With the US and China reaffirming commitment to the Phase 1 deal top Asia FX strategist Mirza Baig presents the case for remaining bullish RMB. A competitive valuation on a NEER basis and central bank that is comfortable with the level and trend of the currency are some of the reasons to remain constructive.
We also feature regular contributor Anton Tonev with a positive case for MMT. He reviews the concepts of government planning versus the free market to argues that inefficiencies in the current system mean this option should be considered.
For our top picks this week we have some sceptical views from Roubini and large asset manager GMO towards recent trends such as dollar weakening and US stock outperformance. But PIMCO is fully behind the gold uptrend. We also feature a take on the new letter to describe the economy – the K-shaped recovery.
On macro, the Fed has a new way of looking at COVID sensitive parts of inflation, the New Yorker has a great read on Presidents playing games with election results, while food could be the new frontier in ESG.
Finally, on the geeky side, we feature some good work on how to trade FX options on a systematic basis as well as an excellent review of capital flow databases.
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With the US and China reaffirming commitment to the Phase 1 trade deal top Asia FX strategist Mirza Baig presents the case for remaining bullish RMB. A competitive valuation on a NEER basis and central bank that is comfortable with the level and trend of the currency are some of the reasons to remain constructive.
We also feature regular contributor Anton Tonev with a positive case for MMT. He reviews the concepts of government planning versus the free market to argue that inefficiencies in the current system mean that MMT should be considered.
For our top picks this week we have some sceptical views from Roubini and large asset manager GMO towards recent trends such as dollar weakening and US stock outperformance. But PIMCO is fully behind the gold uptrend. We also feature a take on the new letter to describe the economy – the K-shaped recovery.
On macro, the Fed has a new way of looking at COVID sensitive parts of inflation, the New Yorker has a great read on Presidents playing games with election results, while food could be the new frontier in ESG. Finally, on the geeky side, we feature some good work on how to trade FX options on a systematic basis as well as an excellent review of capital flow databases.
Enjoy!
Bilal
China: Keep The Faith (3 min read) My discussions with macro investors have recently centred around two questions. First, could the RMB extend its gains further? And second, could the worsening floods and issuance pressure lead to weakness in the bond market?
(Mirza Baig | 25th August, 2020)
Resource Optimization vs Surplus Distribution: The Case For Modern State Economic Planning (12 min read) Modern Monetary Theory (MMT) has finally hit the popular media circuit, generating widely divergent and, sometimes, passionate responses. And rightly so. The flaws of our understanding of how the monetary transmission mechanism works, and its actual flaws, indeed, were clearly exposed during the 2008 financial crisis.
(Anton Tonev | 25th August, 2020)
PIMCO likes gold and GMO bearish on equities
Nouriel Roubini says reports of the dollar’s demise are greatly exaggerated (Marketwatch, 3 min read) Roubini argues that recent dollar weakness is due to cyclical factors not structural ones [Bullish dollar]
Reasons (not) to be cheerful (GMO, 9 page read) GMO presents a bearish equity view and argues Fed is not supporting stocks. [Bearish US equities]
Can Investors Time Their Exposure to Private Equity? (Journal of Financial Economics, 33 page read) Little is known about the practical aspects of investing in private equity across market cycles. New evidence shows that partners are limited in their ability to protect themselves against downturns in private equity performance that come on the heels of strong periods of fundraising in the industry.
Gold Still Shines Bright (PIMCO, 1 min read) PIMCO present their bullish gold view. [Bullish gold]
Inflation post COVID and the case against shadow rate models
Monitoring the Inflationary Effects of COVID-19 (FRBSF, 6 page read) San Fran Fed decomposes PCE inflation COVID categories. They find that the demand shock is pulling inflation lower more than the supply shock is higher. They will be reporting their new inflation measure monthly. [Bullish rates]
Medium-Term Money Neutrality and the Effective Lower Bound (NBER, 25 page read) Gauti Eggertsson is pioneering in the field of policy at the zero lower bound. Here, he investigates the effects of monetary policy at the effective lower bound. Paradoxically, the expansionary monetary policy is even more effective in near money neutrality scenarios.
