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By Bilal Hafeez 28-02-2020
In: post | Newsletter

Macro Hive: Coronavirus Update + Podcast Playlist: Virus Shock / Bond Rally / IMF And ESG

(6 min read)
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We’ve been inundated with questions from members on COVID-19 and its implications. Yesterday, we launched a number of indicators to help with this. We’ve updated the COVID-19 tracker, which is showing an alarming spread. I also include the below on Trump’s odds of winning the elections and the stock market.

On to our podcasts selection. If you want a very bearish take on the COVID fall-out listen to the Macro Voices podcast. To their credit, they recorded it at the start of the week before stocks had totally collapsed.

Then we have an interview of the academic, Paul Schmelzing, who compiled data on 700 years of real interest rates.  The trend has been down over that period, so another reason to be bullish bonds. Finally, we squeeze in a podcast on climate change. We have IMF head, Kristalina Georgieva, and Lord Nicholas Stern from the LSE, talking about greater policy activism to avert climate change.




Trump Odds of Retaining Presidency Starting to Drop

Trump vs S&P

Source: Macro Hive, Predictit



Coronavirus Fears

COVID Super-Spreader Stealth Pandemic? (Macro Voices, 1 hr 25 min listen)

Jim Bianco, from Bianco Research, Mike Shedlock from Money Maven, Dr Ben Hunt – author of Epsilon Theory and Dr Chris Martenson from Peak Prosperity discuss COVID-19 with Erik Townsend.

• They expect a global economic dislocation on a scale similar to the financial crisis. Extreme containment measures such as quarantines may be necessary around the globe. COVID-19 is a silent global pandemic and because of the long incubation period and the asymptomatic nature of the virus we don’t realise the full extent of what has already occurred.

• Singapore is one of very few countries who report the number of people tested and the data is likely to be accurate (unlike China’s). Indonesia not even testing.

• It’s not the flu or SARS, it has pandemic-like characteristics and US virus testing is much too low given high number of Chinese students in the country. He is convinced there is an outbreak ongoing in US if the health system were to test from them. CDC testing criteria too limited. People should prepare for lockdowns, school closures.

• Any assumption of a V-shaped recovery would assume no subsequent panic so we need confidence in local / global organisations. Global supply chains will undoubtedly be hit and deglobalisation set to increase.

• They see potential for huge political fallout in Japan due to the inadequate handling of the cruise ship cases and expects that Abe may have to resign if the Olympics are cancelled. He also highlights political pushback and local unrest in China where people don’t want to return to work.

• Manufacturers already having a hard time sourcing raw materials. In the pharma sector a high proportion of raw materials come from China. Deflationist side – stock market collapse is inherently inflationary. Fed will change towards cuts.

• Overall COVID-19 is an enormous recessionary shock. Stocks now catching up with bonds.


Why does this matter? Global stock markets have suffered their worst week since the financial crisis and predictions of a U or even L-shaped economic impact are mounting. Investors must determine whether this is a buying opportunity or instead the start of a significant equity correction and economic slowdown that will push interest rates down further.



Paul Schmelzing On The ‘Suprasecular’ Decline Of Global Real Interest Rates (Macro Musings, 1 hr listen) Economic historian Paul Schmelzing discusses his new paper “Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018.”

• Schmelzing’s wanted to enter the secular stagnation debate, which he felt was misguided in using the 1970s as a starting point to look at trends.

• His key findings are that long-term real rates have been trending down for 500 years and there have been 46 instances of negative rates since 1311.


Economic Policy in a World

• The 1960s and 70s is an outlier with rates breaking out. Volker triggered a return to the centuries old trend with his war on inflation.

• Analysis of LT advanced economy real rates includes market imperfections such as defaults. The downward trend is evident irrespective of geography, risk premium or type of financial assets. Average annual decline in real rates stands at 1.6bps over the past 700 years.

• As real rates are at their historical trend he is sceptical about the secular stagnation theory. Although secular stagnation relates to unobservable equilibrium rates this should move in tandem with the ex-post real rate.

• The increased fiscal expansion advocated under theories of secular stagnation may not do much to raise rates given the LT downward trend. Moreover, fiscal spending as a share of GDP has gone up significantly over history yet real rates have trended downwards.

• Schmelzing casts doubt on Piketty’s theory that returns on non-human wealth are stable over time. Public and private debt together accounted for 40% wealth portfolio for the elite during the 14-17th century which implies a significant share of wealth showing a downward trending real yield. It would need capital appreciation on the remaining part to achieve stable returns.

• Downward trending long-run real rates are not directly linked to growth or demographics. One unifying theme on inflection points in rates is capital accumulation.


Why does this matter? Central banks globally continue to view the current low nominal and real interest rates as temporary. A fundamental shift in expectations towards a steady downward trend in real rates into negative territory would have profound implications for bond and equity markets as well as real assets. See our Deep Dive for a full review of the paper and implications.



Lord Nicholas Stern

Kristalina Georgieva and Lord Nicholas Stern Talk Climate (IMF Podcasts, 21 min listen) IMF Managing Director, Kristalina Georgieva and Lord Nicholas Stern, of the London School of Economics, discuss the challenges brought by climate change and how the IMF can play a role in mitigating risks.

• Climate change is macro critical according to Georgieva and therefore central to the IMF’s mandate. Fund must integrate climate action into what it already does on fiscal, financial and monetary policy. Can contribute on how to approach carbon pricing / taxing. Can advise on how to improve the quality of expenditure and investment decisions to ensure a sustainable future.

• Strong commitment to work with CBs to look at greening financing. Stress test the financial system for a new category of risks. Think of climate action not as a drag but as a booster, transformation to low carbon, climate resilience is a good investment, better jobs.

• Climate change may be the silver bullet we need at a time of low productivity, low inflation, low rates. But we need policy to pull through investment and the right financing must be available.

• What about the losers, coal dependent countries etc. Sustainable growth should be viewed as an opportunity everywhere to boost demand, investment and growth. Dislocation in the move away from old technologies is inevitable but you also get job creation in new industries.


Why does this matter? A more vocal IMF on climate change suggests more scope for central banks and policymakers around the world to engage in climate-related policy interventions, whether Green New Deals or QE in green bonds.





Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(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.)