Macro Hive Top Picks: Bankrupt Central Banks / Passive Funds Crisis / Trump’s Power Over US Companies
(total reading time: 4 mins)
Welcome to the new format for curated content. We’ve expanded our selection to cover more topics but for the sake of brevity we have shortened our summaries and interpretations. Hopefully, you’ll like the new style. Make sure to scroll to the bottom to see our fun chart.
Asset Allocation Outlook Midyear Update - Easing Into Slowing Growth (PIMCO, 9 min read) Equities: overweight US, underweight Europe, neutral the rest. Rates: long US and EM rates and linkers, neutral rest. Credit: long securitised (MBS) and EM, short IG and HY. FX: Short USD and EUR, long JPY and EM.
"Big Short" Investor Michael Burry Explains How Index Funds Will Trigger The Next Crash (Zero Hedge, 5 min read) Argues passive funds are removing price discovery from equity markets and over-promising liquidity. Likes small caps (under-represented in passive funds) and Japan stocks (owned by BoJ)
From FOMO to FONIR (Dr Ed’s Blog, 3 min read) Ed Yardeni reports back from recent client meetings and finds investors are favouring stocks on FONIR (fear of negative interest rates)
A Perspective on Secular Bull and Bear Markets (Jill Mislinkski, 4 min read) Looks at secular bull and bear markets in US equities. Finds that secular bear years make up 40% of years, that current rally looks extended and the ratio of peak earners to elderly population is turning down. Bearish stocks.
Fed Easing Sees Defensive Stocks Come Out on Top (Variant Perception, 1 min read) Over the last five Fed easing cycles consumer staples, healthcare and energy provide the highest average total return above the index one year after the Fed’s first cut (see chart). Financials and utilities the worst.
Central Banking’s Bankrupt Narrative (Project Syndicate, 4 min read) Prof Roger Farmer argues that aside from monetary policy not working, fiscal policy will also be ineffective. Instead, he argues that recessions are caused by asset market crashes and so policy should focus on that.
Estimating the economic impact of a wealth tax (Brookings, 3 min read) Makes the case for a wealth tax on the top 0.1% of Americans (see chart). Argues that it is more likely to work compared to other attempts in Europe which had a broader target. This is gathering support from various Democrat Presidential candidate.
Negative Interest Rates and Inflation Expectations in Japan (San Fran Fed, 8 min read) They find that inflation expectations actually fell after the BoJ introduced negative rates in 2016. They warn against cutting rates below zero.
Do Monetary Policy Announcements Shift Household Expectations? (Dallas Fed, working paper) They find Fed policy rate move surprises DO impact households’ economic confidence, but surprises on forward guidance and QE DO NOT. This questions the efficacy of unconventional policy.
ECB corporate QE and the loan supply to bank-dependent firms (ECB, working paper) – The central bank finds that corporate QE did increase bank lending. This suggests the ECB will restart such programmes soon.
Globalization Has Changed Inflation Dynamics, but Domestic Developments still Matter (Brookings, 2 min read) Finds that global factors have become more important for determining headline CPI inflation, but local factors are still important for core inflation and wages.
The Inflation Conundrum in Advanced Economies and a Way Out (BIS, working paper) Cross-country study finds that an ageing workforce, crisis scars on workers and the ‘uberisation’ of the labour market imply more slack and less inflation pressures. BIS also argues for fiscal policy rather monetary actions.
A Role for Financial and Monetary Policies in Climate Change Mitigation (IMF, 4 min read) Recommends central banks doing green QE and accepting low-carbon bonds as collateral. We’ve written about this on Macro Hive.
Predicting Returns with Text Data (Ke, Kelly, Xiu, working paper) Outlines single stock trading strategy around text-mining newswires. The daily models deliver sharpe ratio of between and 1 and 2 (after t-costs). Impressive stats.
Replacing LIBOR (Money and Banking, 8 min read) LIBOR will cease at the end of 2021. This piece raises concerns around the lack of clarity around how many contracts referencing LIBOR have fallback language for the switch. Could pose a systemic risk at some point.
3 Shockers from Yesterday’s RPI Plans (M&G investments, 2 min read) UK inflation-linked bonds will soon RPI inflation measure to the CPI measure. Biggest shocker is that linkers maturing beyond 2030 are at risk of having RPI calculations changed at the discretion of statisticians not the Chancellor.
Satellite Data Economics, Night Lights, and More (Conversable Economist, 3 min read) Useful blog that touches on and contains references on how satellite data can be used to measure growth.
Can Presidents Block Investment in China? (Council on Foreign Relations, 4 min read). Apparently Trump could use International Emergency Economic Powers Act of 1977 (IEEPA) to prevent US companies from making future investments in China. He could also use it to make it harder to continue to do business in China.
China to Take Targeted Measures for Steady Economic Growth (State Council, 2 min read) Official announcement that RRR cuts are their way. Credit has been surprisingly lacking this year, so this could provide a boost. Bullish for risk markets.
The Background to HK Turmoil (Xinhua, 4 min read). The op-ed was written in Chinese and argues that unrest in HK was caused by the increase living expenses for HK residents, the inability to afford housing, lack of upward mobility and the inability of the local government to respond to requests from the public.
Hong Kong Leader Carrie Lam to Withdraw Extradition Bill That Sparked Protests (WSJ, 5 min read) Withdrawing the bill no longer the top priority among the “five demands” from the Hong Kong protesters – the top one is holding to account the police officers attacking protesters. Doubt this will ever happen!
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