We’ve leaned more heavily on academic papers this week. One finds that your genetics determine your investment career. Another finds that VC returns have fallen since 1999. And Ken Rogoff does a deep dive on China real estate and is bearish. Then we have papers that describe models to track global trade, European financial conditions, predict corporate bond returns and correctly estimate interest expectations.
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Gold prices took a tumble last week, sparking a debate on whether this was just a blip within a secular bull market or something more fundamental. Mirza, a Morgan Stanley macro strategist, argues the debate should focus on valuations vs asset allocation.
In our top picks, we’ve leaned more heavily on academic papers this week. One finds that your genetics determine your investment career. Another finds that VC returns have fallen since 1999. And Ken Rogoff does a deep dive on China real estate and is bearish. Then we have papers that describe models to track global trade, European financial conditions, predict corporate bond returns and correctly estimate interest expectations.
Enjoy!
Bilal
Peak Gold (3 min read) The sharp decline in gold prices last week has triggered heated debate among market participants.
The bulls argue that this is just another dip within a secular bull market. They say that poor liquidity and CTA stops in futures markets primarily drove the reversal.
(Mirza Baig | 18 August, 2020)
Equities are bouncing back quickly, and risk-taking is related to bonuses and DNA
Molecular Genetics, Risk Aversion, Return Perceptions and Stock Market Participation (NBER, 39 page read) Paper suggests that genetic endowments are shown to predict market participation, risk aversion and beliefs about the distribution of equity returns.
Life Cycle Cash Flows of Ventures (NBER, 29 page read) Paper finds that venture capital returns have fallen since 1999 after National Securities Markets Improvement Act was passed. This allowed more investors to access the venture market. [Bearish VC]
To What Extent Are Tariffs Offset By Exchange Rates? (NBER, 15 page read) paper finds that tariffs explained two-third of CNY weakness over 2018-2019 [watch tariffs for CNY]
The Flying V-Shaped Recoveries (A Wealth Of Common Sense, 2 min read) The average stock market round trip from major peak to trough to peak has been 26 months since the 1920s. This time it has taken six months – the second fastest in history (1932-33 was fastest) [Bullish equities]
Does Bonus Cap Curb Risk Taking? (BoE, 18 page read) Capping bonuses can curb risk-taking, but it depends on the structure of performance-related pay. Bonuses linked to relative performance (to peers) increased an individuals’ risk-taking. In the absence of relative performance pay, constraints on bonuses and malus reduced risk-taking.
IMF and ECB stress tests show US and EU vulnerability
United States: Financial System Stability Assessment (IMF, 79 page read) Pre-pandemic, a rise in corporate leverage and the migration of risks to nonbank financial institutions, put the US financial system under greater strain. Nevertheless, results from the IMF’s stress test show that most investment funds would be able to meet severe redemptions.
Vulnerable growth in the Euro Area: Measuring the financial conditions (ECB, 27 page read) ECB finds the Composite Indicator of Systemic Stress (CISS) is the best measure for Europe.
Estimating nominal interest rate expectations: Overnight indexed swaps and the term structure (Journal of Banking and Finance, 55 page read) Describes model to correctly extract interest rate expectations from yield curve.
Policy challenges, trade openness and the economic impacts of inequality
The Economic Effects of COVID-19 Containment Measures (IMF, 27 page read) NO2 emissions, flight data, energy consumption, maritime trade and mobility are all used as real-time economic activity proxies to find that containment measures reduced industrial production by about 15%. Workplace closures and stay-at-home orders were the most costly measures.
Trade Flows and Fiscal Multipliers (NBER, 43 page read) Countries that are more open to trade, regardless of their initial current account position, can expect a higher economic windfall from unexpected fiscal policy measures.
Measuring Income Inequality and Implications for Economic Transmission Channels (IMF, 36 page read) A comprehensive answer to a question that we all want to understand – how does higher inequality affect a country’s growth outlook? In short, it depends on what you use as your measure of inequality. This result captures nicely the perils of income inequality research.
Using the yield curve to predict, and economic fundamentals to inform on policy
Investor Sentiment, Sovereign Debt Mispricing and Economic Outcomes (IMF, 18 page read) A country’s underlying fundamentals must inform on its fiscal strategy – it shouldn’t just rely on spreads. Why? Countries borrowing at low spreads relative to fundamentals are more likely to suffer from economic difficulties later on.
