We feature our first contribution from Japan expert, Andrew Rozanov, with his take on Abe’s legacy. Abenomics was undoubtedly his biggest achievement yet it didn’t fully succeed, leaving a missed opportunity.
For our top picks this week, a Nobel laureate finds tech valuations justifiable, understanding equity shorts and using credit instead of sovereigns as a hedge. We also have a few that uncover the dynamics of how QE affects the economy and we touch on some growing China tensions with its neighbours.
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We feature our first contribution from Japan expert, Andrew Rozanov, with his take on Abe’s legacy. Abenomics was undoubtedly his biggest achievement yet it didn’t fully succeed, leaving a missed opportunity.
For our top picks this week, a Nobel laureate finds tech valuations justifiable, understanding equity shorts and using credit instead of sovereigns as a hedge are some of the pieces we have curated this week. We also have a few that uncover the dynamics of how QE affects the economy and we touch on some growing China tensions with its neighbours.
Enjoy!
Bilal
PM Abe’s Missed Opportunity To Make Japan Great Again (2 min read) Last week’s surprise resignation of Japanese Prime Minister Shinzo Abe raises questions over what’s next for the country. Abe’s political clout and economic policies provided the economy with the reform impetus it needed, but his disappointing achievements after eight years reflect a backdrop of policy fragmentation and a reform agenda that should have been bolder.
(Andrew Rozanov | 1st September, 2020)
Michael Spence on the disconnect between valuations and the real economy
Governments have given us so much, do they have anything left to give? (GMO, 17 page read) GMO argues that HY credit and EM bonds could provide a hedge against equities [Bullish credit and EM]
Winners and Losers of the Pandemic Economy (Project Syndicate, 4min read) Nobel laureate Michael Spence argues ‘the lofty valuations of companies with high intangible capital per employee make perfect sense in today’s economy.’ [Bullish FAANGS]
Common Short Selling and Excess Co-movement (INET, 25 page read) Excellent paper that finds that stocks shorted by the same entity have predictive power for the future correlation of stock returns.
BoE on QE and bank lending plus the ECB on IMF conditionality and CB independence
Does Quantitative Easing Boost Bank Lending to the Real Economy or Cause other Bank Asset Reallocation? (BoE, 32 page read) During the 2009 financial crisis, banks received reserves injections through the BoE asset purchase program. There is no evidence this QE program had a positive impact. Instead, banks appear to have reacted by shifting portfolios into high-yielding assets with low risk weights (government securities). This suggests using alternative credit easing tools in future. [Bullish credit]
Bank Reserves and Broad Money in the Global Financial Crisis: A Quantitative Evaluation (ECB, 23 page read) Had the Fed has not initiated an unprecedented expansion of bank reserve during the global financial crisis, broad money would have fallen. This could have led to a deeper contraction and a more protracted recovery. This is because reserves can reduce the cost of providing loans.
The Role of IMF Conditionality for Central Bank Independence (ECB, 29 page read) During times of financial turbulence, many governments have no option but to turn to the IMF. Their loans frequently entail central bank independence conditionality clauses, which lead to higher levels of CBI and produce important second round economic policy effects.
LSE on locating hidden wealth to boost tax revenues
Taxing hidden wealth: the consequences of U.S. enforcement initiatives on evasive foreign accounts (LSE, 58 page read) Finds a 2008 US effort to locate offshore accounts found $100bn which resulted in an additional $09.6-$1.2bn tax revenue.
IMF on the cost of FX stability and the ECB on the international impact of incomplete EMU
Covid-19 briefing: heterogeneous impacts of the pandemic (Bank Underground, 5 min read) Summarises recent literature finds ‘workers in jobs with close proximity to others had the most adverse labour market outcomes’ and ‘workers in more vulnerable jobs tend to be less educated, have lower incomes, and are more likely to be renters.’
The international dimension of an incomplete EMU (ECB, 59 page read) ECB finds ‘euro area stress shocks are significant not only for the euro area but also for the rest of the world’.
Destabilizing Stability? Exchange Rate Arrangements and Foreign Currency Debt (IMF, 21 page read) Moving towards greater exchange rate flexibility can insulate EMs from accumulating excessive external FX debts. The scale of the benefits are associated with the prudential regulatory framework, the composition of a country’s BOP, the extent to which foreign debt is hedged, and the structure of domestic financial markets. More generally, the move can alter the risk-return trade off by firms.
Abe’s resignation and Germany after Merkel
Why Minnesota Could Be The Next Midwestern State To Go Red (FiveThirtyEight, 5 min read) ‘Most ominously for Democrats, there is evidence that Minnesota is becoming redder over time, with 2016 being a particular inflection point.’
Shinzo Abe’s shock resignation and the legacy that will follow (CGTN, 4 min read) Chinese take on Abe’s resignation: ‘even though he tried to normalize Japanese relations with China, his effort was half-baked.’
The left in a future federal [German] government? (Spiegel, 5 min read) With Merkel stepping down and German elections next year, there is some talk of an opposition alliance with the Left party to defeat the CDU.
Predicting COVID cases with Google data and capital controls and international flows
Short-term forecasting of the COVID-19 pandemic using Google Trends data: Evidence from 158 countries (Applied Econometrics, 27 page read) Finds Google data can predict COVID cases.
Capital flow deflection under the magnifying glass (OECD forthcoming, 35 page read) New capital controls dataset finds ‘introduction of capital controls in one economy increases capital inflows to other similar borrowing economies.’
Principal Trading Firm Activity in Treasury Cash Markets (Fed, 9 min read) Find non-bank dealers dominate interdealer platforms for Treasuries.
The cost of urbanisation
Tsai authorities deserve a stern warning from Beijing (Global Times, 3 min read) Chinese editorial warns Taiwan about recent US aircraft recon flight into Chinese airspace. [Bearish Taiwan]
Engineering the soul of China (Standpoint, 6 min read) Argues that there is war of values between the US and China led by Xi separating Chinese values from Western values.
China’s urbanisation has fuelled economic growth, but without redirection it will come at a cost (SCMP, 3 min read) Argues that much of China’s urbanisation strategy has been wasteful.
Pandemic brings ESG to the fore
Did ESG improve resiliency during Q1 (Jon Hale, 8 min read) Summarises recent academic papers and finds ‘companies valuing stakeholders during pandemic had higher institutional flows and less negative returns’. [Bullish ESG]
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)