic Slowdown Likely to Continue (The Sounding Line, 4 min read) Lack of improvement in major economies points to the global slowdown persisting this year. Global recession will, however, be avoided but stagflation is a risk given deglobalisation and rising populism. [Bearish equities]

Housing Speculation and its Economic Consequences (VoxEU.org, 6 min read) The share of non-owner-occupied home purchases is an additional factor explaining the US real estate bubble and subsequent collapse in the 2000s. It is independent of the surge in subprime lending and had consequences for house prices, employment and wider business conditions.

January 28, 2020 - Permanent spending cuts are needed to rein in the US fiscal deficit plus Europe’s fiscal multipliers remain sub 1

Structural, Not Cyclical, Budget Reform (Economics One, 2 min read) John Taylor cautions against reforming automatic fiscal stabilisers in the US as they work as well now as in the past. Instead, gradual reduction in the spending/GDP ratio would provide a structural improvement in the fiscal deficit and debt position.

Learning About Fiscal Multipliers During the European Sovereign Debt Crisis (VoxEU, 6 mins read) Rising fiscal austerity had an increasingly negative impact on economic growth during Europe’s sovereign debt crisis. But, in contrast to earlier studies, the fiscal multiplier did not rise above 1.

Peter Thiel on the Funding of Science (Marginal Revolution, 2 min read) Advances in science are being held back by increased bureaucracy and a slow regulatory process. A body channelling funding towards more high-risk research, as well as moving away from the standard double-blind trials could boost scientific progress.

January 28, 2020 - How to capture credit ahead of rating action plus two metrics to help tech investors

Rating Events: One Theme to Follow in Global Credit Markets in 2020 (PIMCO Blog, 3 min read) By individually rating issuers and their capital structures investors can identify value in credits ahead of rating agency moves and position accordingly. Particularly important to capture rising stars (credits upgraded to investment grade) and avoid fallen angels (those downgraded to junk).

Allocation Views: Taking a Nimble Approach to 2020 (Advisor Perspectives, 5 min read) Franklin Templeton’s multi asset team see risks skewed to the downside this year with lingering concerns over weakness in business investment, spillovers from the manufacturing recession in Germany and disconnect between equity market performance and corporate profits. PMs see fatter tails and a need to be nimble and diversified. [Bearish equities]

Most Tech Companies Aren’t WeWork (Tech Crunch, 4 min read) A delve into 21 US Software-as-a-service-startups (SaaS) shows cash burn and revenue growth + profit margins are two useful metrics to determine whether a company can achieve high growth while maintaining margins. [Bullish tech stocks]

January 21, 2020 - Ocean temperatures hit a record high in 2019 while climate activists target Wall Street’s largest financers of fossil fuels

Record-Setting Ocean Warmth Continued in 2019 (Advances in Atmospheric Sciences, 6 page read) Measuring ocean heat content (OHC), driven by trapped greenhouses gasses, is one of the best ways to capture the rate of global warming. Latest data shows 2019 was the highest ever recorded in history.

Why the Climate Movement’s Next Big Target Is Wall Street (Gizmodo, 5 mins read) A new campaign to stop financing of fossil fuels (Stop the Money Pipeline) was unveiled last week targeting some of the largest financers of fossil fuels – JPMorgan, Liberty Mutual and BlackRock. [Bearish financials]

Climate Risk and Response: Physical Hazards And Socioeconomic Impacts. (McKinsey 15 min read). The poorest countries could be more exposed, with greater reliance on outdoor work and natural capital, and less financial means to adapt. Policy makers and business leaders need to put in place the right tools, analytics, processes, and governance to properly assess climate risk. [Bearish frontier EM]

January 21, 2020 - A timely look at CB reserves levels and the impact on policy implementation. For Europe, a new measure to estimate the impact of ECB QE.

Monetary Policy Implementation with an Ample Supply of Reserves (Federal Reserve Bank of Atlanta, 47 page read) After last year’s repo spike this study looks at whether low or high reserve supplies at major central banks offer a more stable monetary policy. Unsurprisingly, the paper finds the Fed’s current policy of “ample reserves” to be the most prudent.

Predicting Downside Risks to House Prices and Macro-Financial Stability (IMF, 47 page read) IMF uses current house price overvaluation, excessive credit growth, and tighter financial conditions to jointly forecast higher house-price-at-risk (HaR) up to three years ahead. Tighter macroprudential policy is found to be the most effective way of limiting downside risks to house prices.

The Euro Area Bond Free Float and the Implications for QE (Wiley, 35 page read) The authors construct a new measure of “free float” to estimate the impact of ECB QE on bond yields, growth and inflation. They estimate QE reduced 10‐year bond yields in the Euro Area by around 30bps in 2015, and in 2016 produced a 0.2 positive impact on the output gap and 0.3pp on inflation.

January 21, 2020 - New indicators on recession forecasting and news-based sentiment

Recession Forecasting With the Federal Reserve Bank of Chicago’s Newly Released Brave-Butters-Kelley Indexes (iMarketSignals, 4 min read) The new BBKIs are constructed using 500 monthly macroeconomic timeseries indicators and aims to measure monthly real GDP growth and a number of its components. Despite a two-month time lag, they seem to be accurate and currently show no signs of a recession. [Bullish equities]

News-based Sentiment Indicators (IMF, 56 page read) Sentiment either spikes or trends up before financial crises according to a new “text based” uncertainty measure developed by IMF researchers. The dataset is for 20 countries and can be used an Early Warning Indicator (EWI).

January 21, 2020 - BlackRock on this year’s geopolitical risks

What to Watch in Geopolitics in 2020 (BlackRock Blog, 2 min read) Mike Pyle, Global Chief Investment strategist for BlackRock, points to the current high in BlackRock’s geopolitical risk indicator with recent tensions between the US and Iran. For this year, geopolitical risks to watch are continued fragmentation of trade and technology, increasing protests driven by income and wealth inequality and cybersecurity.

January 21, 2020 - India’s role in determining whether we have reached peak global growth and the benefits of an H1-B visa for US tech start-ups.

Has the World Economy Reached Peak Growth? (Project Syndicate, 3 mins read) Former Goldmans guru Jim O’Neill argues the 2020s will need a productivity miracle to offset the ageing population in China and the West. India has the greatest potential to influence global growth in the 2020s due to its relatively young population. But current government policies are far from supportive. [Bearish global equities]

The Sahm Rule and Recessions (The Dangerous Economist, 3 mins read) Claudia Sahm’s rule defines predicts recession based on the three-month average unemployment rate rising half a percentage point or more above its low during the previous 12 months. With no false positives and more timely predictions than other recession indicators, it’s well worth using.

The United States is Starved for Talent (NBER, 40 pages) Winning the lottery for a high skilled H1-B visa significantly improves a tech start-up’s likelihood of attracting venture capital funding. Shows access to the best talent in the world is an edge for the US.

January 21, 2020 - New findings that show austerity doesn’t negatively impact public opinion after all, and what’s needed to ensure the 2030 sustainable development goals are on track.

Mad about Austerity? The Effect of Fiscal Consolidation on Public Opinion (Wiley, 18 page read) The effect of a tighter fiscal stance on public opinion is relatively small and closely follows the impact of austerity on economic activity. The findings do not concur with the view that austerity creates a negative effect on public opinion and the popularity of public institutions.

Closing the SDG Gap (Project Syndicate, 5 mins read) Continuing progress at the same rate as the past decade would mean the 2030 sustainable development goals (SDG) will not be met. So far, pledges such as eradicating extreme poverty, ending preventable child deaths and averting a climate disaster have gone unfulfilled.

European Green Finance is Expanding, a Discount on Bank Capital Would Discredit it (Bruegel, 5 min read) Financing for the 1.5% of GDP in annual spending under the recently agreed “European Green Deal” will largely come via by bank loans, not capital markets. But reduced capital requirements for those with eligible loan books could prove counterproductive through higher funding costs.

January 21, 2020 - Differing views on the outlook for US equities plus the role of ETFs in raising Ems exposure to the global cycle

How ETFs Amplify the Global Financial Cycle in Emerging Markets (FED, 61 page read) Investors holding exposure to EM markets through ETFs rather than mutual funds is dramatically increasing the sensitivity of cross-border capital flows and market returns to global financial conditions. [Bullish EM volatility]

Trends Diverge as Markets Enter 2020 (Advisor Perspectives, 5 mins read) Last year, manufacturing lagged services, and profits lagged stock performance. Authors think positive growth outlook is priced and bonds are underpricing inflation. [Bearish equities and bonds]

Nothing To Fear But Nothing To Fear (Dr. Ed’s Blog, 5 mins read) Ed Yardeni is positive on US equities in the year ahead. Earnings growth is set to improve with forward revenues at a record high. Any correction due to concerns over high multiples should be used as a buying opportunity. [Bullish equities]

January 14, 2020 - Japan’s mixed experience with raising its inflation target and an insightful contribution to the ongoing Philips curve debate

Raising the Inflation Target: Lessons from Japan (Federal Reserve, 10 min read) Fed takes a useful look back at the BoJ’s 2013 decision to raise its inflation target from 1% to 2%. They find the new target combined with the introduction of QQE boosted growth but only partially on raising inflation (CPI remains below the pre 2013 target). Achieving the old, before adopting a new target is one lesson for other central banks considering such a move. ECB and Fed take note.

Why Has Wage Growth Been Subdued in the Advanced Foreign Economies? (Federal Reserve, 6 min read) The authors use several models to show that slower productivity growth and lower natural rates of unemployment explain much of the apparent breakdown in the relationship between unemployment and wages. Once this is taken into account the wage Philips curve is indeed alive and well.

Debt Has Not Been Caused by Low Interest Rates, but Higher Rates Would Topple the Whole World Economy (Naked Capitalism, 2 min read) Richard Murphy highlights the latest World Bank concerns on rising debt. Normalising monetary policy is not feasible in his opinion as raising interest rates would “fuel disaster and the most massive collapse”.

January 14, 2020 - Can too much information hurt?

Too Much Transparency Makes the World More Opaque (Marginal Revolution, 1 min read) Transparency is highly desirable, but at certain times it can prove a double-edged sword. The NY Times latest plan of having all presidential candidate interviews on the record will fail to achieve its intended objectives. We will likely no longer see off-the-record uncomfortable comments.

Forecasting Energy Commodity Prices: A Large Global Dataset Sparse Approach (Dallas Fed, 24 page read) The authors show improved forecasting accuracy for energy prices several quarters ahead, particularly gas, using a quarterly global VAR dataset for the 33 largest economies. More accurate predictions could have important macro consequences for the world’s energy dependent countries.

