Macro Hive Weekly Brief: Collapsed Yields / Argentina Cries / Climate Change Capitalism
(total reading time: 10 mins)
The Macro Hive community is growing both in terms of visitors to our site (8,000 regulars and counting) and contributors. The latter is especially gratifying as it allows us to offer more original analysis. As a result, we will now feature more than three special reports every week – in fact, there’s five in this newsletter. Many have also been asking for further analysis from the authors, so if you wish to speak to someone then drop me an email and I’ll arrange it.
The big story over the past week has been the deterioration in market sentiment: rates have rallied hard and stocks have fallen. First up, I write on how it’s up to the Fed to change the bond dynamic and suggest that their upcoming annual gathering at Jackson Hole could be the place they could do it. We also have a piece from regular contributor John Tierney on why QE hasn’t impacted the real economy. This should give pause to policymakers expecting otherwise.
We also feature our first piece from someone writing under a pseudonym. Macro Dilettante is a senior figure in the financial industry who I have known for a number of years. For various reasons, he can’t write under his real name, but the topic of his piece is climate change. And he has an innovative idea on how to re-think financial capital to solve the challenge.
The remaining two special reports are on emerging markets. We feature an update on the Argentine situation following the market-breaking elections written by a Latin American specialist, Miguel Ovalle. For a compare and contrast, we also have a fascinating piece by EM veteran Gary Licht who suggests that the Ukraine may be the better version of Argentina. Scroll down for the complete list.
In our curated section, we have academic and policy heavyweights Larry Summers and Oliver Blanchard singing the praises of fiscal policy, former Goldman Sachs big thinker Jim O’Neill arguing that the Chinese (not the American) consumer will drive global growth, and macro blogger Ben Carlson justifying high equity valuations.
Finally, in my latest personal blog, I write on how to embrace imperfections through an understanding of the Japanese concept of wabi-sabi.
Can Fed turn bonds yields at Jackson Hole? (3 min read)Bond yields on US and European bonds alike are tumbling. All eyes are now on the incoming annual gathering of the Fed to introduce a new bond dynamic – we expect more dovishness but hope for a plausible way of communicating it. (August 15│Bilal Hafeez)
Why QE Doesn’t Really work (4 min read) This piece asks why QE hasn’t delivered in the past and is unlikely to do so now. John Tierney finds that the vast majority of reserves created through QE have remained as excess reserves on bank’s balance sheets and thus staying outside the real economy. (August 15│John Tierney)
The Climate Change Challenge: A Capitalist Solution (4 min read) A provocative note arguing that the financial elite might need a monetary nudge to start injecting capital into climate solutions. Why not make ‘climate change challenge, CCC bonds’ eligible collateral for central banks? (August 15│Macro Dilettante)
Don’t cry for me Argentina…again? (2 min read) Miguel Ovalle updates on the worse-than-expected drop in Argentinian assets after Macri’s defeat in the primaries. Macri is desperate to prevent a calamity and has just offered an incentive package of $635mm. Ovalle doubts this will be enough to convince voters in the 8 weeks before the elections. (August 15│Miguel Ovalle)
What Argentina and Macri can teach Zelensky and Ukraine (4 min read) Gary Licht draws a comparison between Ukraine and Argentina. The former has seen local assets rally. The two countries face similar geopolitical constraints and populist promises. (August 12│Gary Licht)
The IMF’s Latest Victims (Project Syndicate, 3 min read) Continuing our recent discussion of Argentina’s woes from our specials this week, we picked this piece by Jayati Ghosh, a Professor of Economics at Jawaharlal Nehru University in New Delhi, who blames the International Monetary Fund (IMF) for fuelling a crisis. The Fund rescued Argentina in 2018 with an unprecedented $57bn loan, vital after Macri wrecked the economy, in return for promises of massive budget cuts. But the bailout worsened the situation in the long run, and Argentina wasn’t the only country stung by the IMF: Ghosh lists East Asia in 1998, Greece in 2008, and Ecuador earlier this year.
