04 January 2023 Bitcoin & Crypto | Monetary Policy & Inflation | Rates | US

What Academia Taught Us in 2022, Part II

Summary

We’ve covered 46 academic papers in 2022, all published by leading institutions or journals. Here, we revisit some of the key graphs.

How to Build Eco-Friendly Portfolios (Without Losing Returns)

We begin with the first Deep Dive of the year. This chart was used to show that investors can massively reduce the carbon footprints of their portfolios by omitting only the most polluting firms. For example, the 1% of firms with the highest carbon intensity (above 7,580 tCO2e/m$) contribute to 17% of the total carbon intensity of the MSCI ACWI index. Importantly, removing these firms wouldn’t be at the cost of lower expected returns, the paper finds.

Will Wages Push Inflation Even Higher?

Our most popular Deep Dive this year, the following chart gives Larry Summer’s wage growth projection for 2022, 2023 and 2024. Based on his measure of labour market tightness, he expected to see wage inflation about 6% YoY for the next few years.

House Prices Push US Inflation Higher

Another Larry Summers piece, this time projecting the impact of rising house prices on a key component of CPI, owners’ equivalent rent of residence (OER). Back in February, he was expecting housing inflation to peak towards the end of 2022.

Stimulus Checks Fuelled Speculation During the Pandemic

Researchers from Harvard Business School and NYU Stern show here how US stimulus checks impacted stock prices during the pandemic. They find that on the days households received their payments, the number of US retail-initiated trades grew 8%. Otherwise said, for every 1% inflow from these stimulus checks, the prices of popular retail stocks increased 2-4%.

Rich vs Poor – Who Suffers Most from Fed Hiking?

Central banks and governments are becoming increasingly concerned about the impacts of their policies on the distribution of income. This Deep Dive examined the impacts of Fed hiking on inflation and employment across states. It finds that inflation declines faster in poorer cities than wealthier ones, but at the cost of greater employment losses.

US Recession: A Matter of When, Not If

Larry Summers had some punchy conclusions in 2022, and here’s another. A lookback through history gives the probability of recession based on current wage growth and the unemployment rate. With the former above 5%, and the latter below 4%, the probability is 100% over the next two years. This was published in April 2022, so it is very likely we have a recession before April 2024.

Focus on Rental Yields When Investing in Property

A Federal Reserve Bank of New York paper had some interesting insights into residential real estate investment this year. They looked at long-run returns in 15 countries over 150 years to show that smaller cities actually have greater ROIs than larger ones, even after accounting for higher capital appreciation in big cities. The key lies in rental yields, which are much higher outside of superstar cities.

Inflation – The Fed’s ‘Unpleasant Arithmetic’

Another double header here – two graphs showing two different pathways for inflation. On the left-hand side, inflation declines quickly despite no change in the interest rate. On the right-hand side, inflation takes time to dissipate in response to a higher policy rate. It’s the unpleasant arithmetic of fiscal policy-induced inflation.

Making Money Whatever the Weather

The joint highest ranked journal paper covered by us this year, this Deep Dive looked at a novel global weather trading strategy. It showed how combining measures of sunshine, rain, temperature and wind, investors can construct trading strategies that offer up to 15% gross annualised returns – a really novel alternative trading style.

Russia Risks ‘Economic Oblivion’ Without Europe This Winter

A very popular Deep Dive this year, here we see how Russian consumer demand has plummeted as a result of the war. This, alongside import-substitution and supply chain issues, a brain drain and a lack of demand from the East is severely impacting Russia’s economy.

Will China’s Real Estate Market Crash?

Prominent economist Ken Rogoff took his own deep dive into China’s real estate market. There were worrying signs. Tier 3 cities, which account for most of China’s GDP and housing stock, are seeing large corrections in house prices as demand drops off. With supply hugely exceeding demand, completion rates are falling.

A Framework for Forecasting US Inflation

Last but not least, a great paper by the IMF. This chart shows their projection of inflation over the next few years. Only under the most optimistic scenario, where expectations fall back to around 2% and the Beveridge curve returns to pre-pandemic levels, will a 4.4% unemployment rate be enough to drop inflation back to 2% by 2025.

Bottom Line

Hopefully, these charts have given you a quick overview of some interesting academic insights from 2022. It’s incredible to think how much content we’ve covered throughout the year. See you back next week for the start of our 2023 series.

Happy holidays and best wishes from me for 2023!

Links to all Deep Dives in 2022

How to Build Eco-Friendly Portfolios (Without Losing Returns)

What Drives Stock Prices?

How Crypto Impacts Global Equity Prices

Trading During FOMC Meetings

Diversification Strategies for Global Equities and Crypto Investment

Forecasting the Fed’s Policy Rate

Predicting Mutual Fund Performance Using Machine Learning

Will Wages Push Inflation Even Higher?

How the Princeton School Shaped US Policy in the 21st Century

House Prices Push US Inflation Higher