January 14, 2020 - Taiwanese President Tsai Ing-wen’s re-election risks the ire of China

Entangled US-China-Taiwan Relations Likely Just Got More Complicated After President Tsai Ing-wen’s Big Re-election Victory (SCMP, 2 min read) Saturday’s landslide re-election of Tsai Ing-wen as Taiwanese President will add uncertainty to the US-China relationship and could see Beijing attempting to gain concessions through trade policy. [Bearish US-China]

Political Uncertainty, Market Anomalies and Presidential Honeymoons (Journal of Banking and Finance, 23 pages read) Presidents are usually highly inclined to stamp their own mark in the office at the start of a new term, raising market uncertainty and risk aversion. The authors find robust links with spikes in risk measures during these honeymoon periods but have a hard time aligning political uncertainty with overall equity returns.

January 14, 2020 - As fourth quarter GDP releases start to trickle in later this week we feature one take on achieving a growth target. Plus, the winners and losers in three decades of globalization.

How to Boost Your Country’s GDP Figures Like China (The Sounding Line, 3 min read) Ahead of Friday’s Q4 China GDP release this article gives a simplified take on the country’s heavily criticised national accounts data. From building bridges to nowhere, rounding up and underestimating the past, this is the 101 guide to what is in reality a highly complex task.

Three Decades of Globalization: Which Countries Won, Which Lost? (Wiley, 30 page read) They find education and macroeconomic stability as robust determinants of a country’s share in world exports. In contrast to earlier decades, countries across income groups experience marginalization and globalization.

Economic Policy Uncertainty in the Euro Area: an Unsupervised Machine Learning Approach (ECB, 45 page) The paper presents a novel machine learning approach to estimate economic policy uncertainty and its sub-components using news articles from Germany, France, Spain and Italy over almost twenty years. The paper concludes the fiscal policy uncertainty component was quite significant for Spain and Italy when the sustainability of public finances was in focus. Investment for France, Italy and Spain reacts heavily to political uncertainty.

January 14, 2020 - Britain’s changing class divide and Piketty on inequality

What Does Class Mean in 21st Century Britain? (Open democracy, 6 min read) In the context of Labour’s election defeat, the author argues that the class divide is no longer as clear as in the past. The switch out of traditional Labour seats was partly attributable to economic and social factors.

After the Climate Denial, the Inequality Denial (Le Monde, 4 min read) Economist Thomas Piketty argues that rising inequality is being ignored in France and other rich countries. Economic policies in recent years have clearly benefitted the well off and governments have failed to improve transparency. A sobering reminder that reduction in inequality and climate change must be addressed simultaneously.

January 14, 2020 - A crypto focus this week with a basketball star launching a token-based investment platform and a new comprehensive guide to everything crypto

Introduction To Cryptocurrency (Nakamoto.com, 4 min read) A new website that brings together all things related to Crypto. It includes a free guide compiled by Dragonfly Capital’s Managing Partner, Hasseb Qureshi, that explains blockchain, cryptography and all that goes with it. Except, of course, the identity of Satoshi Nakamoto.

NBA’s Spencer Dinwiddie Set to Roll out Tokenized Investment Platform Next Monday (The Block, 1 min read) The scheme will allow the player to instantly collect up to $13.5 million off of his $34 million guaranteed three-year contract. Token holders would then receive monthly payments in the next three years with a 4.95% base interest rate. [Bullish Crypto]

Predicting Intraday Jumps in Stock Prices Using Liquidity Measures and Technical Indicators (arxiv.org, 45 page read) Researchers at Nanjing University and the University of Texas successfully model intra-day stock price moves on the Shenzen stock exchange using information within liquidity and technical indicators. Their data-driven approach is portable to predict price moves in individual stocks.

January 09, 2020 - 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]

January 09, 2020 - 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 page read) 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 page read) 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 page read) 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.

January 09, 2020 - 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 page read) 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.

January 09, 2020 - Recession worries linger on.

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]

January 09, 2020 - 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 page read) 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 page read) 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]

January 09, 2020 - 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 to 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, positive GDP growth, continued profit growth, steady rates, and below average issuance. [Bullish credit]

December 24, 2019 - Whether the frequency of recessions have reduced and whether negative interest rates would likely deepen a recession

The Business Cycle Is Dying (Econ Lib, 4 mins) 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 mins) 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.

December 24, 2019 - Can banks really create money out of thin air?

Banks Do Not Create Money Out of Thin Air (VoxEU, 5 mins) 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]

December 24, 2019 - Recent downshift in the economic growth of the US to stabilise by early 2020, whether growth is moral and is lower unemployment a good thing?

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 Growt]

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.

December 24, 2019 - Re-invigoration of the economy’s capacity to generate good jobs and tackle inequality, and the challenges of Europe’s green deal

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.

December 24, 2019 - Difficulties in accurately forecasting the trajectory of the economy and how PE firms’ cash pile residing in investor portfolios can hammer their ability to exploit cheaper valuations

Why It’s Tough to Make Stock Market Predictions (Econ Life, 2 mins) 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 mins) 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]

December 17, 2019 - There’s a big debate around what objectives a central bank should have – most are thinking of refining the inflation target, yet some are calling for something more radical. Meanwhile, trust in the ECB is declining.

Public Support for the Euro and Trust in the ECB: The First Two Decades (Vox EU, 8 min read) Insights from surveys in member countries of whether the public still supports the ECB and single currency (monetary union). The main findings include: support for the euro is consistently higher than both trust in the ECB and trust in national governments. After the crisis of 2008-2013 public trust in the ECB had deteriorated and the rate of unemployment is the key factor explaining changes in support for the euro and trust in the ECB. [Bearish ECB]

Financial Stability Should Be Central Banking’s Prime Objective (Project Syndicate, 4min read) Former Chief Economist of Citi, Willem Buiter, argues that financial stability rather than stable prices should be primary objective of central banks. Argues for higher rates and also counter-cyclical macroprudential policy. [Bearish bonds]

December 17, 2019 - Market structure is changing. Some like the advent of machine learning could enhance investor returns, while others like fragmented clearing are adding an additional cost.

What Machine Learning Will Mean for Asset Managers (Harvard Business Review, 7 min read) Harvard asserts that machine learning (ML) will actually reverse the trend towards passive investment. ML can make more accurate forecasts by using alternative data (eg images and sound), employ non-linear modelling, reduce human biases and be quickly implemented without regulatory approvals (unlike say the auto industry) . [Bullish ML quant managers, bearish traditional passive}

The Cost of Clearing Fragmentation (BIS, 30 min read) Latest BIS research shows that an architecture based on multiple but fragmented central counterparties (CCPs) lead to daily opportunity costs of $80 million for end users. This happens mainly because global liquidity dealers cannot net trades cleared in different CCPs. [Bearish banks]

December 17, 2019 - UK election results were a surprise to most. Under the hood, it was as much as Labour loss as Conservative win. Elsewhere in Europe, it appears that lack of employment opportunities is a better guide to discontent than age or wealth.

Election Analysis in The Maps and Charts (BBC News, 3 min read) Prime Minister Boris Johnson’s Conservatives have a majority of 80 seats. A series of interactive maps and charts displaying the regions and categories of gains of losses made by each party. Notably, Labour lost more votes in remain areas than the Conservatives. Labor have had their worst return of seats in any general election since 1935; losing votes in every region in the UK.

The Geography of Discontent (Vox EU, 8 min read) Rather than age, wealth, or education, this new research finds that anti-EU sentiment stems from a combination of long-term industrial decline, lower employment and less educated workforce. Importantly, while education remains important, the lack of employment opportunities ranks as high [Bearish euro]

December 17, 2019 - This week we look at longer-term forces. In the UK, it appears that more people are topping up their state pensions with private pensions. Also, the impossibly perfect Nordic countries may have a dark side – their environmental impact.

Pension Wealth in Great Britain: April 2016 to March 2018 (ONS, 31 min read) The last decade saw an increase of around 10 percentage points (from 43% to 53%) in the number of adults below State Pension age who actively contribute to a private pension, which is very likely the result of automatic enrolment introduction that happened between 2012 and 2018. Median pension wealth for pensions in payment for men is double that for women. [Bullish private pension funds]

The Dark Side of the Nordic Model (Al-Jazeera, 4 min read) Scandinavian countries may top every ranking on human development, but their ecological impact on the planet is outsized. They have some of the highest levels of resource use and CO2 emissions in the world with sustainable level of resource consumption at 32 tons per year compared to the average of 7 tons per year. If everyone in the world consumed like Scandinavians, we would need nearly five Earths to sustain us. [Bullish ESG]

December 17, 2019 - Inequality is here to stay, especially in big cities. This could see continued protests in 2020

2019 Was a Year of Global Unrest, Spurred by Anger at Rising Inequality – and 2020 is Likely to be Worse (The Conversation, 7 min read) Conditions that spawned global unrest on every continent in 2019, are likely to worsen in the face of a slowing global economy and little sign of causes of disaffection being addressed. In 1950, there were only two mega-cities with populations of 10 million or more – the New York metropolitan area and Tokyo. Today, there are 25. The megacities overcrowding phenomena contributes to the anger of the masses that feel left out [Bearish EM]

December 17, 2019 - Some investment strategies that contradicted theory are now starting to conform though with an unexpected twist. We all know equities deliver solid returns in the long-run, but that’s not always the case. And watch the rise of green investing, especially from Europe.

The Fama Puzzle at 40 (Econbrowser, 4 min read) Traditionally, FX carry trades have performed well, despite violating theory – uncovered interest rate parity (UIP) and rational expectations. The currency with higher interest rates should depreciate to wipe out the carry, but in reality that doesn’t happen. However, since the financial crisis, the theoretical relationship is correctly predicting the real-life direction of currencies. The trouble is that they are now too sensitive to interest rates. (Bearish FX carry trades)

Charting the World’s Major Stock Markets on the Same Scale (1990-2019) (Visual Capitalist, 3 min read) If you invested $100 in the U.S. market in November 1990, you would have over $1,000 today (+980%). However, if invested in Japanese stocks in 1990, you would have made $10 return (or 1%).

