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By Bilal Hafeez 07-04-2020
In: post | Newsletter

UK Understated COVID Deaths + Top Blog Picks: W-Shaped Recovery / Misleading Equity Valuations

(7 min read)
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It seems like researchers have ramped up their COVID-related analysis, so we’ve got a great selection of pieces today.

On the econ side, one study finds that inflation is expected to fall due to COVID, while another argues that the CPI calculations could be understating inflation by not accounting for a decline in the variety and quality of products. The BIS lays out some growth scenarios including a W-shaped recovery. Their numbers are pretty negative for EM. We have a couple of big shot economists including Oliver Blanchard and James Bullard giving their take on how to conduct policy around COVID.

On the markets side, we have a Fed paper that looks at plagues/pandemics back to the 14th century and finds that real rates tend to fall after such events. A blogger notes that valuations do not provide a good guide to equity market bottoms and an academic study finds that not even the Spanish Flu had as much impact on markets as COVID is currently having. Finally, ESG funds appear to have performed well recently due to them excluding oil and airline stocks.

Also, check out our latest COVID tracker, where we look at how the UK has understated the COVID death count.





Hive Indicators

COVID-19 Country Tracker: UK COVID Deaths Have Been Understated One of the issues with a new virus is that diagnosing and reporting on it is harder than for an existing disease. We saw that for the 2009 swine flu, where initial estimates of global deaths were around 18,000 but these were later revised to a range of 150,000 to 575,000. We can now see this phenomenon with new UK data. The ONS has just released revisions for England and Wales deaths for the period March 5 to March 27…

(Bilal Hafeez | 7th April, 2020)


Coronavirus COVID-19

Valuation does poorly in a bear market and pandemics are worse than war for asset returns.

Why Valuations Don’t Always Matter in a Bear Market (Wealth of Commonsense, 5 min read) Argues that valuations are not good guides to equity market bottoms. In the past, bottoms have occurred with both low and high valuations.

Aggregate and Firm-Level Stock Returns During Pandemics, in Real-Time (NBER, 17-page read) A study finds that unexpected changes in predicted infection cases during the SARS and COVID-19 pandemic led to a 4-11% decline in stock prices of Hong Kong and the USA. The volatility of stock prices also decreases as the trajectory of pandemic becomes clearer.

The Unprecedented Stock Market Impact Of Covid-19 (NBER 5 page read) Using textual analysis going far as 1900 (including the Spanish flu), the study finds no previous infectious disease outbreak impacted the equities (large daily price movement) as strongly as the COVID-19 did. Current containment efforts are more extensive than the past, hence more detrimental to the economy. This could explain the current volatility.

Longer-run Economic Consequences of Pandemics (NBER, 13-page read) Study analyses rates of return on assets using a dataset going back to the 14th century, focusing on 15 major pandemics and major armed conflict where more than 100,000 people died. Finds significant real rates of return remain depressed and this can last up to 40 years. War has the opposite effect.


Lessons in Yield Management from 1940s and why CPI measures are biased.

How the Fed Managed the Treasury Yield Curve in the 1940s (Liberty Street Economics, 7 min read) Two key Lessons in Yield management from 1940 include; the shape of the yield curve cannot be fixed independently of the volatility of interest rates and debt management policies and, large-scale open market operations may be required, from time to time.

What drives inflation in advanced and emerging market economies? (BIS, 14-page read) Inflation expectations, output gaps, exchange rates, and oil prices impact inflation of individual economies differently. However, after the GFC, expected future inflation has become an important driver of inflation for both the advanced and emerging market economies.

The Responses of Consumption and Prices in Japan to the COVID-19 Crisis and the Tohoku Earthquake (JSPS, 14-page read) A study compares the responses of consumption and prices to the COVID-19 shock and the Tohoku earthquake in March 2011. The YoY CPI rose by 0.6% vs 2.2 percentage points in the wake of the earthquake.  Consumer expected higher inflation after the earthquake, and lower in response to COVID 19. This difference in inflation expectations implies that the economic deterioration due to COVID-19 could be viewed as driven mainly by adverse aggregate demand rather than aggregate supply.

The True CPI Just Jumped (Econ Lib, 2 min read) There exist a CPI Bias. CPI calculation does not account for: a variety of available goods (loss of product variety due to shortages) and quality of goods (disruption of the international supply chain means using a substitute). During this crisis, CPI bias means that we fail to appreciate how much we’ve lost hence its effect is inflationary but may not be captured.


Savings of rich fuels government spending and why huge fiscal deficits is and isn’t a bad idea.

The Macroeconomic Implications of the CARES Act (Ed Dolan’s Econ Blog, 7 min read) US debt to GDP ratio could accelerate to 170% in the coming years. However, as the interest rate on the national debt remains lower than the growth rate of GDP, the ratio of debt to GDP will have a finite ceiling (default or hyperinflation scenario is avoided as debt wouldn’t explode). Provisions like loans to small businesses will mitigate supply-side constraints.