Inflation At Risk From Covid-19 (BIS, 6 page read) The pandemic has increased deflationary risks in advanced economies, whilst it has increased large inflationary and deflationary risks in emerging markets. This comes down to the collapse in output and oil prices, recent exchange rate depreciations, and tighter financial conditions. [Bearish EM rates]
Are Shadow Rate Models of the Treasury Yield Curve Structurally Stable? (Fed, 44 page read) Argues against current shadow policy rate models used since 2008 to capture true monetary policy.
Skidelsky on crowding out and policy and poverty during the pandemic
Income and Poverty in the COVID-19 Pandemic (NBER, 65 page read) ‘Results indicate that at the start of the pandemic, government policy effectively countered its effects on incomes, leading poverty to fall and low percentiles of income to rise across a range of demographic groups and geographies.’ It worked.
The Crowding-Out Myth (Project Syndicate, 4 min read) Robert Skidelsky argues that governments crowding out investment is not empirically true. [Bullish equities]
A k-shaped recovery and risks from LT unemployment
Mitigating Long-Term Unemployment in Europe (IMF, 24 page read) For those interested in EU labour markets, the COVID-19 pandemic could likely aggravate the long-term unemployment. Skills mismatches, a high share of NEET and declining labour market efficiency are to blame. Policy will play an important role moving forward.
Corporate dollar debt and depreciations: all’s well that ends well? (BIS, 63 page read) EM study finds that FX depreciations lead to lower corporate investment.
It’s Professionals vs Everyone Else in the K-Shaped Recovery (Mish Talk, 3 min read) The new letter to describe the economy, K. Professional are doing well, while the rest not.
Changing attitudes on US immigration and what if Trump disputes the election results
What Happens if Donald Trump Fights the Election Results? (New Yorker, 10 min read) Runs through historical cases of electoral games – but argues that a candidate not conceding would be unprecedented.
Tectonic and Sudden Shift in Public Opinion about Immigration (Cato, 2 min read) ‘The percentage of Americans who want to increase immigration rose above the percentage who want to decrease it for the first time.’
IMF guide to capital flow data and the BoE on understanding capital flows
The Cross-Section of Currency Volatility Premia (Journal of Financial Economics, 18 page read) A zero-cost portfolio strategy that buys forward volatility agreements in currencies with the lowest implied volatility term structure slopes and sells those with the highest slopes (a volatility carry strategy) generates significant excess returns.
How Does International Capital Flow? (BoE, 43 page read) Understanding capital flows can shed light on the current account. In particular; (i) that they are poor indicators of financial vulnerability, (ii) US digital purchasing power finances deficits, (iii) Triffin’s dilemma is not a dilemma, and (iv) high correlation between capital inflows and outflows is a consequence of double entry bookkeeping.
Capital Flow Data – A Guide for Empirical Analysis and Real-time Tracking (IMF, 47 page read) Excellent survey of widely used capital flow databases from EPFR to IIF to BoP data.
Struggling SMEs and Xi’s focus
China’s banks must innovate to help small businesses weather ‘complex and severe’ economic environment (SCMP, 4 min read) Suggests China’s small businesses are struggling.
Xi Focus: Xi stresses advancing integrated, high-quality development of Yangtze River Delta (Xinhua, 3 min read) Interesting structural change. [Bullish Chinese equities]
The definition problem and ESG in the food industry
Eat clean: The hottest trends as food moves into an ESG-conscious age (CityWire, 2 min read) ‘The way in which food is produced and consumed will come under increased focus in the wake of the pandemic’.
Labor Department’s ESG proposal likely to advance amid overwhelming opposition (Investment News, 3 min read) Under the proposal ‘plan fiduciaries are instructed not to make investment decisions that promote ESG goals above achieving the highest return possible for retirement savers.’
Uncertainty over ESG definition amplifies risk of greenwashing (Portfolio Adviser, 2 min read) Fund buyers can’t define it, so who can?
(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.)