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With continued concerns of globally spreading Japanification – a term used to describe limp economic growth and deflation despite monetary policy efforts – we feature Ray Dalio’s views on negative yields and the rock-bottom rates. Joined by Goldman’s Jan Hatzuis, the pair maintain a bullish view and advocate against over-stimulating the US economy.
In our second podcast, Jeff Snider from Alhambra Investments explains why there is method to what seems madness in the global negative yield bonanza. Snider is a critic of Janet Yellen’s confidence in stimulus and sees gold as the ultimate hedge.
Moving to Emerging Markets, this week we continue our discussion on climate change and renewables with our third podcast. It explores why Asia is still favouring coal, and the ways to incentivize India and China (which contribute to three quarters of all coal production) to shift to a more climate-friendly model.
Staying on the topic of environment for our fourth podcast, we look at Indonesia’s decision to move its capital given that the megacity of Jakarta is predicted to sink by 2050 and is heavily polluted and over-populated. The move will clearly be costly and is expected to cause political disagreement.
In our final podcast of the week we move to China, where we discuss the suffering pork industry as a case in point for the escalating tariff hikes.
Finally, I re-visit three of Shakespeare’s most famous plays and consider how they represent the different stages of life – each coming with its own tragedy, but also wisdom.
Top of Mind: Dissecting the Market Disconnect (Exchanges at Goldman Sachs, 22 min listen) Bridgewater Associates’ Ray Dalio and Goldman Sachs’ Jan Hatzius discuss what’s causing the divergence between falling bond yield and rising equity prices. Dalio believes this recent divergence makes sense. As interest rates fall, stock value has to rise due to the present value of future cash flow increasing. He argues this is a temporary and non-sustainable positive, as there are limitations on how low interest rates can go. Hatzius asserts that concerns relating to growth are overstated. He claims that despite levels not being as high as in 2017 and 2018, growth is still strong, agreeing that rate cuts are not even necessary in the US. He also believes that over stimulating the economy can push the unemployment down to a level that is unsustainable over the long term, in effect causing a recession.
Why does this matter? Although the speakers explore contrasting opinion regarding US growth prospects, both in their own way signal caution amid rising global uncertainty – and that’s worth regarding. Where Hatzius is overweight on defensive stocks, Dalio calls for intrinsic diversification in assets like Gold and Chinese assets to reduce risk.
Yield Curves Don’t Lie. But Central Bankers Sometimes Do. (Macro Voices, 28 min listen) In this podcast, Jeff Snider, Head of Global Research at Alhambra, discusses how interest rates are currently driving gold prices up – its behaviour is similar to what we see in global bond markets. He explains that while negative bond yields make little sense to an ordinary investor, for many institutions those assets are a balance sheet tool and can have utility in managing liquidity risk (i.e. they consider it as an insurance policy). The opportunity cost of holding such bonds is liquidity premium that banks are willing to bear. Further, sovereign debt is highly dependent on repurchase agreements (repos) and act as collateral reserves. Later in the podcast Snider criticises Janet Yellen for over-promising on stimulus delivering growth; the markets clearly think differently and is expecting lower or even negative term premiums. Finally, he looks at why gold is the ultimate hedge – not only due to its general stability, but for the lowered cost of using it as a hedging instrument.
Why does this matter? Euro dollar futures are up (meaning the market is expecting lower short-term rates) and this points to overall lower bond yields caused by reduced expectations for inflation and expected further rate cuts. But a long euro dollar futures position would take a beating if Powell goes back to rate hikes.
A Friend of Mines: Asia’s Coal Habit (Economist radio, 23 min listen) We have previously talked about the economics behind renewables and the rising appeal of their low cost. This podcast explores the reasons why Asia – specifically China and India – is still favouring coal as its main energy source and why these two countries will probably miss (by some decades) the deadlines agreed to under the Paris Climate Change Agreement. Miranda Jonson, Economist South-East Asia correspondent, explains that while China is initiating small steps, such as more investment in renewables and a carbon trading scheme, India is much more complex. The latter has become the biggest builder of coal fireplants as the government is preparing for a tripling of energy demand by 2030. Towards the end of the episode, the topic turns to the troubles of Liberia, which, after suffering a 14-year civil war, is left with a non-existent economy and a starving population. Even though the war ended in 2003, poor political leadership might be driving another uprising soon.
Why does this matter? Despite the clearly devastating impact of coal on the climate and the promises made to reduce its usage, Asian countries are stubborn. Coal is heavily interlinked with these emerging economies. For example, the central Government in India owns about three-quarters of ‘Coal in India’, which provides revenue to the treasury through dividend payments and taxes on coal production, and employs thousands of people. To reduce pollution and greenhouse gas emissions, improving the efficiency of the coal-fired power system, might be a more realistic goal than trying to remove it entirely.
Sinking Jakarta is Test Case for Climate Retreat (Deep Dish on Global Affairs, 26 min listen) In this episode, Professor Tom Pepinsky from Cornell University and the Brookings Institution explains Indonesia’s ongoing campaign, led by President Joko Widodo, to move its capital away from Jakarta and the political reactions to this. Located on the low-line areas of the Java Island, Jakarta is facing more storm surges and floods than ever. An increase of population, underdevelopment of infrastructure, and overexploitation of local groundwater, put Jakarta at greater risks as sea levels continue to rise. The Indonesian government therefore decided to de-centralize its administrative functions to the Eastern Kalimantan region. This new capital is effectively moving to a less convenient area to all of the nation’s ethic groups. Pepinsky sees this as a way for Indonesia to emphasize itself as a multicultural country and downplay biases towards any demographic group (a key challenge traditionally faced in Indonesia is the divide between Muslim and religious minorities over the relationship between state and religion in Indonesian politics). Pepinsky finally suggests paying attention to the state of Indonesian democracy, as well as how mobilization in Indonesian politics is used to voice different opinions.
Why does this matter? The proposal to move the Indonesian capital is similar to Brazil’s construction of Brasilia on the Amazon. This brings forward investment opportunities in government-led infrastructure projects and, given the current state of the economy in Indonesia, this could be greatly rewarding. However, it’s also important to pay attention to the socio-political risks that might incur given the current division within the Indonesian society.
U.S. Pork Producers Are Forced Out of China-led Rally (P&L from Bloomberg Markets, 28 min listen) Christine McCracken, Animal Protein Analyst at Rabobank examines the pork industry in China. She estimates after the African Swine Flu (AFS) about 50% of China’s hog supply was lost. And prices in Asian markets have started gaining momentum in response, with around a 30% rise last month and almost doubling compared to last year’s price levels. One key reason for this is that since China imposes 62% tariff on US pork, it makes it difficult to resolve the supply scarcity immediately. This has also led to European and Brazilian markets being tapped to import pork aggressively.
Why does this matter? The pork industry can be used as a case in point on how damaging the escalating tariffs in the US-China Trade War can be for producers and consumer alike. The podcast also raises concerns on how higher inflation or more wide-ranging tariff hikes can be for both economies, magnifying such supply shocks.
(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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