The Green Deal Will Make or Break Europe (Project Syndicate, 4 min read) The proposed “European Green Deal” by new EC president Ursula von der Leyen could lead the EU to dominate the issuance of “safe assets” and green bonds. This could help the euro become the top reserve currency. However, the path to this is fraught with politics. (Bullish green bonds and Euro)

December 10, 2019 - 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]

December 10, 2019 - 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]

December 10, 2019 - 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.

December 10, 2019 - 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]

December 10, 2019 - 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]

December 10, 2019 - 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]

December 03, 2019 - Whether monetary policy and supervisory roles can be kept separate and the optimal inflation rate in Japan

The ECB after the Crisis (ECB Working Papers) The ECB makes the case that its expanded responsibility to ensure the stability of the banking system, through the establishment of the Single Supervisory Mechanism (SSM), is the most far reaching action taken by the Euro-area. They argue that they can keep monetary policy and supervisory roles separate. [Bullish EU Financials]

Generation War on Inflation: Optimal Inflation Rates for the Young and the Old (Dallas Fed) Dallas Fed computes the optimal inﬂation rates for the young and the old in Japan. They conclude that the “optimal” rate for the older generation is negative due to their nominal asset holdings. An ageing population may lead to lower expected inflation rates in the long term. [Bullish JGBs]

December 03, 2019 - Asset managers will have to implement AI-based cost reducing solutions to cope with structural shifts. Punitive regulation for credit market making activity has direct impact on liquidly and prices, and dealer inventory data now a major source of advantage.

Adapting to a New Normal in European Asset Management (McKinsey & Company) European Asset Managers were less affected by the switch to passive strategies and successfully dealt with the last decade’s macro structural changes. But McKinsey argues the next decade will be more difficult. Profit margins are likely to fall not least because of lower bond yields. Therefore cost control will be key.

Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress (NBER Working Paper) A broad financial distress measure and a dealer corporate bond inventory measure can statistically explain about 50% of the excess variation of credit spread changes beyond structural credit risk factors.

December 03, 2019 - Economies in East Asia should be proactive on policies to avoid Latam like social unrest and what do Michael Bloomberg’s philanthropic endeavours indicate?

East Asia’s Political Vulnerability (Project Syndicate) Korea University professor Lee Jong-Wha argues that East Asian countries could follow the path of Latin American instability unless policymakers change their policies. He argues the case for economic policies that reduce inequalities but are balanced with fiscal sustainability. [Bearish East Asia]

What Mike Bloomberg’s giving says about Mike Bloomberg (Axios) Bloomberg has donated to support numerous social development causes. This could help reveal his likely policies. His major causes include controlling the use of tobacco, tackling climate changes, road safety, and urban development

December 03, 2019 - Secular stagnation, scarce full-time work and defence spending spillovers

Demographics and Technology Explain Secular Stagnation and More (Vox EU) Argues that lower fertility and population ageing are likely to generate more automation, which will lead to a reduction in GDP per capita growth and the labour income share. [More Populism]

Involuntary Part-Time Work a Decade after the Recession (Federal Reserve Bank of San Francisco) San Fran Fed identify shifts in the US labour market over the past decade. The bottom line is that full-time work has become scarce and voluntary part-time employment has exceeded its pre-recession level. [More Populism]

The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers (NBER Working Paper) Empirical evidence from major OECD countries shows that a 10% increase in government-funded R&D in the defense sector generates privately-financed defense R&D by 4.3% and encourages private investments in other nations. [Bullish Big Military Countries]

December 03, 2019 - Alongside increased reasoning for equity market corrections, this week we have a piece for bullish selective EM debt and complications of the CLO market.

We Don’t Need a Recession For a Reset in the Stock Market (A Wealth of Common Sense) Ben Carlson crunches the numbers and finds that 60% of double-digit equity market corrections take place outside of recessions. Therefore expect a big correction even if the US doesn’t formally enter a recession. [Bearish US equities]

Does The Return Of QE Mean Big Gains For Stocks In 2020? (Advisor Perspectives) Some argue that the stock market gains of the past 10 years were largely attributable to the massive expansion of central bank balance sheets. So the return of “QE-lite” by the Fed could be viewed as a positive for stocks. However, investors should be cautious. On a rolling 12-month basis, historic data shows no consistent relationship between central bank balance sheets and stock markets. Watch economic growth indicators instead. [Bearish US Equities]

Remain Selective on EM Debt (Variant Perception) This piece argues that the top performing EM debt markets will be those that have simulative monetary policies, but contained inflation. The markets that stand out are India, Mexico and Indonesia. [Bullish Selected EM Debt]

Leveraged Loans – History Rhyming? (In The Long Run) The article draws a parallel between GFC’s CDOs mismanagement and today’s leveraged loans build-ups (particularly CLOs products). Author argues that CLO asset quality is underestimated. [Bearish US Credit]

November 28, 2019 - 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.

November 26, 2019 - 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]

November 26, 2019 - 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]

November 26, 2019 - 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.

November 26, 2019 - 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]

November 26, 2019 - 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.

November 19, 2019 - It’s clear that economists have got a lot wrong, but mainstream thinking isn’t changing much. Moreover, the Fed seems reluctant to try anything new when it comes to inflation targeting but is happy to support banks.

Against Economics – Book Review of “Money and Government: The Past and Future of Economics” (The New York Book Review) David Graeber argues that the mainstream economic thinking and policy is broken yet continues to be used. [Bearish economists!]

Learning and Misperception: Implications for Price-Level Targeting (Fed Board of Gov) Fed argues against adopting a temporary price-level targeting strategies during a recession. [Bearish rates]

The Global Equilibrium Real Interest Rate: Concepts, Estimates, and Challenges (Fed Board of Gov) Fed argues that they may have overestimated how high real rates should be as they didn’t correctly incorporate global trends. [Bullish rates]

Fed’s Push into Funding Markets Stirs Fears of Widening Role (Politico) Questions whether the FED’s latest effort to intervene in the funding market can lead to the Fed becoming the whole U.S. money market. The expectations that the FED will protect banks in volatile markets that are inconvenient to monetary policy, can potentially lead to adverse risk-taking by the banks. [Bullish banks]

November 19, 2019 - US national accounting suggests companies are using offshore investments to hide income from taxes. Shadow banks could be harming liquidity. But in the new world, we could see the rise of digital currencies.

A Big Borrower and a Giant Corporate Tax Dodge? How Best to Describe the U.S. External Balance Sheet (Council on Foreign Relations) Brad Setser argues that the US is analogous to a household that can borrow indefinitely at a very low rate, as the US’s financial assets can barely cover the US debt liabilities. The equity side is seen as a corporate tax dodge for US-based multinationals.

The High Stakes of the Coming Digital Currency War (Project Syndicate) Harvard Professor Kenneth Rogoff suggests that Facebook’s proposal of Libra has intensified the competition of digital currencies between countries. He also warns how state-sanctioned digital currencies may disrupt the scene. [Bearish bitcoin]

The Side Effects of Shadow Banking on Liquidity Provision (Liberty St Economics/ NY Fed) Since the mid-1990s, shadow banks have started eating into traditional banks’ share in the term loan business. The increasing presence of shadow banks also has an indirect, negative impact on the liquidity insurance that credit lines provide to corporations.

November 19, 2019 - There’s growing awareness that we may be experiencing decreasing returns to scientific research – this has major implications for policy and companies. Better then to rethink the work week, perhaps. In the short-term, though, politics will continue to be a big risk for economies.

On the Decline Of R&D Efficiency (VOX EU) The empirical evidence of Japan following the Great Recession suggests that the marginal benefits of R&D spending may not be sufficient to drive growth in developed economies. [Bearish high investment companies]

Is the Rate of Scientific Progress Slowing Down? (Marginal Revolution) In-depth review of different strands of literature and metrics such as total factor productivity, patent measures, researcher productivity, crop yields, life expectancy and progress of computing power, shows some evidence that the rate of scientific progress had indeed slowed down. [Bearish high investment companies]

Is Economic Winter Coming? (Project Syndicate) Former RBI governor and current Chicago Professor, Raghuram Rajan, argues that the biggest risk factor for a recession is the White House, not the Fed or any one sector of the economy.

Economics of A Four-Day Working Week: Research Shows It Can Save Businesses Money (The Conversation) Several businesses that adopt this scheme report an annual saving of GBP 92 billion and an experiment carried out by Microsoft Japan shows a 40% increase in productivity.

November 19, 2019 - Populism is affecting all dimensions of policy. A less discussed but very likely shift will be clamping down in corporate tax dodges. Underlying much of the shift in sentiment is growing inequality. Yet, we may be measuring wrong and we may picking the wrong tools to fix it.

2020: An Inflection Point in Global Corporate Tax? (Deutsche Bank) Jim Reid argues that populism will see higher corporate tax rates across the world. [Bearish big tech]

Declining Labor Shares of GDP Are Not the Story of Inequality (CEPR) Argues that using declining labour shares of GDP as an indication of inequality is incorrect. This is partly because of the way depreciation of capital is accounted for.

Why US Inequality Is Higher Than Europe’s (Project Syndicate) The pre-income of the US bottom-half has only gone up by 3% since 1980 compared to 40% for Europe. This is due to Europe’s national minimum wages, greater worker protections, free public education and free healthcare. [Bullish Europe]

November 15, 2019 - Trade wars are the obvious source of geopolitical tensions. But we should add conflict over water and also over mobility – remember the Chile protests were triggered by rising costs of public transport.

The Growing Threat of Water Wars (Project Syndicate) More geopolitical conflicts are about access to water resources. However, most of these conflicts take place between developing economies, and many advanced economies still maintain water-consumption habits that won’t alleviate the global water stress.

Quantifying the Unemployment Effects of Trump’s Protectionist Policies (VOX EU) Researchers conclude that repealing NAFTA and the bilateral tariffs between the US and Mexico would reduce welfare by 0.31% in the US and by 6.6% in Mexico. However, evidence also shows that Canadianworkers are slightly better off as a result. [Bearish Mexico]

When Markets and Mobility Collide (Project Syndicate) Harvard Professor Ricardo Hausmann reflects on the recent Chilean protests over an increased metro fare. He concludes that this “market adjustment” on access to public goods and services – i.e. public transportation – is unfair to the economically disadvantaged population.

Congress, Nord Stream II, and Ukraine (The Brookings Institute) Steven Pifer argues that sanctioning parties that are involved in the construction of the Nord Stream II pipeline doesn’t make much difference. But the Congress could still amend legislation to help Ukraine take advantage of its position as a transit country for Russian gas. [Bullish gas]

November 12, 2019 - Amidst Australia battling with catastrophic bushfires, the San Fran Fed is waking up to the need to tailor monetary policy to climate change and natural disasters. In Europe, the efforts to save the staling economy – and the euro – are surging.

