Big results in the UK elections with the Conservative party gaining a significant majority. UK markets have rallied (which will likely continue). I give my early views on the consequences of the election including on the Brexit process, austerity and more.
Then as usual on Fridays, we feature our 5 favourite macro podcasts of the week. These include ones on low inflation, market bubbles, the speed of tech, separatist movements in Canada and biases in retail investors.
Enjoy!
Bilal
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Big results in the UK elections with the Conservative party gaining a significant majority. UK markets have rallied (which will likely continue). I give my early views on the consequences of the election including on the Brexit process, austerity and more.
Then as usual on Fridays, we feature our 5 favourite macro podcasts of the week. These include ones on low inflation, market bubbles, the speed of tech, separatist movements in Canada and biases in retail investors.
Enjoy!
Bilal
My 8 Takeaways From The UK Election Result (4 min read) The results are in and it looks like the Conservative party will have an 80-seat majority. This is much more than polling had suggested; it is the best Conservative result since the 1987 elections under Margaret Thatcher and the worst Labour one since 1935. We expected a Tory victory, but not of this magnitude. The pound and other UK markets have surged in response. I give my early take on the consequences.
( Bilal Hafeez │ 13th December, 2019 )
Jim Bianco on Negative Interest Rates, Low Inflation, and Yield Curve Expansion (Macro Musings with David Beckworth, 59 min listen) Jim Bianco, President of Bianco Research, discusses Fed policy and negative interest rates. $12.5 trillion in negative interest rate assets, all of which originate from continental Europe and Japan leaves the US almost the last bastion of positive rates in the developed world.
• Bianco highlights low inflation and demographic shifts as the two primary drivers behind rates declining, with most inflation figures in the developed world below 2.5%. Developments in information technology are the most likely reason behind the prices staying low year-on-year.
• Lowest cost providers in all parts of the value chain are easy to source and compare online. Dynamics across all industries are changing. For e.g., Vanguard undercutting Fidelity’s fees by just 1bp saw billions of dollars flow their way.
• Boomers are to blam for low rates. In the developed world, there are currently over 300 million people over the age of 65 who are projected to live for another 21 years. Their asset allocations typically veer towards fixed income instruments and especially ones of a high quality, to ensure predictable income streams for years to come. This has exerted extreme downwards pressure on interest rates. (Bullish Rates and Tech)
Why does this matter?
• Conventional wisdom usually points to accommodative central banks as instigators of low rates, but this combination of low inflation with a strong appetite for safe assets has arguably more influence.
• The consumer does appear a winner from low prices due to technological advances. However, educational systems designed for the industrial age are failing to provide the appropriate skillset for participation in a modern economy and is a major cause of global disparity.
Financial stability relies on positive rates; negative interest rates in the US could be a major threat.
How Nearly Two Decades Of Fed Policy Contributed To Bubbles, Busts, And A Boom In Debt (Bloomberg Markets, Odd Lots, 33 min listen) Srinivas Thiruvadanthai, Managing Director of the Jerome Levy Forecasting Center, explains how the Fed’s goal of inflation targeting is responsible for high leverage.
• Thiruvadanthai believes that inflation trends over the past few decades (excluding the shocks from oil prices) have been stable in the US thanks to how the Fed targets inflation.
• He reiterates that the Fed’s mandate is to keep price level low and stable (less variability). These, in turn, are the culprits behind debt excess in the economy.
• Thiruvadanthai explains that with inflation targeting the Fed signals two promises to credit investors: inflation will not erode the real returns, and real return will be stable year on year. This, in turn, has led to excessive private debt build-up in the economy and new sub-segments of credit appearing such as the junk bond market (inexistant a decade ago).
• He believes monetary policy should be supplemented with fiscal policy and that NAIRU is a flawed concept.
Why does this matter?
Based on Thiruvadanthai’s argument, if the Fed fails to keep inflation stable (price low and less variable), there is a potential risk of the private debt market busting (via expectation channel). Currently, private debt to GDP stands at 197%. Potential triggers to inflation include escalation in the US-China trade war and an oil price shock (check out #8 of our Grey Swan exclusive).
X-Prize Founder Peter Diamandis & Steven Kotler on the Speed of Technology (Business Podcast) (We Study Billionaires – The Investor’s Podcast Network, 47 min listen) Peter Diamandis, Founder and Executive Chairman of X-Prize Foundation and Harvard Professor Steven Kotler discuss their new book detailing the thought provoking paradigm shifts in technology we can expect in the coming decade.