Low Interest Rates, Policy, and the Predictive Content of the Yield Curve (NBER, 33 page read) Excellent paper with great datasets. They find that the yield curve does have predictive power even rates are low
America’s Dual Recession (Project Syndicate, 4 min read) Occupations at risk of automation are also those susceptible to the pandemic-induced recession. Without a firm policy response, the divides between the haves and the have-nots will extend quicker than we imagined.
Trump is heading into the elections all guns blazing
Just How Far Will Trump Go? (The Atlantic, 5 min read) President Trump seems to be weaponizing virtually every component of the federal government to secure victory, even those agencies that have always been protected from politics. From sabotaging the postal service to undercounting people of colour, his recent moves are both illiberal and authoritarian.
The Myth of Andrew Cuomo (The Atlantic, 3 min read) Seen as a hero of the coronavirus pandemic, the Democrats seem to be pushing the status of ‘legend’ on Cuomo. The New York governor has come out of the health crisis in a good light, but is that only because he has performed relatively better than President Trump?
Trump Could Win Again, Without Cheating (The Conversation, 4 min read) Trump’s deep pockets and his support from a critical mass of white voters and business owners may make the election results far closer than the polls suggest.
FinTech dominance, bond market predictions and global trade data
Risk and Return in International Corporate Bond Markets (ECB, 55 page read) Average corporate bond returns increase with risk, something the world CAPM can confirm in developed countries. The model does not, however, explain return variations and co-movements very well. A factor model does, and suggests local factors explain variations in returns.
Keeping Track of Global Trade in Real Time (Bank of Spain, 19 page read) Introduces an innovative composite world trade cycle index that can be used to perform short-term forecasts of world trade growth.
Patterns in Invoicing Currency in Global Trade (ECB, 28 page read) The European Central Bank provides the most comprehensive and up-to-date panel data set of invoicing currencies in global trade. Interestingly, the data shows that the euro is used as a vehicle currency in parts of Africa.
Does FinTech Substitute for Banks? (NBER, 25 page read) Following on from our Deep Dive discussion last week, there is yet more evidence that traditional banks are playing a less prominent role in the supply of financial services. In this case, PPP loans seems to be disproportionately provided by FinTech firms.
Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns (NBER, 58 page read) Paper finds that calculating the corporate bonds “book-to-market” ratio can prediction future returns.
Rogoff on China’s real estate, and former Biden advisor talks China strategy
Peak China Housing (NBER, 44 page read) Ken Rogoff et al do a deep dive on China real estate and argues that it is still vulnerable and could shave 5-10% off growth.
A Better Alternative to Trump’s WeChat Ban (Project Syndicate, 3 min read) Former Chief Economist of Asian Development Bank argues that rather than a complete ban, stopping US government agencies using WeChat, adding a pop-up warning to US users of WeChat and stopping TenCent ads would be wiser.
The Chinese Military Threat Is Real (Democracy Journal, 22 min read) Former advisor to Joe Biden argues that progressives need to have a strategy to contain China.
What Does the China-Iran Deal Mean for the China-Pakistan Economic Corridor? (The Diplomat, 3 min read) Argues it is a big win for Pakistan, but not for India.
Making the case for ESG, and providing green-conditional debt relief
ESG Disclosure Trends in SEC Filings (White and Case, 10 min read) “Every company surveyed increased its ESG disclosures in at least one category in their proxy statements between 2019 and 2020, and 21 companies (or 42%) also increased their ESG disclosures in at least one category in their annual report on Form 10-K between 2019 and 2020.”
Making A Better Business Case for ESG (Stanford Social Innovation Review, 6 min read) Despite the short-term costs embedding environmental, social and governance concerns into business strategies, there are many long-term benefits. This include; money making, customer allegiance, protecting against major threats to social stability, and inclusiveness that makes a business healthy.
The Need for Debt-for-Climate Swaps (Project Syndicate, 5 min read) Debt relief is inevitable following COVID-19, but there must be a push towards greener recoveries. Debt-for-climate swaps, similar to debt-for-nature swaps in 1980s, gives debt relief linked to climate change efforts and equality.
(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.)