A Phillips Curve for the Euro Area (Ball, Mazumder) Finds that the textbook Philips Curve largely holds for the Euro area, using a weighted median rather than core inflation rate, which includes food and energy prices.

Why Climate Change Matters for Monetary Policy and Financial Stability (Federal Reserve) After the Kincade fire in California destroyed homes and businesses alike and the ongoing Australian bushfires, monetary policymakers are waking up to the need for incorporating how disasters such as hurricanes, wildfires, and flooding affect labor markets, spending and output. [Bullish rates]

A Digital Euro to Save EMU (VOX EU) Thomas Mayer argues for the idea of relaunching the Euro as a digital bank central currency, suggesting it may be beneficial for the Eurozone economy in the long run and increase its competitive advantage on a global scale. [Bullish euro]

November 12, 2019 - Not all stock market losses have been created equal – there is a clear hierarchy and we feature Ben Carlson from Ritholtz exploring it. Also, a great piece on what the next trends in asset management are and why nearly 90% of U.S. stock market funds failed to beat their indexed benchmark over the past 15 years.

Trends That Matter in Asset Management (A Wealth of Common Sense) It’s not all about fundamentals – professionals overtaking amateurs, a surge in target-date funds and quants replacing star managers now matter too.

Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds (NBER) This working paper examines empirical evidence to explain how mutual fund managers could misclassify their holdings, and how such misreporting behaviours are more incentivised after continuous periods of large negative returns.

The Hierarchy of Stock Market Losses (A Wealth of Common Sense) Ben Carlson explains how people may lose money in the stock market differently – this depends on if they’re in developed markets, emerging markets, or just individual stocks.

November 12, 2019 - Trump is casting a shadow of uncertainty on markets – he hasn’t yet signed an agreement to roll back trade tariffs on China and his impeachment proceedings can fly in either direction. Similarly, across the pond in the UK, Conservatives are scrambling for support in the North.

Did Trump’s Trade War Impact the 2018 Election? (Blanchard, Bown, Chor) Academics find trade war accounted for one-tenth of the observed nation-wide decline in Republican House candidates’ vote share between 2016 and 2018. Largely driven by retaliatory tariffs on agricultural products.

The 7 Ways Impeachment Could Shape The 2020 Election(Fivethirtyeight) Things could go in a number of directions – Trump could lose everything, but outcomes can also lead to utter chaos and destruction for the Democrats.

Can the Conservative Party Win in the North of England? (The Conversation) The Conservative’s strategy of appealing to the “Workington Man” in North England oversees the demographic complexity of this region and may not be as effective in the face of the upcoming UK election. [Bearish GBP]

We Are Finally Getting Better at Predicting Organized Conflict (MIT Technology Review) Shows the anatomy of “conflict models” and how it computes a “risk score” to assess the probability of social conflicts in a region. Such models successfully forecast the September 2018 conflicts in Ethiopia.

November 12, 2019 - We focus on the much-feared trend of declining productivity and find surprising reasons behind it, such as obesity. Technology might also be hampering growth long-term. We also look at ways the US can learn from Australia’s mild and short-lived recessions.

Where Is That Confounded Recession? (Nevins Research) Daniel Nevins argues against the general market sentiment about an upcoming recession by conducting examinations on the housing sector, public policies and real spending capacity. [Bullish equities]

Why Does Australia Have Mini-Recessions? (EconLib) Scott Sumner argues that Australia’s recessions have been much milder than in the US, as they do monetary policy more efficiently. They track the price of money (exchange rate) rather than the rental cost of money. It is far more powerful and unambiguous.

What are the Real Reasons for Declining Productivity? (Mish Talk) Some of the Top 10 reasons include wrong measurement of productivity, time wasted on Facebook and surging obesity levels. [Bearish equities]

Is Rising Concentration Hampering Productivity Growth? (San Francisco Fed) The increase in productivity brought by the IT revolution for large firms in the US has caused lower profit margins across other businesses and a decrease in market competition. In the longer term, this phenomenon will lead to weaker growth in productivity. [Bearish small caps]

November 12, 2019 - We continue our discussion on wealth inequality, a heavily featured topic in the US Presidential run. Harvard’s Taehoon Kim finds that the role of the US as the “banker of the world” contributes to wealth concentration there. The IMF came out with a handy map to use when targeting regional inequality with fiscal policy.

The World’s Banker: On the Rise in U.S. Wealth Inequality (Harvard University) Harvard researchers have developed an equilibrium model to show that global financial integration contributes significantly to income inequalities and the current economic environment in the US exemplifies that. [Bearish global banks]

A Map of Inequality in Countries (IMF Blog) Regional income inequalities in developed economies are increasing over time and have created mobility issues. IMF researchers urge governments to introduce geographically-targeted policies to address this problem.

November 12, 2019 - Despite equity markets climbing up in the past month or so and a rise in long-dated bond yields and steeper yield curves, the overall sentiment in this week’s blogs is negative. Fund managers fear a recession, the credit boom might be a predictor of an equity crash and to top it up, we have the 30 most extreme risks for the year. At least Scott Sumner says bubbles are fiction.

The Bubble in Phony Bubble Calls (EconLib) Scott Sumner claims bubbles don’t exist yet there are constant ungrounded warnings of them across the media. Canada’s housing market never crashed despite years of scary headlines. [Bullish stocks]

Extreme Risks 2019 (Thinking Ahead Institute) Comprehensive report that lists 30 extreme risks ranging from anarchy to hyperinflation to tech singularity. [Bullish volatility]

Year-End Fixed Income Survey 2019 (Russell Investments) Survey of fund managers finds that bond managers expect only one more Fed cut, while credit managers fear a US recession and FX managers are bearish euro [Bullish rates, bearish credit]

The Leverage Factor: Credit Cycles and Asset Returns (Davis, Taylor) Credit boom periods tend to be followed by equity return underperformance in the near future, thus credit growth signals can be useful input in asset allocation. [Bearish equities]

November 02, 2019 - Yesterday, the Fed cut rates for the third time this year. The persistent low rate environment seems to be a cause of bubbles forming after all. The least central bankers can do is help reduce carbon emissions – ‘Green QE’ is all in.

When Yields Talk, Sectors Listen (Advisor Perspectives) Low interest rates impact not only bonds but equity valuations too. And some sectors are more rate sensitive. Financials suffer whereas Utilities, Consumer Staples, and Healthcare outperform. [Bullish these latter sectors]

Herd Behaviour in Asset Markets: The Role of Monetary Policy(VOX) Argues against economist Robert Shiller’s findings that bubbles are random and unpredictable and instead finds they are closely linked to loose monetary policy. [Bearish stocks]

Jens Weidmann: Climate Change and Central Banks(Jens Weidmann)Discusses ways in which central banks can be involved in transitioning to a low-carbon economy. Heavy focus on green finance or ‘Green QE’, however, might distract from the main policy objectives and hinder bank independence. [Bearish green bonds]

November 02, 2019 - A number of uncertain macro factors are weighing down on equity valuations while at the same time value stocks are making a comeback, riding the volatility and possible undervaluations.

Tracking Macro Factors In Portfolio Strategies(The Capital Spectator) Runs a number of regressions to estimate the impact of different macro factors on diversified ETF portfolios. Finds that influence of such factors varies by market and over time.

The Revival In The US Equity Value Factor Rolls On(The Capital Spectator) Explores the recent revival in value stocks. It’s likely caused by heightened concern over slowing economic growth refocusing the market’s attention on undervalued assets. [Bullish value factor]

Using Payment System Data to Forecast Economic Activity(Aprigliano, Ardizzi, Monteforte) Models large amounts of retail payments data in Italy to show that tracking such transactions more closely helps make better GDP predictions.

November 02, 2019 - The idea of introducing a wealth tax to solve inequality in the US and beyond has been thrown around a lot recently. Most economists frown upon it (we previously featured Timothy Taylor’s piece crunching numbers to find it makes little sense), but this week we picked an opposing view by Nobel laureate Michael Spence. He sees value in a wealth tax but with some caveats.

Which Wealth Tax? (Project Syndicate) Spence supports Democratic candidates Warren and Sanders in pledging for the introduction of a wealth tax, but only if it’s done right and the cash goes to the bottom 50%. [Bearish US stocks]

How the Rich Are Different: Hierarchical Power as the Basis of Income Size and Class(Blair Fix) A new paper on inequality claiming that the rich of the world are different not because they are more productive or can exploit workers, but because of their hierarchical power or i.e. greater command over subordinates.

The Great Gatsby goes to College: Tuition, Inequality and Intergenerational Mobility in the U.S. (Damien Capelle) Finds that unequal access to higher education in the US has led to increases in returns to human capital, heightened income inequality, and has increased tuition fees and stagnated the enrolment of low-income students.

November 02, 2019 - Yesterday, the Fed cut rates for the third time this year. The persistent low rate environment seems to be a cause of bubbles forming after all. The least central bankers can do is help reduce carbon emissions – ‘Green QE’ is all in.

November 02, 2019 - This week we see a series of pessimistic signals around the future of the workforce. Automation could be a dehumanizing force, real wage growth has been sticky, and ageing populations create more than just financial problems.

My Favourite Job Market Paper So Far This Year (Marginal Revolution) Professor Tyler Cowen of George Mason University flags a recent MIT Paper about wage rigidity, finding that the real wages for the same position at the same establishment decrease over time. So stable jobs lead to lower wages. The solution would be reallocating similar jobs across firms.

Intergenerational Mobility of Immigrants in the US over Two Centuries (Abramitzky, Boustan, Jacome, Perez) Finds that the ‘American Dream’ rings true: children of immigrants from nearly every country have higher rates of upward mobility than US-born children.

What is the Problem with Rising Dependency Ratios in Japan – Part 1? (Economic Outlook) Japan’s rising dependency ratios result from its ageing and shrinking population. MMT advocate argues that these dynamics lead to real reductions in productivity and social resources, but do not cause fiscal issues. [Bearish rates]

November 02, 2019 - The idea of introducing a wealth tax to solve inequality in the US and beyond has been thrown around a lot recently. Most economists frown upon it (we previously featured Timothy Taylor’s piece crunching numbers to find it makes little sense), but this week we picked an opposing view by Nobel laureate Michael Spence. He sees value in a wealth tax but with some caveats.