“Whatever it takes.” Getting into the specifics of fiscal policy to fight COVID-19 (Peterson Institute for International Economics, 7 min read) Olivier Blanchard argues that roles for fiscal policy in the COVID-19 crisis are crucial for; fighting infection disaster relief and supporting aggregate demand. He believes even if the fiscal deficit for advanced economies rises by 30% – the low-interest rate would make welfare cost for future generations small. However, the Emerging market wouldn’t have this fiscal liberty and would require grants.

The Saving Glut Of The Rich And The Rise In Household Debt (NBER, 47-page read) The study finds saving glut of the rich has been linked to a large accumulation of debt by the non-rich (household debt). Since the Great Recession, the saving glut of the rich has also been significant in financing government deficits.


Alternative Business Cycle and how 34% of jobs can be done from home.

How Many Jobs Can be Done at Home? (NBER, 5-page read) COVID-19 has raised this question. The study finds that 34% of all US Jobs can realistically be done from home.

The Impact of COVID-19 on Gender Equality (NBER, 26-page read) The study finds that current social distancing measures will have a large impact on sectors with high female employment shares, such as schools and daycare centers. After the immediate crisis, there are drivers which may promote gender equality in the labor market. For example, the adaptation of flexible work arrangements’

Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period (St Loius Fed, 7 mins) St Louis Fed President James Bullard argues for a “National Pandemic Adjustment Period” (NPAP) as an alternative to the traditional business cycle during the pandemic, as a focal point for many policymakers and Americans to understand the current situation. 

The macroeconomic spillover effects of the pandemic on the global economy (BIS, 8 Page read) BIS study finds that the reduction of GDP due to lockdown is likely to drag on over several quarters. The total GDP shortfall could be as much as twice that was initially thought due confinement measure. Risks of uncoordinated confinements lead to repeated virus outbreaks and spillover across the globe could drag growth further.


COVID-19 may lead to self-sufficiency and deglobalization.

What Explains The Bump In Trump’s Approval Ratings? ( FiveThirtyEight, 4 min read) Heightened national unity triggers the rally around the flag effect. This short-term effect usually gets triggered during outbreaks of war, terrorist attack or natural disasters. Other major world leaders have experienced a much higher increase in their approval rating. The bigger question is whether Trump can sustain this higher rating?

The Coronavirus Pandemic Has Opened the Curtains on the World’s Next Economic Model (Naked Capitalism, 10 min read) The US’ inability to produce basic medical gear amid pandemic revealed a strategic vulnerability of being dependent on multinational supply chains. The new economic era will be dominated by countries who are self-integrated.  Recent advances in technology such as AI computing, Automated Manufacturing, nanotechnology and highspeed data transfer will quicken this transition

Stretching the international order to its breaking point (Brookings, 14 min read) COVID-19 is the fourth major geopolitical shock in as many. In each of the previous three, analysts and leaders underestimated the long-term impact on their society and world politics. A crisis will make the government focus on the national economy and lead to de-globalization.


Why money multipliers are now useless and how random sampling can tackle COVID-19.

Multiplier misconceptions (Econlib, 4 min read) Money multiplier models taught in the textbook are not as useful as they change over time. Before 2008 the interest rate was controlled by adjusting the number of reserves. Today, it also includes adjusting the interest rate paid on reserves.

Data Needs for Shutdown Policy (VoxEU, 5 min) To decide when to ease lockdown would require calculation on how widespread the virus is. Current testing for the virus is focused on those showing severe symptoms or at high risk due to resource constraints. One potential solution – random testing of the population to identify the true infection rate.

Repo market and leverage ratio in the euro area ( Banca D’ ITALIA, 17-page read) New evidence on the effect of the leverage ratio (LR) on repo market activity in the euro area. Banks are found to exert market power towards non-bank financial institutions by applying lower rates and larger bid-ask spreads.LR is not a significant factor in the widening of bid-ask spreads. This evidence lessens the concern of additional LR reporting and disclosure requirements


Chinese consumers optimistic about recovery and how China can win global trust.

Cautiously optimistic: Chinese consumer behavior post-COVID-19 (McKinsey, 6 min read) McKinsey interviewed around 2,500 Chinese consumers. Around 50% of respondents to their March survey said they are optimistic that the economy will recover. Post-crisis – Chinese consumers are more likely to shop online, adopt a healthier lifestyle and consider environmentally friendly products.

Is This China’s Global Leadership Moment? (Project Syndicate, 2 min read) China should quietly win global trust by helping the United States and other countries, not out of strategic interest, but on moral grounds. Help includes; sending supplies and equipment, share its data and clinical experiences, guarantee continued operation of its medical supply chains and provide financial assistance to developing countries.


FX reserves can benefit from green bonds and why ESG funds are outperforming.

Reserve management and sustainability: the case for green bonds? (BIS, 23-page read) BIS study finds sustainability objectives can be integrated into reserve management frameworks. Including green bonds within foreign exchange reserves, they found it improved reserves risk profile without sacrificing the return (due to diversification benefits).

Sustainable’ funds a safer harbor in coronavirus market meltdown (Financial Post, 2 min read) Investors who were overweight ESG performed better than their non-ESG peers. In cases, the top 50 most overweighed stocks by ESG funds had outperformed the most underweighted by more than 10%. Some of this outperformance is due to the aversion of sectors that score less on ESG metrics including airline and oil stocks.




(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.)