• One key takeaway is an extension of Moore’s Law: we are building cheaper and faster computers and using those computers to make them cheaper and faster.
• Big push for demonetization of technologies. Diamandis and Kotler shed light on some phenomenal technological advances like films created completely by AI and $100 human genome decoding. Expect genome-specific (not just general-age-specific) treatment, promising to completely eliminate some 30 thousand diseases.
• We’ve reached an all-time high in venture capital, crowd-funding, and sovereign wealth funding in startup tech spaces. This easy capital has accelerated the levels of breakthroughs and has given a green light to a lot of projects that would’ve been rejected a few years ago.
• Diamandis also has an interesting perspective on resource scarcity issues: tech has the capacity to make abundant what was once scarce. E.g., film to digital photography. No our problem is choosing what to do with all our photos!
• Technology paves the way in natural resources, too. It aids us to liberate new resources and renew those we need sustainably. Even time is made abundant: now bandwidth enables instant connection without physical travel.
(Bullish tech, healthcare)
Why does this matter?
Diamandis predicts that these explosive technologies will reshape the way most institutions and markets operate. In the next decade AI and machine learning will pave the way for up to ten new business models to form. This may not sound like much, but the best that we’ve managed so far was one new business model per decade: bate and lock, franchise, and super stores in last 50 years. In the last decade? Online superstores, global cab franchises, subscription based shared accommodation, workspace, and content. All of these are improving efficiencies and increasing productivity at an alarming rate.
Oil Be Going: Canada’s Separatist West (The Economist, 23 min listen) The Economist covers Wexit (Quebec breaking away) in Canada, big data startups in climate change, and how the increased numbers of billionaires in Sweden are no longer despised nor subject to punitive wealth tax.
• After two referendums (1980, 1995) on the separation of Quebec from Canada, WEXIT is gaining traction in the oil-rich western province of Alberta.
• Alberta is rich and young compared to the rest of the country, at an average household income of $90k and age of 36. People feel their resources are being exploited and resent the distant central government. (Bearish Global Macro)
• Part two of the podcast discusses the surge of startups in climate change analytics as their risk management and decision making enables a competitive advantage. Moody recently acquired 427 and incorporates heat stress as a factor in local government debt rating in the US (Link). (Bullish ESG startups)
• Sweden has one of the highest numbers of billionaires in the world (1 for every 250K). However, they don’t face the same disdain as elsewhere. Why? Mostly because of how they amassed their wealth: avoiding labour exploitation, donating to research, and avoiding ostentation. A high tax on billionaires in Sweden failed due to the mobility of their wealth. (Bullish US wealth tax)
Why does this matter?
• Catalonian independence, the Hong Kong protests, the Scottish referendum; all are marked by the same far right populism as WEXIT in Canada. Mainstream politics risks losing control, as witnessed already with Brexit and Trump. Recent polls suggest 33% of Alberta residents desire secession.
• The recent acquisition and incorporation of 427 by Moody’s in debt ratings, Well Fargo acquiring The Climate Service for decision making, and other players like PWC and MSCI making similar acquisitions are clearly proving a source of competitive advantage.
• Finally, Elizabeth Warren’s wealth tax might work due to the US’s worldwide magnetism. However, other nations will experience capital flight as did Sweden: even the founder of IKEA left the country in protest of high taxes.
Picking 401(k) Funds Can Be as Easy as ABC, and That’s Bad (WSJ Your Money Briefing, 7 min listen) Wall Street contributor Daisy Maxey reveals several behavioural biases found to be associated with investors’ fund selection process:
• The biggest (and most shocking) issue: when they are to choose, investors pick the first funds in the list, placing basically the alphabet at the centre of the decision-making process.
• Reordering funds from bottom to top showed a remarkable difference of around a $578,000 increase in a bottom-listed funds’ intakes.
• When presented with multiple alternatives with different attributes, individuals stop searching after finding the first acceptable option.
• Such behaviour appears also at a larger scale: companies with early alphabet names tend to have larger traded volumes, politicians in the same category tend to get elected more frequently, and researchers in the same category tend to be invited to present more.
Why does this matter? There are currently attempts to design and test mechanisms that eliminate this ordinal bias, one of them being ordering by expense ratio. So, if you happen to see differences in how your 401(k) options are listed, that’s probably why.
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.)