Politics keep intruding on markets, whether President Trump’s apparent support for Turkey’s involvement in Syria, his impeachment, the escalating violence in HK, or of course Brexit. This week’s podcast list, therefore, leans more towards politics.
We have JP Morgan’s Michael Cembalest discussing Trump’s re-election prospects and, importantly, Elizabeth Warren’s rise to prominence. Our second pick looks at how China is expanding its military bases abroad through military partnerships. This allows them to expand quicker, incurring lower costs but still exerting influence and control. Our third pick has Cambridge Prof. David Runciman discuss the UK’s struggles with Brexit in light of David Cameron’s memoir publication. It’s well worth a listen for context to the current political mess the UK finds itself in.
Returning to markets and the economy, we have a great discussion on business cycles with Oaktree co-founder Howard Marks. He’s not a fan of central bank activism especially during recessions. Finally, we feature another monetary policy pessimist, this time the Cato Institute’s George Selgin who critiques the Fed for paying interest on reserves, which was partly behind the recent disruptions in US repo markets.
Enjoy!
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Politics keep intruding on markets, whether President Trump’s apparent support for Turkey’s involvement in Syria, his impeachment, the escalating violence in HK, or of course Brexit. This week’s podcast list, therefore, leans more towards politics.
We have JP Morgan’s Michael Cembalest discussing Trump’s re-election prospects and, importantly, Elizabeth Warren’s rise to prominence. Our second pick looks at how China is expanding its military bases abroad through military partnerships. This allows them to expand quicker, incurring lower costs but still exerting influence and control. Our third pick has Cambridge Prof. David Runciman discuss the UK’s struggles with Brexit in light of David Cameron’s memoir publication. It’s well worth a listen for context to the current political mess the UK finds itself in.
Returning to markets and the economy, we have a great discussion on business cycles with Oaktree co-founder Howard Marks. He’s not a fan of central bank activism especially during recessions. Finally, we feature another monetary policy pessimist, this time the Cato Institute’s George Selgin who critiques the Fed for paying interest on reserves, which was partly behind the recent disruptions in US repo markets.
Enjoy!
Warren Piece (Eye on the Market from J.P. Morgan, 10 min listen) Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset Management, looks at the perceived worries in the tech IPO market. A lot of investors miss that most true tech IPOs are doing well; those actually struggling are the tangential tech firms, or those with a marketplace model. The latter have a lot of substantial third-party costs and balance sheet mismatches.
Cembalest also examines the increasing number of policy proposals hindering global trade. For example, Senator Rubio proposed delisting Chinese companies that don’t comply with accounting regulations. We now see a coincidal lower confidence and a manufacturing slump but stronger consumer and service sectors, which he sees as a dangerous dichotomy. At the end, Cembalest considers the impact of Elizabeth Warren’s proposed highly leftist policies and how harmful they could be for markets.
Why does this matter? Wall Street fears the emerging popularity of Elizabeth Warren among Democrats and she is routinely leading Trump in general-election trial-heat polls. Corporates have been demonizing her, claiming she is too leftist and threatens their bottom line.
Furthermore, they warn that markets will probably react to potential policy implementation long before general-election ballots are cast. A recent RBC investor survey showed that nearly three-quarters of respondents are worried about health care, pharmaceutical, and biotechnology stocks. Financials and banks — as well as technology and internet stocks, especially after Zuckerberg’s statement on Warren – wouldn’t be safe either.
Global China’s Plan for Overseas Military Bases (The Brookings Cafeteria, 30 min listen) In this episode, Leah Dreyfuss and Mara Karlin from Brookings introduce a paper they co-author: ‘All the Xi wants: China attempts to ace bases overseas.’ They kick off by discussing the historic rationale behind the US’s global military bases: the US wanted to be able to fight ‘away games’. China has historically been avoiding such moves due to its ‘non-interference’ policies, but Chinese scholars and military officials have recently started speaking against this idea. Karlin suggests that the level of Chinese military presence in its bases is an important metric to keep an eye on.
