To receive weekly insights and a filtered lens on macroeconomic and financial market analysis
Brexit and WeWork aside, this Thursday’s ECB meeting will be Draghi’s last. He widely expanded the toolbox available to “save” the euro, most notably by wildly growing the Central Bank’s Balance Sheet and driving yields to record lows. In light of Lagarde’s beginnings, who is unlikely to change Draghi’s stance we feature a great interview with Frances Coppola around her new book, exploring QE and what needs to change for helicopter money to ever work.
Last week we looked at an obituary of the 40/60 portfolio and so, in our second podcast, we chose to feature Vanguard’s Fran Kinniry view of the future of index funds and why they aren’t to overtake active investing yet.
Elsewhere, we feature two podcasts on Asia. The first is a discussion with US General Robert Spalding, who gives detailed record of his time as a Defence Attaché in Beijing and his belief that China will soon overtake the US. The second is by McKinsey – they are strong believers in the future of Asia as a superpower but are wary of geopolitics.
We also look at another new book, this time on the future of the workplace. In our last podcast, University of Glasgow Professor, Melanie Simms explores the ungrounded claims that robots will overtake and how to make the office more flexible for an aging population.
Frances Coppola on the Macroeconomics of Helicopter Drops (Macro Musings, 60 mins) Frances Coppola, former banker and financial author discusses her new book, The Case for People’s Quantitative Easing. It’s an in depth analysis of Quantitative Easing as a stimulus method and reason it hasn’t worked well. Coppola claims that QE stimulus is essentially indiscriminate and Central Banks are gifting net financial assets into the hands of the private sector. That sector in turn tends to save in a crisis and hang onto the cash. QE, Coppola argues, must be designed to be spread thinner in order to have any impact on aggregate demand.
Coppola then stresses the need for QE to be permanent and convince the private sector that the cash won’t eventually be clawed back. Simultaneously, though, this kind of stimulus zaps safe assets out of circulation. Towards the end, she discusses ways for governments to directly finance their own investments, which is illegal in most places but, she suggests, there are ways around it by using state investment banks.
Why does this matter? Last week, the US Fed announced a QE-like operation in which they will purchase around $60 bn of Treasury bills a month in response to sharp spikes in interest rates in overnight markets. Soon after, in a separate action, the New York Fed injected $104.15 bn into financial markets to boost liquidity. Equally, the ECB has reversed its plan to end asset purchases and Bank of Japan continues to be the virtual sole purchaser of government debt and a major buyer of corporate shares. It’s essential to analyse whether this would work to revive a slowing Western World or whether such ‘unconventional monetary policies’ and the ongoing economic stagnation now operate in a vicious circle.
Fran Kinniry Discusses Diversified Portfolios (Masters in Business, 75 mins) A wide-ranging interview of Fran Kinniry, Global Head of Portfolio Construction at Vanguard, who created their research department and coined the term adviser’s alpha. He debunks the myth that passive investing is largely surpassing active and the incorrect claims that indexing is a bubble threat due to its size. Kinniry also vouches for the simple 60/40 portfolio, a long-time favourite of PMs (though last week we discussed how it was recently declared obsolete by BAML).
He is largely pessimistic on alternatives – alpha is almost nowhere to be found. Kinniry then discusses the scalability of the low-cost asset management business and how Vanguard managed to grow into a behemoth. The best faring funds are tax-exempt, multi-state US portfolios. Then he explains how safer index funds will deal with the aging population that requires higher risk portfolios to carry them through their longer life.
Why does this matter? Even though this interview sounds much like an advertisement for index investing and Vanguard, it’s worth listening for Kinniry’s wealth of experience in investing. He is critical of the narrative around a smart beta, but he believes that there is a quant factor in investing to be exploited. In the low rate, low inflation and high equity valuation world, investors should avoid thinking about individual components in their portfolios. Instead, see bonds as a diversifier to equities as the correlation between the two still holds strongly in a downturn.
China vs. The U.S.: Trade War to Cold War? (Real Vision, 60 mins) This podcast interviews retired US General Robert Spalding, an ex-Defence Attaché in Beijing. Spalding walks through his time in China and recounts his correspondence with his Chinese counterparts. Being a self-taught expert on Chinese government affairs, Spalding first differentiates the Chinese Communist Party (CCP) from the government of PR China. Spalding argues that the CCP implements its governance by ‘controlling the narratives’ – criticising government acts can be easily redirected to ‘anger 1.4 billion people’.
Meanwhile, both China’s diplomatic and corporate circles have been openly believing in their model’s own superiority and that China will eventually take dominance in its competition against the US. The episode then moves on to explain the Uyghur Concentration Camps in Xinjiang as an example of where the CCP efficiently redirects external narratives. Finally, Spalding considers how the CCP utilises a combination of state capitalism and authoritarian power to earn China lobbyists around the world.
Why does this matter? Much of the analysis regarding the US-China tension would be in vain without an effective understanding of the Chinese Communist Party and why it runs the country in the way it does. China’s (or the CCP’s) strategic approach to public opinion – integrating itself with its people – has partly contributed to its dominance whenever it has a conflict of interest with a foreign entity. It has surely taken advantage of globalisation by offering its huge domestic market to international investors who subsequently scrutinise themselves and give in to governmental pressure in return.
The McKinsey Podcast: The Future of Asia (McKinsey Institute, 28 mins) Dives into the upcoming ‘Asian century’ – over half of the world’s GDP will come from Asia by 2040, emerging as the new centre of global commerce, consumption, capital, and technology. In a global context, Asia should collaborate more with the rest of the world. In turn the world ought to rethink certain premade economic arrangements with Asia.
Currently, the biggest uncertainty in Asia is geopolitical risks. Consequently, the podcast hosts suggest, maintaining the win-win mentality becomes important for Asian policymakers. Continuous social progression is another key driver for the region’s growth aside from an ample supply of labour force. The podcast then breaks Asia down into four parts: China, advanced Asian-Oceanian economies, the ‘emerging’ Asia and the ‘Indian Frontier’ Asia. The interrelation between these four will be crucial for the region’s future development.
Why does this matter? Asia’s combination of a versatile, hungry demographic and an accumulated wealth resulting from its integration with the rest of the world turns it into the next key powerhouse of global growth. While geopolitical uncertainties are the root causes of economic turbulence both within Asia and with the rest of the world, we can still put faith in this region’s continuous flow of vitality and growth potentials. Historically, entities around the region have all learned their fair share of lessons on how to handle cross-country conflicts while minimising damage to themselves.
What Do We Know and What Should We Do About The Future of Work? (New Books in Economics, 32mins) Features Melanie Simms, Professor of Work and Employment at the University of Glasgow discussing her latest short book, “What do we know and what should we do about the future of work?” Simms dives into the tendency to romanticise the rapid change in the work world.
She believes instead in the likelihood of stability in jobs. Despite the UK being one of the world’s greatest producers of goods, automation has added jobs and changed the face of manufacturing, with more highly skilled jobs desired than ever before. Simms also discusses how the service sector consists mostly of ‘emotional’ labour, how an ageing population will transform pensions, and the ways that flexible working and 4-day weeks might encroach.
Why does this matter? By placing work in an appropriately modern setting, it’s important to explore how societies can respond to change, focusing in particular on rights and regulation, enforcement, and the role of unions and collective action. Yes, automation will inevitably disrupt a number of jobs, but this will only drive higher productivity higher in the long run.
(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.)