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By Bilal Hafeez 22-08-2019
In: post | Newsletter

Macro Hive Weekly Brief: Culture Shocks Market / MMT / Europe Recession Risk

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(total reading time: 10 mins)

The market frenzy over the US yield curve inversion may have subsided but all eyes remain on the Fed. Chair Powell’s speech tomorrow is therefore the top event risk for markets, and all of our special reports for this week touch on monetary policy in some way.

In our first special report, seasoned market expert John Tierney uses this year’s 50th anniversary of the Summer of ‘69 (man walked on moon, Woodstock) to examine how culture often shifts alongside changes in market regimes. His take is that we could be witnessing something similar today. Then, US rates veteran George Goncalves gives us highlights from a US macro event where China, MMT, and negative rates took top billing. And I’ve written two pieces this week – one arguing that a moderation in the US-China trade war could help FX carry trades, and the other arguing that Europe, not the US, has a higher risk of imminent recession.

In our curated content, we present finance theory legends Eugene Fama and Ken French, who debunk the idea that yield curve inversions have any predictive power for stock markets. The Deputy Director of the Banque de France, Alessandro Turrini, releases his research on housing valuations: Russia, Korea, and Australia are overvalued. And currency expert Professor Menzies Chinn finds that policy uncertainty has resulted in 10%+ dollar strength. On China, we include an excellent New York Review of Books piece on the country’s surveillance state, summarised below alongside the other selections we have made.

Finally, have you ever wondered which year was the best for movies? In my personal blog, I argue for 1999: The Matrix, Fight Club, Sixth Sense – need I say more?


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The times they are a-changin’… (4 min read) The summer of 1969. It was one of those special moments in American history. In July, man first walked on the moon, and then a few weeks later in mid-August the baby boom generation celebrated its coming of age at the now legendary Woodstock music festival. It seemed then that everyone knew they were living in an extraordinary time. What they couldn’t know was that these events marked the end not just of a decade, but of an era. (August 22│John Tierney)

Thoughts from Camp Kotok 2019: China, MMT, and lower/NIRP rates (3 min read) George Goncalves brings back the highlights from the annual macro event, Camp Kotok. These include how US-China relations will evolve, the rise of Modern Monetary Theory (MMT) and the scourge of negative rates. (August 22│George Goncalves)

August Curse Hits FX Carry, So Watch Trade (2 min read) There seems to be an inverse relationship between policy uncertainty and carry trades – after the recent trade war escalations, the Global FX carry basket dropped 4%, lowest since a year ago. Bilal Hafeez hopes for a dovish stance at the Jackson Hole Conference, which will help carry. (August 22│Bilal Hafeez)

It’s Europe with the Recession Risk, Not the US (2 min read) Worry about a recession in Europe, not the US – a brief insightful analysis by Bilal Hafeez, on growth data surprises heading down for the Eurozone, signaling vulnerability. (August 21│Bilal Hafeez)


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For details: Trump’s International Travels Mapped

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Inverted Yield Curves and Expected Stock Returns (Fama and French Working Paper, 15 min read) Trying put to rest the widespread concern that the recently inverted yield curve predicts a looming recession, two Professors of Finance, Eugene Fama and Kenneth French, test the hypothesis that inverted yield curves predict low stock returns or, in other words, negative equity premiums. They use monthly stock and government bond data from 1975 to 2018 in several scenarios and find no evidence that the inversion predicts a drop in stocks and consequently a recession.

Why does this matter? Macro Hive’s view is that the US probably won’t face a recession in the immediate future (we discuss why in one of our specials this week). Fama and French’s research supports our view and consequently we see no reason to fear plummeting stock markets. This piece also caught our eye – it tracks a Business Cycle index formed of a number of indicators, and it’s currently calm.