November 02, 2019 - This is another tough week for big name start-ups and their major stakeholders. Are the anticipated bubbles around ‘fake’ tech start-ups finally going to bust? The outlook for the overall market is still heavily affected by uncertainties and a lack of faith, but maybe there’s an unexpected silver lining lying in the increased interest around ESG or green investing.

Exorcising Phantom FDI (VOX EU) This paper proposes a clever technique to identify the true investors behind FDI data. US companies actually account for 10% of FDI into China, rather than the officially reported 1%. Meanwhile, the EU accounts for around 30% of FDI into the UK, rather than the official 40%. [Bullish US large-cap, bullish GBP]

Alternative Proteins and the Future of Meat (McKinsey) Across different economies, health is the common driver of demand for alternative proteins. Alternative protein is a niche market, but McKinsey believes it is sizeable enough to disrupt the food industry in the future. [Bullish alt meat markets]

10 Key Investor Takeaways From the 2019 Annual Meetings of the IMF and World Bank (PIMCO) Geopolitical uncertainties such as the 2020 presidential election and the US-China trade tension were the biggest concerns. Meanwhile, ESG investing has become the trendy topic as a result of increased awareness of climate changes. [Bullish ESG stocks]

October 26, 2019 - With a few new Central Bankers settling in, and the UK about to select its new Governor, the uncertainty around their next move remains. Earlier this week we discussed the few specific ways to make QE work, given it now seems inevitable – now we look at how politics might play with fiscal stimulus. We also feature a great analysis on why the Philips curve is still relevant and why the Fed should do all it takes to foster expansion.

Can Tariffs Have a Deflationary Impact? (The Library of Economics and Liberty) Not all tariffs are inflationary. Famously, the Depression-era Smoot-Hawley tariff reduced aggregate demand by enough to offset any inflationary impact. It contributed to causing the Great Depression. Bearish growth and equities.

Objectives and Boundaries of Monetary Policy: A Governor to Renew the Bank of England’s Monetary Vows (VOX) Warns thatthe credibility of central banks gained after decades of hard work could be unwound by a new era of economic populism. This could be accelerated by central banks issuing short-term debt to help the governments fund their spending sprees. Suggests yield curve steepening.

The Phillips Curve: Dead or Alive (VOX) Argues that the Philips curve, which links employment to inflation, is not dead as many believe but just in hibernation. It will wake up – this has happened before in the 1960s and history could repeat. Recommends the Fed’s to keep the economic expansion going, especially as unemployment could fall below natural rate estimates. Bulish rate markets.

October 26, 2019 - We looked at how populism is turning left-wing in one of our specials this week. This might be holding true for Eastern Europe too, as some excellent Brookings analysis points at. Elsewhere, we picked out a curious list of the financiers attending “Davos in the desert”.

Is the Tide Turning Against Right-Wing Populism and Nationalism in Central Europe? (Brookings) Argues that the uniting of opposition parties is a key strategy to the diminishing power of right wing in European politics. Could support rise of left populism = less business friendly = lower stocks

The Grandees Headed to Saudi Arabia’s “Davos in the Desert” (Axios) Axios compiles the list of guests who will attend the Future Investment Initiative in Riyadh later in October – heads of state, high-profile Trump administration cabinet members, executives of the world’s largest financial institutions and will.i.am all made it to the list. Saudi unaffected by human rights issues.

U.S. Military Could Collapse Within 20 Years Due to Climate Change (Vice) A Pentagon research report highlights several climate-trigged factors that could be detrimental to the US Military in the upcoming two decades: a collapse of the power grid, disease epidemic and geopolitical tensions stemmed from climate-related population displacement.

October 26, 2019 - Amid heated debates on Big Tech’s market power, the new legislation in California, called AB5 is gaining traction. We feature Laura Tyson, a former chair of the US President’s Council of Economic Advisers arguing that rather than allowing technology to accelerate the hollowing out of the middle-class, governments at all levels should be strengthening worker protections. We also feature analysis claiming that the determining factor behind your wealth seems to be pure luck.

Middle Management, Geographic Frictions, and Firm Establishment (VOX EU) Geographic frictions, such as the distance between a firm’s headquarter and its establishments, may adversely impact the firm’s performances. Hiring “middle managers” who function like CEOs in regional offices is an effective way to offset this negative externality. Argues middle management may be positive for international firms.

A New Approach to Protect Gig Workers (Project Syndicate) California has passed a new law to make it harder for the Ubers and Lyfts of the World to classify workers as independent workers instead of employees. Given that Trump is against the legislation, it can expected to spur major legal and political battles in 2020. Could see higher wages, so potentially negative gig economy companies.

If You’re So Smart, Why Aren’t You Rich? Turns Out It’s Just Chance (MIT Technology Review) Researchers from the University of Catania simulate how people utilise their talents to exploit opportunities in life and accumulate wealth. Results show that the wealthiest individuals are nowhere near “the most talented” – an important factor is, in fact, pure luck. Suggests taxing the rich.

October 26, 2019 - The way we work and do research is vastly changing thanks to tech and the automation it brings. There are worries around potential protests emerging from low-skilled workers but also from Academics. We also look at the continuing discussion around inequality, some widely dropping revenue sources in cities and how we can possibly tax the rich more.

Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy (NBER) Billionaires’ geographical location is highly sensitive to state estate taxes. For state-level policymaking, one-time tax revenue gains following the death of a wealthy resident often exceeds the foregone revenues over the remaining lifetime of those who relocate. Bearish state finances and munis.

More Power to the People: Electricity Adoption, Technological Change and Social Conflict (VOX) Uses a historical case of a new technology “shock” (electrification) in Sweden to predict potential reactions to the increasing automation. Finds more local strikes are likely, especially from lower skilled workers, but not against the technology itself, but for higher wages. Suggests higher inflation, therefore bearish rates.

Financial Fragmentation of the Eurozone in Pictures (Money Maven) Funds have been increasingly flowing towards “central” Eurozone countries from “peripheral” European countries since the financial crisis. The general distrust of the “peripheral” countries’ banking systems lies at the heart of the fragmentation problem. Bearish European banks.

October 26, 2019 - Unsurprisingly, this week’s woes around Adam Neumann and his WeWork have been all the hype, raising some worries around a bubble forming. No need to be too concerned, however, as we don’t see a dot-com style crash on the horizon – private markets are learning from their mistakes.

The Not-Com Bubble is Popping (The Atlantic) Sees the recent tech company IPO failures are the exact opposite of the dot-com bubble. Now public investors do the hosing instead of getting hosed. That said, true tech companies, especially software ones, are showing little sign of crisis. Suggests shorting ‘fake’ tech companies and going long ‘true’ tech companies.

Airbnb’s WeWork Problem (Tech Crunch) Wall Street might have greater patience with Airbnb despite its massive Q1 2019 loss. Airbnb has more capital in the bank than it’s raised in the previous 11 years, some “cumulatively” positive free cash flows, and positive EBITDA for two consecutive years. Bullish AirBnB view.

How a Weapons Dollar Could Backfire (Project Syndicate) The dominance of the dollar is at risk. Many countries are looking to non-dollar currencies and alternative payment mechanisms to protect themselves from the Trump administration’s exploitation of the currency’s global supremacy. Bearish dollar argument.

October 19, 2019 - Negative interest rates might be actually a good thing after all. Recent work by San Fran Fed shows they have stimulated economies.

The Cash Hoarding Puzzle and the Rising Global Demand for Cash (VOX) Demand for cash has been rising, despite the increased access to cashless payments.Finds monetary easing and aging population as main incentives for cash hoarding.

The Ownership of Central Banks (Bank Underground) Looks at the impact of public vs private ownership of Central Banks globally and finds that it makes little difference if the overarching aims are clear. Most, such as the BoE are wholly owned by the public sector, but in the US, Japan and Switzerland, there is a private shareholding.

Yield Curve Responses to Introducing Negative Policy Rates (San Francisco Fed) Studies the experience of five countries that introduced negative interest rates to see their impact on the economy. Finds that negative rates are effective in lowering yields of all maturities and effectively shifts the whole yield curve downwards, offering effective stimulus.

October 19, 2019 - It might be hard to trade Trump’s erratic decisions –but a bunch of investors have made a fortune from his tweets. The question is whether they have used insider information. Plus, there could be an unbeatable model to predict fund performance and no one has taken much notice.

The Best Predictor of Stock-Fund Performance (Morningstar) Turns out buying stocks held by successful funds is a reliable trading strategy for success.

“There Is Definite Hanky-Panky Going On”: The Fantastically Profitable Mystery of the Trump Chaos Trades (Vanity Fair) Investigates a number of large e-mini trades on the S&P500, often made right before the market closes and strangely right before a big geopolitical market shaker. Argues that this could be a case of insider trading and calls for heavier regulatory watch.Gulp.

The Banking View of Bond Risk Premia (Haddad, Sraer) Shows that the net exposure of the banking sector to interest rate risk, as measured through banks’ average income gap, strongly forecasts future bond excess returns.

October 19, 2019 - Trump is likely to get away with it this time. At least, according to a great piece comparing his impeachment process to that of Nixon’s . Meanwhile, with Extinction Rebellion protests globally, we re-cap the negative externalities of climate change and how to tackle them.

Trump and Nixon: Three Key Differences Between 2019 and 1974 (The Conversation) Differences include Nixon’s impeachment process started in the Senate not the House, Republicans and Trump loyalists dominate today’s Senate unlike Nixon’s time and the media is more fragmented than earlier.

Anti-globalisation Bias and Public Policy (Project Syndicate) Argues that a number of anti-globalisation negative biases, most commonly nationalism, self-interest, and lack of economic understanding, result in misguided public policies.

The Necessity of Climate Economics (Project Syndicate) Re-visits the main economic concepts of negative externalities as ways to tackle climate change.

October 19, 2019 - The new IMF Managing Director, Kristalina Georgieva, started her mandate on a gloomy warning of a global slowdown. We look at what weak growth might mean for monetary policy and why ageing populations are even more of a threat than previously thought.

The World Economy: Synchronized Slowdown, Precarious Outlook (IMF Blog) IMF downgrades growth for 2019 to 3%, the slowest pace since the 2008 crisis. Also flags bubble risks of monetary policy and need for macro-prudential policies.

Sailing into Unchartered Demographic Waters (VOX EU) David Blooms discusses the implications of the global population ageing. He proposes reforms in healthcare policies, human capital management and social securities to take on these challenges.

