We cover a wide range of topics in this week’s podcast list. JPMorgan argues that the recent decline in investment is temporary. This implies interest rates could go higher. A podcast from The Indicator suggests that the link between economic growth and US election outcomes is broken. Time to change your election prediction models. Our third podcast has Investec making a bullish case for China based on its large rural population.
BNP brings back some pessimism. In their podcast, they argue that negative rates lead to weaker economic growth. Finally, UBS shows that companies run by billionaires are more successful. I wonder who they bank with!
Breaking Down the Economic Impact of Capex (JP Morgan Economic Take, 6 min listen)
• JPMorgan’s Head Economist Jim Glassman delves into the perceived slump in capex this year.
• He finds that decline is not due to trade war dynamic, as most analysts thought.
• Starting with energy, he notes that business investment in mining structure has fallen, but this is mostly because oil prices have dropped below $60.
• Additionally, there has been a major drop in purchases of transportation equipment. This is almost entirely due to the grounding of 737 Max 8s. These are being produced at fast rates but are not showing up in official capex reports yet. Once delivered and cleared by the FAA, the decline in capex will disappear.
Why does this matter? Recent low capex is being cited as a structural problem for the US economy and many are downgrading US growth and interest rate expectations accordingly. However, if it is a temporary decline, then many investors could be wrong-footed. Notably, interest rates may end up higher than many expect.
How Does The Economy Influence Voters? (The Indicator from Planet Money, 7 min listen)
• Professor Amber Wichowsky of Marquette University argues that the relationship between elections and the economy is changing.
• Democrats and Republicans now look at the same set of data and interpret it in diametrically opposed ways, overturning conventional wisdom that the economy dictates election outcomes.
• Mark Zandi, Chief Economist at Moody’s Analytics, then shows that just three key states have the capacity to swing the election’s outcome.
• He argues that voters are famously short-sighted and the only data that will matter will be the economy’s performance up to 90 days before the election.
Why does this matter? With the US presidential election less than a year away, many are using economic trends to predict the outcome. This podcast says that is futile. Economic data has become partisan – better to watch polling in key states instead. And those currently show Trump leading the pack.
Rural China: The Next Half-Billion (Investec Asset Management, 11 min listen)
• Sahil Mahtani, strategist at Investec, describes the next key growth engine for China: its rural population.
• He dismisses the consensus view that Chinese growth engines have exhausted or that the country is mimicking Japan in the 1990’s.
• Instead, he suggests China’s current 40% (560m.) rural-to-urban ratio is similar to that of Japan in 1960s – the period where its growth took off.
• He cites primarily e-commerce growth in rural China but also a policy push by Xi Jinping to develop rurally as encouraging signs for growth.
• These factors combined make him bullish on Chinese assets, in particular consumption-exposed sectors.
Why does this matter? The Chinese economy grew at just 6% in 3Q 2019, its weakest rate in 27 years. Meanwhile, an ongoing trade war with the US continues to cast a shadow over Chinese growth. As such, this podcast is an important light in the dark, pointing to more structural, long term growth.
The Paradox Of Saving: Individual Rationality, Macroeconomic Headache (BNP Macro Waves, 5 min listen)
• William De Vijlder, Group Chief Economist of BNP Paribas, explains how low or negative rates increases saving rather than consumption, which slows economic growth.
• He believes people are forward-looking and see low interest rates as requiring more savings to retire well.
• Low interest also creates a bigger mismatch between assets and liabilities as people borrow short term.
• He sees this developing into a cycle. Slower growth pushes the central bank to cut rates, which in turn leads to more saving and slower growth. The power of monetary policy stimulation is therefore reversed.
Why does this matter? Despite the rise in unconventional monetary policy, growth in the EU and Japan has remained muted. Instead low rates are leading to economic zombification. Fiscal easing may be the better policy path, but politically it is harder to enact.
The Billionaire Effect (The Bulletin with UBS, 20 min listen)
• Experts from UBS and PWC discuss their annual billionaire report and cite the existence of the “Billionaire Effect”.
• Relative to non-billionaire peers, companies owned by billionaires were more successful, profitable, and better managed in the long run.
• Companies owned by billionaires on average have outperformed the MSCI world index in the last 9 years by 4.5%.
• Post-IPO performance of these companies have generated twice the returns relative to peers.
Why does this matter? There’s clearly a public backlash against the top 1% (or top 0.1%), but this work shines a rare light on their more positive aspects. This could be problematic for politicians wishing to appeal to populist sentiment – by attacking billionaires they may end up damaging other areas of the economy unintentionally.
(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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