The Danger of Climate Doomsayers (Project Syndicate, 4 min read) Extreme counteraction measures on climate change can do more harm than good. Bjorn Lomborg, a visiting professor at the Copenhagen Business School, argues that completely eliminating the use of fossil fuels will damage struggling developing nations. Copenhagen Consensus Centre research shows that using coal power to drive economic growth in Bangladesh is an effective policy with benefits estimated to be greater than $250bn, easily offsetting its $9.7bn cost. So what’s the alternative? Lomborg suggests investing in more research to develop renewable sources of energy to outcompete fossil fuels so that any development is financially sustainable.

Why does this matter? The use of fossil fuels may not be the doom and gloom portrayal we’re used to. It might be controversial, but a recent working paper finds that the world – and especially Africa – will actually be better off in a high fossil scenario. Don’t expect public opinion on the matter to shift suddenly, though.

The WeWork IPO (Stratchery, 5 min read) WeWork’s expansion plans are aggressive: they are targeting every desk job out there. The problem is that half of their locations are still loss-making. Amid the backlash on their optimistic IPO valuation of $47bn last week, given the company’s results in the red, despite massive amounts of capital raised, this piece offers an alternative, bullish view. WeWork’s model is comparable to Amazon’s Web Services from 2006 in that they turn a fixed cost (real estate) into a variable cost for their clients, an approach that requires a massive upfront investment. Also, apart from IWG, there is little competition for the time being.

Why does this matter? We have previously talked about the number of tech start-ups racking up massive valuations despite little assets or profitability (Uber just reported a $5.2bn quarterly loss). While there is some justification for the high figures, there is plenty of concern if a recession hits. WeWork operates long estate leases on fixed terms, whereas clients can easily come and go. The question remains: can WeWork transform from an overhyped property start-up into a mature, diversified corporation?

Assessing house prices: Insights from a dataset of price level estimates (VoxEU, 5 min read) Jean-Charles Bricongne (Deputy Director, Central Bank of France) and Alessandro Turrini (Head of Macroeconomics Surveillance, EU Commission) gauge global house prices using a novel approach in this article. Currently in the literature, house price statistics exclude direct, cross-country comparisons via changes in prices. Bricongne and Turrini’s ability to fill this gap allows for early detection of boom and bust behaviour. They discovered housing affordability can be determined through the price-to-income (PTI) ratio and found that the global median value is around 10. That implies that if buying 100 sqm house requires more than 10 years of income, there is a material risk of a downward correction in house prices going forward. The housing market in the UK (10.2) and the US (3.8), through this measure, seems safe. But markets in Australia (16.3), South Korea (17) and Russia (20.4) are signalling overvaluation.

Why does this matter? In light of the lessons learned from 2008 GFC, the health of the housing sector is a crucial signal of macro-economic stability. While the US, EU, and China are in the headlines as recession risk brews, we must recognise that with the global nature of our modern economy the risk from other countries and its sectors can spill over. This was evident with the spread of 2008 GFC, which stemmed from the US housing market.

Back-of-the-Envelope Calculation of Trump Induced Dollar Appreciation (Econbrowser, 3 min read) Econometric analysis conducted by Menzie Chinn, Professor of Economics at the University of Wisconsin, untangles variety of factors at play that can explain the valuation of the US dollar. He discovers that traditional variables such as inflation, interest rate, and GDP growth relative to the rest of the world, still explain significant variation in the US dollar value. But the most striking element he found was the global economic policy uncertainty channel, which attributed to about 12% appreciation of the dollar over the period 2017Q1-2019Q2 – the highest relative to the other variables.

Why does this matter? US trade policies can easily be credited as the single biggest addition to the recently elevated uncertainty surrounding global policy. With this plot, is it fair to search for villains outside (currency manipulators) where real culprit for the strong value of the US dollar are its own policies?

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Hong Kong is in India, Kashmir is in China. Right? (SCMP, 4 min read) There are many differences but also some insightful parallels between the June mass protests in Hong Kong and the recent and dramatic revocation of the autonomous status of Kashmir. India has fallen to 140/180 on the World Press Freedom Index this year, way behind Hong Kong at 73. Weeks on from the revocation, Kashmir is still cut off from the rest of the world with telecommunications still down and Kashmiri political leaders still detained. Despite all this, the Indian mainstream media has been in support of Prime Minister Modi’s government and has downplayed clashes whereas puzzlingly, in Hong Kong, the recent widespread protests were highly lauded.