Reviving Innovation in Europe (McKinsey) A highly fragmented market and a lack of scale are what hinder Europe’s edges on technology innovation, causing it to fall behind the US and China. McKinsey suggests five approaches that Europe plays to its strengths including building on its industrial strength.

October 19, 2019 - Elizabeth Warren is gaining popularity in the polls. She’s floating the of a wealth tax. But they could have massive negative implications. Equally, tax data suggests taxing the rich more won’t fix the budget deficit.

How the Rich Are Different: Hierarchical Power as the Basis of Income Size and Class (Blair Fix) A new paper on inequality claiming that the rich of the world are different not because they are more productive or can exploit workers, but because of their hierarchical power or i.e. greater command over subordinates.

Some Income Tax Data on the Top Incomes (Conversable Economist)Finds the top 50% pays almost all the federal income tax whereas the very top income brackets get away with proportionately less. However, simple math shows that taxing the rich more won’t be enough to balance out the $800bn yearly budget deficit.

MMT Heaven and MMT Hell for Chinese Investment and U.S. Fiscal Spending (Carnegie) Argues thatthere aren’t inherently unacceptable levels of government debt If the government can spend the additional funds in ways that make GDP grow faster than debt. That way, there wouldn’t be runaway inflation or the piling up of debt.

How to Argue for a Wealth Tax (Marginal Revolution) Estimates that a seemingly benign 2% increase in the wealth tax in the US ends up stacking up to a 50-70% net capital gains tax, which can’t be sustained. Proposes a higher consumption tax instead.

October 19, 2019 - Holding a good old diversified equity and bond portfolio won’t make the cut any longer – at least according to BAML. ETFs are hotter than ever and sweeping away active investing; but watch out for gig economy companies. They are ignoring the law.

A Eulogy for the 60/40 Portfolio (A Wealth of Common Sense) A tongue-in-cheek “obituary” piece to celebrate the life and recent death of the long-standing 60/40 investment strategy, declared obsolete by BAML recently. Despite it’s ever-healthy performance and simplicity, it’s now largely replaced by ETF trackers and rebalancing.

Corporate America’s Second War With the Rule of Law (Wired) In-depth historical perspective on whymore and more gig economy (and other) firms are opting to disobey the rule of law. Think Uber refusing the order to start formerly employing its drivers and Facebook misusing data. Predicts a looming “techlash” by public servants.

Optimists and Pessimists in the Housing Market (New York Fed) Extrapolation of beliefs or i.e. assuming that a rising asset price will continue rising can be a source of market bubbles. Analysis shows that optimists on future house prices extrapolate twice as much as the median household and artificially influence prices.

October 12, 2019 - 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.

October 12, 2019 - 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.

October 12, 2019 - 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.

October 12, 2019 - 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.

October 12, 2019 - 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.

October 12, 2019 - 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.

October 04, 2019 - Everyone is worried about the structural challenges facing the Eurozone – it might be the eventual loser from the trade war. The US continues to face the “reserve currency curse” – the trade war could just be a mechanism to lose such status. It might just prove best to be a small economy, steer away from controversy and enjoy control over your policymaking.

Mario Draghi: Stabilisation Policies in a Monetary Union (BIS) Mario Draghi discusses whether the eurozone has increased its ability to stabilise macroeconomic shocks given that crisis has lasted in the region much longer than in other developed regions. The key matters are stabilisation across countries and stabilisation over the cycle.

Are Europe’s Economic Prospects Brighter Than They Appear?(Project Syndicate) Europe is the real loser from the US-China trade wars. The region is still extremely vulnerable to collateral damage, it always has the wrong policy response and is torn by internal political shocks (think Italy). Long-term prospects are brighter, however, driven by aggressive easing.

Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis(Mish Talk) The trade wars are just a hidden mechanism for the US to get rid of the “reserve currency curse”. No one seems to want to hold the World’s reserve currency and are working hard to ensure it stays that way. The EU and Japan have negative rates, China does not float the Yuan but props up corrupt SOEs, and Germany punishes the rest of the EU.

The Curse of Size (Econlib) Size matters – smaller countries have the choice to devalue their currency or go into negative rate territory without much attention and are free to control inflation. Argues that he creation of the euro made the world more susceptible to deflationary traps.

Unconventional Monetary Policy Operations: The Upside for Central Bank Balance Sheet Risks (Orduna, Schwaab) Finds that in exceptional circumstances, a central bank can remove illiquidity-related credit risk from parts of its balance sheet by extending the scale of its operations.

October 04, 2019 - A number of insightful pieces exploring how tech and machine learning in particular are breaking into finance. But models aren’t always perfect – mispricing risk can lead to a chain reaction and a downturn.

World Wide Currency (VOX EU) Is it possible to introduce a globally recognised electronic currency in the future alongside the national currencies? Researchers test this idea with a two-country model and conclude that it’s theoretically doable. Although for monetary policymakers, there’s certainly so much more to do to get them prepared for this futuristic trend.

A Volatility Smile-Based Uncertainty Index (Central Bank of Brazil) Introduces a new index to measure uncertainty: the “Volatility Smile-Based Uncertainty” (VSU). It looks at the discrepancy of the implied volatility of exchange rate options, and after calculating this value for five major emerging economies, concludes that VSU is negatively associated with industrial production and has peaks close to turbulent periods.

Ten Applications of Financial Machine Learning (SSRN/Cornell University) Explores how the core of machine learning – studying past data to predict future outcomes – can be revolutionary for the financial services industry. However, it also warns that machine learning tools are vulnerable to input selection biases and that can lead to undesired consequences.

Perceiving Risk Wrong: What Happens When Markets Misprice Risk? (Bank Underground) Risk perceptions are extremely subjective and hard to quantify. This paper examines how overpricing and underpricing market risks can both eventually lead to an economic downturn in the manner of a chain reaction.

FinTech, BigTech, and the Future of Banks (NBER) Explores areas in which non-bank fintech firms can outplay their banking rivals. Being less regulated than banks gives fintech firms an important competitive advantage. Large tech firms are also challenging traditional banking businesses such as consumer finance and loans due to their capability to tap into large amounts of unique user data.

October 04, 2019 - Impeachment is all the focus now, bringing us back to the years of Clinton. It’s unlikely to lead to much, however. We compare how Republicans are performing in light of re-election hopes and how Trudeau lost his reputation – slowly, then all at once.

The Impeachment Trap (Project Syndicate) Argues that Democrats have made a mistake to call for Trump’s impeachment, hoping to follow Clinton’s experience. Trump retains the loyalty of his base supporters and enjoys majority support in the Senate. It’s been a info-leaky administration – nothing new was learned about Clinton after the Starr Report was issued, and nothing new will be learned about Trump.

Looking at America’s Two Economies (Econlife) Analyses the state of the economy in the Republican states in comparison to Democrats. In 2008, the Republican median HH income, at $55,000, was higher than the Democrats. By 2017, Democrats were up to $61,000 and Republican voters were down to $53,000. Argues that this is because with Democrats increasingly clustered in affluent coastal urban areas, they also represent a bigger share of productivity, education and better paying jobs than their opponents.

Justin Trudeau’s Spectacular Self-Destruction(Foreign Policy)Gives an insight into Justin Trudeau’s stunning fall from grace, with approval ratings of just 31% down from more than 60% in 2016. Not only has he been underdelivering on his promises, (despite millennials favouring his legalisation of cannabis) but he also backtracked from his pledges to revamp the electoral system. Far from his initial appeal of being a change maker, he is now seen as a run-of-the-mill politician.

Europe Needs a Migration Reset (Project Syndicate) Argues that Europe needs a rethink on how to handle the floods of migrants as camps are overflowing. Four actions – better secure external borders, handle economic and asylum migrants separately, repair the migrant distribution system to member states and forge stronger ties with countries of origin.

Political and Economic Drivers of Pogroms (VOX) – Analyses the interaction of political and economic factors to drive pogroms in an anti-semitic environment. The authors find that massacres occurred when economic downturns coincided with political upheaval. One of their key findings also indicate that occupational segregation between Jews and the mass played a significant role in triggering ethnic violence.

October 04, 2019 - Aging populations across the Western World comes with a number of issues while it is transforming the labour market. Established tech exporters such as Japan are losing their edge. We also look at how tech is revamping retail banking.

Why Japan Lost its Comparative Advantage in Producing Electronic Parts and Components(VOX) A sharp appreciation of the yen after the Financial Crisis, caused by capital seeking safe havens has hurt Japanese competitiveness in electronic parts, their bread and butter. Yen export prices tumble relative to production costs. Highlights a need for “craftsmanship” instead of pure price competitiveness going forward.

Population Aging and Structural Transformation(Cravino, Levchenko, Rojas) Shows that the older the population of a country, the more expenditure end up in the service sector. Population aging played a much larger role than changes in real income in the structural change observed in the US between 1982-2016.

Seven Transformative Shifts in US Retail Banking Inflection Point (McKinsey) – Pinpointing to seven transformational shifts which are advancing changes in the US retail banking industry. They have to quickly adapt – a growing number of consumers are trusting Big Tech players (Amazon, Google, Apple and Facebook) with their money instead.

Financial integration in Europe through the lens of composite indicators(Hoffman, Kremer, Zaharia) Financial integration within the Euro area, within money, bond, equity and banking markets is an important driver of growth and heavily influences per capita GDP. Another testament against Brexit.

October 04, 2019 - Fiscal stimulus is all the hype and is often cited as the only tool left to steer away from a recession, especially in the Eurozone. Germany might be just warming up to the idea. We also look at solution to the growing issue of unaffordable housing and how to actually build more – not just fuel buying with cheap debt.

Japan’s Government Will Soon Make a Profit on Its Huge Debt (CEPR) Amids raising worries about Japan’s tax lift from 8% to 10%, this commentary reminds that given the negative nominal rate, the debt service burden is virtually zero. Debt is now becoming a source of revenue.

It’s Time for German Fiscal Expansion (Project Syndicate) Advocates that it now makes sense for Germany to spend more without fears of overheating. It should spend more on infrastructure maintenance and modernization, and it could cut payroll taxes. This piece similarly supports fiscal action for the wider Eurozone.

Estimating Regional Wealth in Germany: How Different Are East and West Really? (Kreutzmann, Marek, Salvati, Schmid) Almost 30 years since the German reunification, this paper finds the East lagging in significantly in regional indicators, most notably private net wealth. Each eastern German federal state private wealth comes to less than half of the national mean.