Both professors agree that China’s major purpose in establishing these bases was protecting its overseas investments and its nationals in regions where it had significant impact in the past few decades – they, for example, look at China’s “logistics center” in Djibouti. Another issue that the professors raise is a ‘slippery slope effect’ – China has been purchasing pieces of ports or lands where the US military also has a significant presence, which doubtless betrays the competition between the US and China regarding each party’s international military influence.
Why does this matter? A key point often stressed is how China seeks to protect its overseas investments by establishing these bases – mostly in emerging markets. The potential competition it has with the US does add more uncertainties to the narrative.
However, given China’s recent economic numbers haven’t been pretty, this could also be viewed as another attempt by China to give its economy a boost by stimulating overseas investments and exporting infrastructure.
Cameron’s Referendum (Talking Politics, 50 min listen) Following the publication of David Cameron’s memoirs, this podcast takes a step back and looks into the events leading up to the risky move of calling the Brexit referendum in 2016. David Runciman, Head of the University of Cambridge’s Department of Politics and International Studies points out that Cameron wanted to reconfigure the UK’s relationship with the EU rather than abolish it.
Brown’s ratification of the Lisbon Treaty without public consensus set in motion a series of political ramifications as Cameron sought to claw back powers handed to Brussels from Westminster – with ongoing EU-UK discussions, the European Union Act of 2011, the ECB policy advocating the move of Europe’s clearing houses away from London, and eventually being cornered into calling a referendum posing the question of membership.
Why does this matter? Whether you plan to get a copy of Cameron’s book or skip it, it’s worth revisiting the early days of the Brexit saga. From Blair’s referendum thoughts in 2004, through to the Lisbon Treaty and the 2011 ECB policies hindering London’s clearing houses, as we question whether Cameron was personally culpable or pressured into it all.
As we enter the supposedly final days of Brexit negotiations and Johnson is struggling to navigate forces, a history lesson full of mistakes might be necessary.
Howard Marks on Mastering the Cycle (Brewin Dolphin Podcast, 28 mins listen) Howard Marks, co-founder of Oaktree Capital Management, questions the recent longevity of the US Business Cycle. He thinks that the recent Fed rate cuts are a policy misdirection and believes that by extending the business cycle unnaturally the FED actually increases the risk of recession.
For Marks, this unnatural extension could also increase the severity of the next recession. He even goes on to state that the mandate of the central bank should be limited to when the economy is either in hyperinflation or recession itself. The reason being that too much intervention within economy, in his view, increases the frequency of boom and bust behaviour.
Why does this matter? The Japanese and EU experience of a low-interest rate has taught us that aggressively slashing it does not have the intended effect on growth in real life as it seems to in theory.
Marks may be right in pointing out that cutting interest rates as a pre-emptive step to prevent recession is just like borrowing growth from the future, which can make for a gloomy picture since it leaves less leeway in terms of policy tools.
Don’t Fear the Repo (Grant’s Current Yield, 25 min listen) George Selgin from the Cato Institute reviews the recent repo rate surge and argues that the private repo market’s inability to accommodate banks’ demand for excess reserves was the root cause. By paying interests on excess reserves, the Fed essentially encouraged and necessitated banks holding large amounts of them.
Selgin then addresses the excessive collaterals in the market and parallels them with too much debt in the money market. He also goes into why the Fed would introduce additional QE to address the problem and how the Fed should address the redistribution problem that doing so would bring – that is, avoiding having too many reserves becoming concentrated in the largest banks. Finally, he agrees that each time a new problem emerged in the money market, it appeared as a result of the Fed’s previous attempt to solve a precedent market problem.
Why does this matter? The ‘fixes to fixes to fixes’ problem from central banks is a dilemma without quick solutions in sight. It seems like trying to manually strike the market equilibrium and stop an unwanted chain reaction from happening is next to impossible.
However, if the Fed does introduce a new round of QE to handle the liquidity issues and we anticipate another havoc in the interest rate markets and if growths are still going to pick up in real terms in the long run. A recent BIS report also confirmed that the rapid bank balance sheet expansion is highly distortionary.