We have Nobel laureate Eugene Fama reiterating the case for efficient markets and against active managers in our first podcast pick. We then have Credit Suisse’s Zoltan Pozsar argue that we could see more repo volatility in December unless the Fed acts. In our third podcast, award-winning blogger, Mike Shedlock, talks bubbles and being bullish gold.
Our last two podcasts go big picture. We feature one discussing how 3D printing could see manufacturing return to developed countries. The other has Chicago Professor Luigi Zingales defend a pro-market agenda. He’s not a fan of the ‘green deal’ or universal healthcare.
MIB Live with Eugene Fama and David Booth (Masters in Business, 60 min listen)
• In a live panel podcast hosted at Chicago Booth, the “father of modern finance” Eugene Fama and the business school’s namesake David Booth share their perspective of the on-going relevance of Fama’s efficient markets hypothesis.
• It’s a rare opportunity to listen to Fama, who is notoriously press-shy and whose acerbic wit can ruffle feathers in the industry. “The business-man’s pornography”, he replies when asked of his opinion of Wall Street-generated research, for instance.
• The discussion explores the two economists’ relationship, as Fama took on a mentorship position in Booth’s early career as he was impressed by his intellect, and helped him set up his first microfund from his apartment. They talk through their career trajectories and the impact of their work on people’s lives.
• The pair underscore the necessity of practitioners using robust academic models and of backtesting research to make sure it fits well with out-of-sample data (which is another one of Fama’s criticisms of many published papers). Fama and Booth both credit their work with helping people’s lives for the better.
• Booth especially notes that since the ‘60s, clients have seen their fees drop tenfold and risk controls have improved exponentially, and he’s proud to contribute to this legacy.
Why does this matter? As the author of many of the most widely-used financial models, Fama’s philosophy regarding active management is worth keeping in mind. Assuming markets are reasonably efficient (which he firmly attests is the case), active managers will barely break even after fees. This argues for passive investors and a grim future for active management. And if you do have a winning active manager, Fama suggests this is more likely due chance rather than skill. Given the dominance of passive management, his views have clearly been accepted by investors. But he doesn’t talk much about the liquidity flare-ups we have seen with this shift. Perhaps, the theory needs updating.
Why the Repo Markets Went Crazy (Odd Lots/Bloomberg, 56 min listen)
• Credit Suisse’s Zoltan Pozsar, one of the leading experts on money markets, speaks on September’s repo market volatility.
• He believes the repo crisis was largely due to Fed’s quantitative tightening and the resulting loss of market liquidity.
• He argues that the post-2008 regulations have encouraged the formation of an unhealthy distribution of reserves across US money markets. An illiquid repo market can have negative effects on businesses, so the Fed’s eventual response was needed.
• The anchors and Pozsar also explore how foreign primary dealers may suffer losses during the such events, and why the Fed should be less ignorant about this part of the market.
• Finally, Pozsar expects more repo volatility in December if the Fed doesn’t act more aggressively or release another round of QE.
Why does this matter? The unprecedented level of unconventional monetary policy since 2008 still lives with us today. The Fed tried to unwind these but has seen unintended consequences in repo markets. At one level, this shows how much we don’t understand which markets are being propped up by central banks. It also suggests that the Fed could restart QE (to save repo markets) even if the economy is not in recession.
With Mike Shedlock, Author of “MishTalk” (Hedgeye, 52 min listen)
• Mike “Mish” Shedlock is one of our top bloggers of 2019, so he is well worth listening to. In this podcast, he opines on several controversial topics.
• First, Shedlock explains his belief in holding gold in the long-term. He sees gold as a measure of faith in central banks, rather than just inflation hedge. He cites various historic policy errors and argues the case for the gold standard.
• Second, he discusses bubbles in European bonds, global equity markets and the US housing market. He sees an overpriced US stock market as a harbinger of a possible recession.
• Then on politics, he argues Trump lacks the right tactics on trade policy and is influencing monetary policy. He makes the case for Trump defeating Warren in the 2020 election.
• Finally, on US monetary policy, he sees the Fed itching to return to hiking rates, not least because of the failure of low rates to work in Europe.
Why does this matter? Shedlock is clearly not a fan of ultra-easy monetary policy. His support of the gold standard may be too dogmatic, but he’s right on the possibility of bubbles forming today. He’s not alone in being bullish gold which may be the right hedge in the world we are in.
Will 3D Printing Increase Trade? (Peterson Perspectives, 24 min listen)
• This episode discusses how 3D printing can impact international trade.
• Many think trade is the ladder for economies to develop – successful industrialisers have all followed this path of building up stronger export sectors. Now some are worried that this model could be impaired due to automation and 3D printing.
• A wider application of 3D printing could mean that the future of trade may be in digital goods rather than physical goods. This is not good news for developing economies who rely heavily on traditional trade.
• On the flip side, the cost and production efficiency of companies will improve which may benefit the global economy in the longer run.
• Recent academic work on the influence of 3D printing on the production of hearing aid devices found a 58% increase in hearing aids trade since 2008. But it has been developed economies with advanced production technologies that have benefited from this revolution.
Why does this matter? While the first wave of globalisation saw developing countries like China benefit and uneducated workers in developed countries suffer, the rise of 3D printing could change these dynamics. The biggest losers will be poorer developed countries that don’t have the technological capacity to manufacture goods using 3D printing. Developed countries could see manufacturing return, but it’s not clear whether uneducated workers will benefit. Inequality may therefore continue to rise.
Is Economic Orthodoxy Evolving? (Pitchfork Economics, 59 min listen)
• In this episode, University of Chicago finance professor Luigi Zingales discusses the impact of the ‘Chicago School’ of economic thinking on the US.
• He makes a distinction between being ‘pro-market’ or ‘pro-business,’. He sees the latter as leading to market inefficiencies.
• He argues US capitalism started to deteriorate after the collapse of the USSR. This allowed the US to not keep up its image of capitalism on an ideological level.
• Controversially, Professor Zingales disapproves of universal healthcare as its hidden costs are beyond American society’s capacity to bear them.
• On “green deals,” he sees them as an inefficient wealth transfer from the government.
• However, he does advocate for cheaper public higher education. He points out that the US high school system prepares students neither for college nor for vocational skills. This phenomenon contributes largely to the student loan problem in the US.
Why does this matter? It’s not fashionable today to be stridently pro-market, but Professor Zingales makes a strong case. Popular policies like universal healthcare and green deals may not be the panaceas many hope. He does argue against big business, which people on the left would agree with. This suggests that the backlash against big business could have supporters from the right as well as the left.
(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.)
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