We Cannot Build Our Way Out of Inequality (VOX) The path to a solution of the housing crisis in large metropolitan areas might be to cut regulation in order to build more and denser housing in metro regions (upzoning). The answer is not simple and needs combining education, social, health, and housing policies.

To Tackle Housing Affordability in Canada, Build MoreHouses (IMF) Argues that to solve the lack of affordable housing in Canada (and most of the Western World), we need accelerated process of supplying houses. Sounds simple – but governments have been too focused on making borrowing quicker and accessible – which fuels house price surges.

October 04, 2019 - Following WeWork’s sky-high valuation and its consequent IPO break-down, the market seems to be waking up to the unjustified unicorn rush. Where will all the free capital pour into now?

IPOs Have Been Crushed in 2019. Why That’s Actually Good News for Stocks.(Barron’s) Amidst the many IPO disappointments recently, investors have become more discriminating, and that’s good for everyone. Most recently, WeWork has caused abrupt sobering up and return to focus on fundamentals and a credible path to profitability. Great piece dissecting all the techy unicorns.

Softbank’s Vision Fund is Just Too Damned Big(Barry Ritholtz) Softbank isn’t about diversification – it’s making a few, big bets, often on more established companies. It’s flooding ventures with capital, but is it paying enough attention to fundamentals? Or simply driving a race to bubble?

Are CLOs the New CDOs? (Conversable Economist) Last week we shed light on Collateralised Loan Obligations, which have very similar structure to CDOs but in this case, the debts are corporate loans rather than subprime mortgages. This is another good analysis on why they have now reached sizes close to those of CDOs in 2008. And why we shouldn’t worry too much yet but keep an eye on the space.

The Great Fee War of the 2010s (A Wealth of Common Sense) Fund fees get lower by the year and access to instruments gets higher for individual investors. Investment firms are going to have difficult business decisions to make in the years ahead as their margins slowly erode and investor behaviour might get more reckless.

September 28, 2019 - Trump impacting market pricing through Twitter, reducing credit spreads through BoE buying corporate bonds and Fed ZLB risk

Threats to Central Bank Independence: High-Frequency Identification with Twitter (Bianchi, Kung, Kind) Academic paper finds that Trump tweets demanding the Fed cut rates does impact market pricing. Cumulatively, his tweets have lowered market expectations of Fed policy rate by 10bps.

Consumers Price Beliefs, Central Bank Communication, and Inflation Dynamics (Bank of Japan) Argues that prolonged periods of low inflation make the central bank’s inflation target less relevant for consumers. Instead, targeting price level (rather than the change in prices – inflation) would have more impact.

Credit Easing Versus Quantitative Easing: Evidence from Corporate and Government Bond Purchase Programs (Bank of England) BoE finds that buying corporate bonds was more effective than QE in reducing credit spreads, especially for higher-rated bonds.

Zero Lower Bound Risk according to Option Prices (San Fran Fed) Fed uses option prices and finds market has 24% probability that Fed policy rates will hit lower bound by end-2021.

New Weapons for the ECB (Project Syndicate) Former Greek finance minister, Yanis Varoufakis, argues that the ECB’s current toolkit will only lead to further right-wing populism as economic stagnation continues. Instead, he argues for the creation of “ECB conversion bonds” which effectively converts up to 60% of a country’s debt to low yielding bonds at ECB rates. This would allow for fiscal stimulus. Instead, he argues for the creation of “ECB conversion bonds” which effectively converts up to 60% of a country’s debt to low yielding bonds at ECB rates. This would allow for fiscal stimulus.

September 28, 2019 - Derivatives trading in OTC markets soar, private equity ripe for disruption and unpreparedness for the end of LIBOR

Collateralized Loan Obligations in the Financial Accounts of the United States (Fed) Two new data series on CLOs have been introduced into US Financial accounts. The blog also describes how to navigate the tables to find these series and others relating to CLOs

Derivatives Trading in OTC Markets Soars (BIS) Latest triennial survey shows daily turnover in FX and rates derivatives has jumped from $11 trillion to 2016 to $19 trillion this year. The share of trading exchanges has also fallen.

Tracking the Sources of Robust Payments Growth: McKinsey Global Payments Report (McKinsey) Deep dive on payments landscape by region and player (including non-bank ones). Asia-Pac is the largest region by revenue.

Why Private Equity Is Ripe for Vanguard-Style Disruption (Institutional Investor) Argues that the average 7% fees for private equity is ripe for disruption. A Warren Buffet-style passive approach to holding private companies could be one path for this.

John C Williams: LIBOR – the Clock is Ticking (BIS) NY Fed President argues that market participants are not prepared enough for the end of LIBOR. Despite mentioning recent repo turmoil, he didn’t draw any connections between LIBOR reform and repo (there are some linkages)

September 28, 2019 - Key ingredients for globalisation, inquiries into the big tech companies and global corporate tax avoidance

Six Small Facts About Globalization That Are Really Big (econlife) Highlights six key ingredients for globalisation: 1) refrigerated containers, 2) WTO, 3) Low non-tariff barriers , 4) FDI, 5) Services are important, 6) Mexico becoming important.

Companies Are Using a Depression-Era Law To Escape Trump’s Tariffs — And It’s Costing Them (ProPublica) An old law that allows free trade zones with the US is being revived

The Growing List of U.S. Government Inquiries into Big Tech (Axios) Lists the number of inquiries against Facebook (5), Google (4), Amazon (2) and Apple (1)

Why Global Trade Imbalances Could Get Worse Before They Get Better… (CFR) Argues that europe’s demand deficit and Asia’s excess savings are driving trade surpluses against the US. Their trends are not positive. Could keep trade wars in the headlines.

Tracking Global Corporate Tax Avoidance (Big Picture) 40% of multinationals profits are shifted to tax havens each year. This surely will be attacked by politicians.

September 28, 2019 - Real-time estimates of output gaps are useless to forecast inflation, unsynchronised global growth and equity prices, credit spreads and USD to predict PMIs.

How Informative Are Real Time Output Gap Estimates in Europe? (IMF) Basically finds that potential growth is typically over-estimated and real-time estimates of output gaps are useless in forecasting inflation.

One Ring to Rule Them All? New Evidence on World Cycles (IMF) Counterintuitive findsing that the world growth cycle is weak for most countries and that synchronisation between economies has not increased over time (at least for growth, rather than inflation).

Why Are Some Societies More Entrepreneurial than Others? Evidence from 192 Countries over 2001-2018 (Wharton) Academic paper finds institutional factors like R&D expenditure, STEM education and density of established firms has little bearing on rates of entrepreneurship. Instead, cultural factors like gender equality, societies that value performance and acceptance of status privilege/hierarchy matter more.

Financial Conditions and Purchasing Managers’ Indices: Exploring the Links (BIS) Finds that equity prices, credit spreads and the dollar predicts PMIs

Yield Curve Inversion and Recession Risk (BIS) Decomposing components of yield curve inversion finds mixed signals for recession.

Some Observations on Determining Business Cycle Chronologies (Econbrowser) Provides a survey of how recessions and business cycles are dated. There’s a big variety of definitions – and two negative quarters of GDP is not the best.

September 20, 2019 - There’s so much criticism of monetary policy these days – much of it justified. One of the toughest criticisms is that it is leading to more monopolies. Aside from this, there is a role for more macro-pru policy and changes in the goals of policy.

Jerome Powell’s Dilemma (Project Syndicate) Top economists Carmen and Vincent argue that Powell is helping Trump get re-elected by neutralising the negative impacts of Trump’s trade policy.

Macroprudential Policy Could Have Reduced Imbalances in The Euro Area (VOX) Academics argue that country-specific macropru policy, such as adjusting LTV values for mortgages, are more affective in reducing Euro imbalances rather than ECB policy.

Could Ultra-Low Interest Rates Be Contractionary? (Project Syndicate) House of Debt authors Mian and Sufi and Princeton Prof Ernest Liu argue that big companies disportionately benefit from low rates and drive out competition. This reduces productivity and growth.

Hitting the Elusive Inflation Target (Chicago Fed) Argues that part of US’ inflation undershoot has been due to its symmetric inflation target. Allowing inflation overshoots is instead a better approach.

September 20, 2019 - Two great papers – one on modelling retail sales in almost real time and another on imperfect decision making.

From Transactions Data to Economic Statistics: Constructing Real-time, High-frequency, Geographic Measures of Consumer Spending (Federal Reserve) They find that daily retail transaction data from First Data Merchant Services can replicate monthly official retail sales data in almost real-time.

Modeling Imprecision in Perception, Valuation and Choice (Columbia, Michael Woodford) A piece on imprecise decision. It gives a summary of psychophysics which models the relationship between objective physical properties of a person’s environment and the way these are subjectively perceived.

September 20, 2019 - US foreign policy has been changing since the height of interventionism during the Bush years. Now Trump may be setting the tone for years to come. Meanwhile, the UK may need to focus on trade deals with the US, Aust, Canada and NZ and we shouldn’t forget Ireland is key for Brexit.

How Trump is Remaking Republican Foreign Policy (Defense One) Out: neoconservatism and noninterventionism. In: a reactionary style that may outlast his administration.

Beyond Brexit – What a US-UK Trade Deal Will Really Look Like (CAPX) Argues for UK to focus on US and the broader 5 eyes alliance (Canada, Australia, NZ)

A Repeat of The Turmoil of 1914-1922? (Progressive Pulse) Compares the current dilemma of the Irish Backdrop Plan to the 1914 Crisis of the UK, where Ireland sought to break away from UK control and regain its sovereignty.

September 20, 2019 - The economy is changing thanks to tech – but increasingly the response is for more regulation, whether gig workers or automation-linked processes. We shouldn’t also forget about the dramatic disruption of the retail sector.

Working Conditions on Digital Labour Platforms (VOX) Gig economy workers on these platforms have low wages and poor labour market protections. Expect this area to be regulated soon!

The Economic Consequences of Automation (Project Syndicate) Keynes expert Robert Skidelsky argues that much automation may lead to job losses even in long-run if Karl Marx was right in the need for “reserve army of the unemployed” to keep profits high. Argues for government intervention.

Annual Report on Global Preparedness for Health Emergencies (World Health Organisation) Get scared by reading about all the bad things that can happen (see chart)

Death of Shopping Malls and Department Stores in Five Charts (Mish Talk) Battery of charts showing the rise of online shopping and its deflationary impact.

September 20, 2019 - Many are clamouring for more fiscal policy, but it may not be so straightforward. There are clamours for taxing the rich, yet others argue for spending on big infrastructure projects. Then, some argue that fiscal policy won’t solve for real shocks to the economy like trade uncertainty.