Why does this matter? After Christine Lagarde resigned as the IMF Chief earlier this year, the process of choosing a new one is underway (Kristalina Georgieva is currently frontrunner, but the selection process is criticised for excluding capable non-Europeans). The Fund’s long-standing belief in expansionary austerity as a fix-all is proving damaging. The question of opportunity cost remains, however – if the fund was to not intervene, would the situation be even worse?
Tracking Foreign Capital (Bank Underground, 4 min read) A new paper by the Bank of England explores how foreign capital inflows specifically aimed at UK banks and financial institutions are channeled at home. Such flows can be large (they reached 100% of GDP pre-crisis) and volatile. The paper shows that they boost domestic lending to corporates and to other banks; pre-crisis, the funds indirectly reached households and the public sector, too. But post-crisis, patterns switched, and UK banks channeled foreign capital mostly back abroad.
Why does this matter? If FDI into the UK is to dry up, which is likely given low-interest rates and Brexit uncertainty, it’s useful to know that this won’t have any significant damage on home industry because they will probably flow back abroad.
Why we can’t just blame rising inequality for the growth of populism around the world (The Conversation, 4 min read) Trump’s triumph is commonly attributed to the marginalised voters favouring his populism, fuelled by a rage against rising income inequality. This research by Brian Nolan, Professor of Social Policy at Oxford University, shows, however, that the widespread rise of populism in other Western countries can be attributed instead to a general distrust in economic conditions. On a similar note, we came across a humorous article by Jim O’Neill, a former banker and UK Treasury Minister, now Chair of Chatham House, who explores how Western leaders are blindly following Trump’s populist playbook because his precedence makes them feel that now ‘it’s allowed’. O’Neill believes that the Fed can’t be a saviour for Trump’s reckless behaviour and that growth will be driven by the Chinese, not the American middle class.
Why does this matter? It has become somewhat trendy to condemn populism as the new plague of the West. While many of the new leaders might portray populist characteristics, it’s important to avoid getting bogged down by the label and focus on the tangible economic issues at play.
The Impact of Interest Rates & Inflation on Stock Market Valuations (A wealth of common sense, 2 mins) Macro Hive has previously discussed why the Shiller’s CAPE ratio might need a re-visit given its 10-year trail no longer picks up the crisis drop in earnings. We readdress the topic with this piece, where Ben Carlson points that the ratio has been hovering above 30x since 2017, something which only happened twice before (1929 and 2000) – and both times it preceded huge market crashes. However, with continued low interest rates and non-existent inflation, he claims the high market valuation today is justified and stable. Carlson also warns against the universal use of high valuations as a crisis timing tool, since this has proved unreliable in the past.
Why does this matter? As difficult it is to decide whether a new recession is approaching, we agree that it’s worth keeping in mind that high market valuations aren’t a diagnosis for a crash.
Evolution or revolution: An afterword (Vox EU, 6 min read) In their latest research, Olivier Blanchard, Professor of Economics Emeritus at MIT, and Lawrence Summers, Professor and President Emeritus at Harvard, express their discontent with the zero-bound rate environment in the Western World. They encourage a major policy role redistribution – or in other words for Central Banks to turn from monetary to fiscal tools as the primary stimulus apparatus. There is no free lunch, however. Debt, regardless of the current low rates, still leads to a general welfare loss. Also beware the Japanese stagnation experience, where aggressive fiscal stimulus did little to revive indicators.
Why does this matter? It’s baffling to observe the rate cut bonanza across the Western World given the plethora of indicators that it’s doing little to revive slow growth and inflation. We continue questioning Central Bank independence and now turn to research that offers alternative policies in hope that policymakers take note.