Why does this matter? Rising tensions in China and India are clearly worrying for the regions affected and will probably hamper the delivery of economic plans, especially as China’s economy slows and India experiences the lowest level of private investment for fourteen years.

Data Leviathan: China’s Burgeoning Surveillance State (The New York Review of Books, 5 min read) Continuing our discussion on China’s Orwellian measures to monitor and control citizens, we chose this piece on the indiscriminate methods applied within the lesser-known area of Xinjiang, which is densely populated with Uighur Muslims. Vast resources are going into mass surveillance of the 22m citizens in the region, using advanced mobile apps that share personal information with authorities. Unacceptable behaviour includes preaching the Quran, using too much electricity, or even failing to socialise with neighbours, and if caught, Muslims are relocated to political education camps.

Why does this matter? The case of Xinjiang sheds light on how mass surveillance works throughout China. While Xinjiang’s systems are particularly intrusive, their basic designs are similar to those the police are planning and implementing elsewhere. All this is gathering global attention, with a recent Human Rights Watch report suggesting immediate termination of the practices or otherwise a need for foreign intervention.

China’s version of GPS now has more satellites than US original (Nikkei Asian Review, 3 min read) In this article, the Nikkei Asian Review reports that BeiDou, China’s satellite positioning system (another implement to gather and monitor the data of its citizens) has surpassed its US equivalent in market size. In 2018, China launched 18 satellites, whereas by comparison the EU has just 22 altogether. It’s expected that the market for these location data services will reach 180bn euros by next year. Middle Eastern and African countries are already using Chinese navigation systems and if this becomes standard practice, China will lead the way in introducing new technologies and products in the future. It seems that for ambitious companies, making products which are compatible with the BeiDou is a must despite the fact that it is raising alarm bells for the US security services over the possibility of cyberattacks.

Why does this matter? If adopting the BeiDou becomes the standard across the world, China will become the market leader in introducing new technologies and products, leaving the US behind which has traditionally been at the forefront of technology. Of perhaps more concern to Western governments is President Xi Jinping’s strategy to develop a smaller, smarter military – and Beidou’s crucial role in this.

Beijing unveils detailed reform plan to make Shenzhen model city for China and the world (SCMP, 3 min read) China has some grand plans for the Shenzhen area, and they shine a light on their long-term strategy towards Hong Kong. The plan is to transform the area into a socialist example of global leadership and innovation. It’s part of Beijing’s plans to turn Greater Bay Areainto a mega-hub for growth – it currently accounts for 12% of the country’s GDP into a mega-hub for growth. The plans were released amid the rising tensions with Hong Kong this summer; meanwhile, Shenzhen’s economy surpassed Hong Kong’s for the first time in 2018, reaching HK$2.87 trillion compared to Hong Kong’s HK$2.85 trillion in the same year.

Why does this matter? In February, Beijing stated that it plans to integrate eleven regions within the Greater Bay Area, turning them into a large powerhouse. But after this summer’s unrest they might decide to reduce Hong Kong’s significance in the scheme.

Russia, China seek Security Council meeting after US missile test (Al Jazeera, 3 min read) Earlier this week the US tested a cruise missile that hit its target after an astounding 500km flight. This troubled China and Russia – they have called for the UN Security Council convention to investigate. The US defence secretary claimed the test was performed in a response to the Kremlin’s recent expansion of its nuclear arsenal and their breach the 1987 Intermediate-Range Nuclear Forces (IMF) treaty, which prohibited land-based missiles with a range of 500-5,500km. China was never part of the treaty.

Why does this matter? Tensions are escalating: Putin has already claimed he will respond to any threat from the US, and Russia is not the only country to breach the 1987 treaty – the US is guilty, too. The US Pentagon has also said it will probably test missiles of an even longer range (of between 1,864 and 2,485 miles) before the end of the year.

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