The Return of Fiscal Policy (Project Syndicate) Former Goldmans Sachs Asset Management Chairman argues for greater government investments in long-term projects given interest rates are so low.

Taxing the Rich: Issues and Options (NYU, Batchelder and Kamin) Propose 4 viable ways to tax the rich – increase top tax rate, tax wealth on accrued gains, a wealth tax on the rich and a financials transactions tax.

Fiscal Stimulus Under Sovereign Risk (Minnepolis Fed) Finds that fiscal policy is often pro-cyclical as fears of heightened sovereign risk during recessions induce austerity. To overcome this, the authors argue for “fiscal policy forward guidance”.

Germany’s Real Business Cycle (Scott Sumner) He argues that Germany does NOT need a fiscal stimulus as its recent weakness is due to a real shock (trade war) rather than a nominal shock (eg sticky wages in face of weak labour market).

September 20, 2019 - Recent market behaviour shows how much we just can’t predict – we have a bunch of articles that play on this theme whether on timing market crashes, day trading or the Fed’s ability to control rates. We also find cracks in some of the darling investment themes of the day – platforms. They’re being disrupted one-by-one.

Yes, the Stock Market is Going to Crash (A Wealth Of Common Sense) We know markets will crash, but the problem is no-one knows when. Metrics like valuations and yield gave poor signals in the 1940s, mid-1970s and early 1980s. Moreover, we could have a long stretch like 1938-1972 without a major crash (as opposed to a 20% correction).

As Long as Trump Tweets His Way Randomly through the Trade War, the Dollar Will Stay Strong (Econbrowser) Trump tweets = more trade uncertainty = dollar rallies on uncertainty

Repo Chaos Tests Wall Street Confidence in NY Fed’s Williams (Reuters) John Williams who runs the NY Fed has lost some key staff recently, which have contributed to this week’s repo debacle. Some are questioning his position.

Day Trading for a Living? (Chague, De Losso, Giovannetti) Academic paper crunch the numbers on day traders in Brazil and finds 97% lost money. They find no evidence that day traders learn with experience.

Platforms vs Verticals and the Next Great Unbundling (Andreessen Horowitz) Excellent piece that argues broad platforms like eBay, LinkedIn and YouTube risk being disrupted by narrow platforms that target narrow verticals like StubHub, Hired, and TikTok.

September 13, 2019 - Trump firing Powell? CBs should publicly express their concerns of the government and increased Swiss FX intervention to keep CHF weak, rather than rate cuts

What Happens if Trump Tries to Fire Fed Chair Jerome Powell? (Brookings) It’s a bit more complicated than you think. Essentially, Trump would need cause (“inefficiency, neglect of duty, or malfeasance in office.) to remove him. Powell could sue if he felt it was unfair.

Did Dudley Do Right? (Project Syndicate) Prof Barry Eichengreen makes the case for the Fed and other central banks to make public their concerns about the policies of the government.

SNB – Between A Rock and a Hard Place (Pictet) Argues for more Swiss FX intervention to keep CHF weak, rather than rate cuts.

September 13, 2019 - New index tracks global uncertainty across 143 countries, entrepreneurial personalities and the FX carry trade puzzle

Entrepreneurial Personalities (VOX) Finds that entrepreneurs have a higher tolerance for risk, stronger self-belief, sense of controlling one’s destiny and need for achievement than nono-founding CEOs, inventor employees and other employees.

New Index Tracks Trade Uncertainty Across the Globe (IMF) The Fund creates trade uncertainty indices for 143 countries starting in 1996.

Why We Should Care About Economic Uncertainty (Econlife) Describes some uncertainty indices and where to find them. They do impact growth.

Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (VOX) In theory, FX carry trades shouldn’t make money, so many ideas have emerged to explain this puzzle. This column argues that the slow response of investors to interest rate changes is the answer.

September 13, 2019 - Mark-to-market taxation, shifting government expenditure away from defence towards social protection to reduce inequality and the impact of Brexit on UK Firms

Taxing Wealth by Taxing Investment Income: An Introduction to Mark-to-Market Taxation (Washington Center for Equitable Growth) Argues for taxing capital gains on a mark-to-market basis rather than on disposal. Another policy aimed at introducing and refining wealth taxes at a time of rising inequality in the US.

Germany to Play Smokes and Mirrors Again (Bill Mitchell) MMT advocated Bill Mitchell argues that Germany uses entities like KFW to engage in fiscal stimulus.

Reallocating Public Spending to Reduce Income Inequality: Can It Work? (IMF) Paper finds that a country can reduce inequality while keeping expenditure fixed if it shifts money away from defense and towards social protection and infrastructure.

The Impact of Brexit on UK Firms (Bank of England) Finds business uncertainty has increased, investment has fallen by 11% over three years and productivity has fallen as top management diverts time to Brexit preparations.

September 13, 2019 - Calculating intangible asset growth to improve value strategies, the various factors behind financial crises and scenario analysis for bonds from here

Explaining the Demise of Value Investing (Lev and Srivastava, academic paper) Clever paper that captures internally-generated intangible asset growth and adds back to book value. This improves the returns of value strategies

More on Low Long-Term Interest Rates (The Grumpy Economist) Argues that stable inflation should lead to an inverted yield curve much like the late 19^th century.

Fat Tails, But Which Way? Up or Down? (Mish Talk) Makes the case that we may not see extreme market moves, but rather choppy declines.

A Crash Course On the Euro Crisis (Brunnermeier, Princeton) Excellent educational resources that runs through various factors behind financial crises from capital inflows to shadow banking.

The Best and Worst Case Scenarios for Bonds from Here (A Wealth Of Common Sense) Shows a strong correlation between starting bond yields and subsequent 5y returns and so although bonds have performed well recently – their long-term performance is likely to be poor.

September 06, 2019 - Whether policymakers should focus on asset market prices, wealth tax on U.S top 0.1% and the warning against cutting rates below zero

Central Banking’s Bankrupt Narrative (Project Syndicate, 4 min read) Prof Roger Farmer argues that aside from monetary policy not working, fiscal policy will also be ineffective. Instead, he argues that recessions are caused by asset market crashes and so policy should focus on that.

Estimating the economic impact of a wealth tax (Brookings, 3 min read) Makes the case for a wealth tax on the top 0.1% of Americans (see chart). Argues that it is more likely to work compared to other attempts in Europe which had a broader target. This is gathering support from various Democrat Presidential candidate.

Negative Interest Rates and Inflation Expectations in Japan (San Fran Fed, 8 min read) They find that inflation expectations actually fell after the BoJ introduced negative rates in 2016. They warn against cutting rates below zero.

Do Monetary Policy Announcements Shift Household Expectations? (Dallas Fed, working paper) They find Fed policy rate move surprises DO impact households’ economic confidence, but surprises on forward guidance and QE DO NOT. This questions the efficacy of unconventional policy.

ECB corporate QE and the loan supply to bank-dependent firms (ECB, working paper) – The central bank finds that corporate QE did increase bank lending. This suggests the ECB will restart such programmes soon.

September 06, 2019 - Text-mining trading strategy delivering impressive stats, replacing LIBOR and alternative data

Predicting Returns with Text Data (Ke, Kelly, Xiu, working paper) Outlines single stock trading strategy around text-mining newswires. The daily models deliver sharpe ratio of between and 1 and 2 (after t-costs). Impressive stats.

Replacing LIBOR (Money and Banking, 8 min read) LIBOR will cease at the end of 2021. This piece raises concerns around the lack of clarity around how many contracts referencing LIBOR have fallback language for the switch. Could pose a systemic risk at some point.

3 Shockers from Yesterday’s RPI Plans (M&G investments, 2 min read) UK inflation-linked bonds will soon RPI inflation measure to the CPI measure. Biggest shocker is that linkers maturing beyond 2030 are at risk of having RPI calculations changed at the discretion of statisticians not the Chancellor.

Satellite Data Economics, Night Lights, and More (Conversable Economist, 3 min read) Useful blog that touches on and contains references on how satellite data can be used to measure growth.

September 06, 2019 - Underweight European equities & overweight US equities, passive funds removing price discovery and over-promising liquidity, and fed easing leading to defensive stocks performing well

Asset Allocation Outlook Midyear Update – Easing Into Slowing Growth (PIMCO, 9 min read) Equities: overweight US, underweight Europe, neutral the rest. Rates: long US and EM rates and linkers, neutral rest. Credit: long securitised (MBS) and EM, short IG and HY. FX: Short USD and EUR, long JPY and EM.

“Big Short” Investor Michael Burry Explains How Index Funds Will Trigger The Next Crash (Zero Hedge, 5 min read) Argues passive funds are removing price discovery from equity markets and over-promising liquidity. Likes small caps (under-represented in passive funds) and Japan stocks (owned by BoJ)

From FOMO to FONIR (Dr Ed’s Blog, 3 min read) Ed Yardeni reports back from recent client meetings and finds investors are favouring stocks on FONIR (fear of negative interest rates)

A Perspective on Secular Bull and Bear Markets (Jill Mislinkski, 4 min read) Looks at secular bull and bear markets in US equities. Finds that secular bear years make up 40% of years, that current rally looks extended and the ratio of peak earners to elderly population is turning down. Bearish stocks.

Fed Easing Sees Defensive Stocks Come Out on Top (Variant Perception, 1 min read) Over the last five Fed easing cycles consumer staples, healthcare and energy provide the highest average total return above the index one year after the Fed’s first cut (see chart). Financials and utilities the worst.

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Robin Brooks On COVID-19’s Impact On Emerging Markets And The Domestic Policy Response To The Crisis (Macro Musings) (53 min listen)

By Caroline Grady | Apr 01, 2020

read

From Cholera To Coronavirus (Talking Politics – LRB) (39 min listen)

By Caroline Grady | Apr 01, 2020

read

Simon White: Aftermath Of The Biggest Monetary Policy Intervention In World History (Macro Voices) (1 hr 26 min listen)

By Caroline Grady | Apr 01, 2020

read

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CURATED CONTENT

Robin Brooks On COVID-19’s Impact On Emerging Markets And The Domestic Policy Response To The Crisis (Macro Musings) (53 min listen)

From Cholera To Coronavirus (Talking Politics – LRB) (39 min listen)

Simon White: Aftermath Of The Biggest Monetary Policy Intervention In World History (Macro Voices) (1 hr 26 min listen)

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