Inside China’s vast influence network – how it works, and its reach in Australia (The Conversation, 4 min read) Garry Groot, a Senior Lecturer in Chinese Studies at the University of Adelaide, outlines the little-known Chinese United Front Work Department within the Communist Party, designed to reach out to and influence ethnic Chinese abroad. It is aimed at promoting the party’s ideals abroad and attracting intellectuals, minorities, and religious groups. Unsurprisingly, Jinping has favoured the expansion of the Department as he consolidates his power and reinforces his claims over Taiwan, Macau, and Hong Kong. Hong Kong, however, might be proving ineffective given the events of this month.
Why does this matter? In yet another stealth power grab, Beijing is reinforcing the work of a secretive influence arm that formally promotes itself as a world trade facilitator. But Hong Kong observers have seen none of that.
Stimulus Prep or Prelude to Deflationary Crisis: China Tightening Screws on Real Estate (Investing in Chinese stocks, 4 min read) Real estate prices are rallying due to loose buying restrictions in Chinese localities and Central Government stimulus. Meanwhile, credit has failed to flow to SMEs and other industries. But the situation may not last – Beijing is tightening up loan supervision, claiming that real estate won’t be the engine of GDP growth. Further, the real estate businesses of banks are being investigated in 32 cities, with inspections focusing on areas such as development loans. It is also worth noting that July showed a decrease of 19.63% in real estate trust since June.
Why does this matter? There were some worrying tales of a huge real estate bubble in China, especially given that 25% of the country's GDP comes from construction, 80% of the nation's wealth is in domestic property holdings, and that right now there is a $3.4 trillion real-estate debt stacked up.
Hong Kong protests: history lessons for Beijing from British colonial era uprising (The Conversation, 4 min read) With unrest in Hong Kong escalating, Beijing is weighing up the cause for forceful intervention. This article uses the cases of Soviet Union interference in Hungary in 1956 and Czechoslovakia in 1968 to claim that this would be a mistake. It would ruin Jinping’s image as a peacemaker amongst the Chinese and his long-fostered hopes for international leadership. Restraining from intervention, on the other hand, would have long-term benefits such as increased stability and a much-needed boost in confidence among Hong Kong citizens.
Why does this matter? With the unrest escalating in Hong Kong, now blocking roads and airports, sending in the troops is becoming increasingly appealing. We agree that the potential economic fallout between Hong Kong and Beijing would be devastating. We still predict some intervention, but it is likely to be milder, for example stationing Chinese police officers from a neighbouring province to work alongside HK officials.
China’s AI Talent Base Is Growing, and then Leaving (Macro Polo, 3 min read) Similarly to the US, China has seen dramatic growth in the developments of its AI talent base. Most of Beijing’s efforts are on expanding the talent rather than retaining it, however, and they are consequently experiencing a huge brain drain as 50% of the top AI talent exits China for better work in the US. The central government published a development plan in 2017 with the aim of retaining talent at home by opening up development channels and offering higher salaries.
Why does this matter? The US and China have long battled for supremacy on high tech and, as of recently, progressive co-operation seems even further away. We previously discussed the rise of Chinese scholars in the US and now US corporates are whisking away top talent too. Washington should expect a potential backlash from Beijing.
Smart home tech makes inroads into China's emerging elderly care market (Reuters, 4 min read) China, similarly to Japan and many Western countries, has an aging population and start-ups are waking up to huge market potential. With millennials too busy to look after their parents and retirement homes too expensive, there is a demand for alternatives. A little-known venture, Lanchuang is proving popular, targeting 30m users by 2021 and a Nasdaq listing. It launched a smart care system costing just 15 cents a day that offers a webcam, TV set, a voice assistant, and an SOS button. The Chinese government, after initial hesitancy, is finally convinced of the gap in the market and has just injected 25m yuan into the venture.
Why does this matter? In an aging and wealthier western world, we will be closely following the emergence of assistive technology start-ups. There’s room for these to expand beyond everyday care, too, as ventures are now discovering how tech can offer relief for a number of common old-age illnesses.
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