The Macro Dilettante returns with a bearish take on the economy with a dash of musical references. We update our US election tracker and find that Trump’s polling has improved, though his odds of winning the election remain low. The tracker also shows that Kamala Harris is the favourite to be Biden’s running mate.
We’re also pleased to feature John Llewellyn on our latest podcast episode. John is the co-founder of Llewellyn Consulting – a leading independent economic advisory firm. We discuss the challenge of returning to pre-COVID output, MMT, climate change and more. A must-listen.
On my curations, we have a great selection of pieces this week. FX expert Stephen Jen argues for dollar strength on his dollar smile framework. Uber-bear Nouriel Roubini lists non-COVID risks for the rest of 2020, and Politico asks, what happens if President Trump postpones the election? We also highlight some excellent academic papers ranging from using Google Trends to predict stock returns to using flow data to predict bond returns.
On another note, many of our readers will be aware of our main site, macrohive.com. But there is another side to Macro Hive, where we deliver much more in-depth analysis which incorporates trade ideas, models and insights from our network. Our recent positioning data shows that the euro is near historic longs, but our expert trade ideas summary suggests people are initiating short euro positions. Is the market topping out? Drop me an email and I can tell you more.
Lady Sings The Market Blues? (3 min read) Trawling Netflix for interesting viewing, as you do these days to relieve ennui, I came across the 2018 docufilm on Eric Clapton, A life in 12 bars. I can’t say I liked him as much as I wanted to by the end of it, but the film features a short section on one of my favourite Aretha Franklin tracks, titled, Good to Me as I Am to You.
(Macro Dilettante | 3rd August, 2020)
US Election Tracker – Battleground States Still Favour Biden President Trump’s approval has increased over the past week, but prediction markets continue to show low odds for a Trump victory. One reason is that battle-ground polling continues to show Biden clearly leading in Michigan, Florida, Pennsylvania and Wisconsin (i.e. above margin of error), comfortably ahead in North Carolina and Arizona and possibly bringing Texas into play.
(Bilal Hafeez | 4th August, 2020)
In this episode, I talk with John Llewellyn. John is the co-founder of Llewellyn Consulting – a leading independent economic advisory firm. Before setting up the firm in 2009, John had various research roles including being the Global Chief Economist at Lehman Brothers, Head of International Forecasting and Policy Analysis at the OECD and teaching at the Faculty of Economics of the University of Cambridge.
Gold and credit are in favour, and doubts around ongoing dollar weakness
Why Is Gold Rising? (A Wealth of Common Sense, 5 min read) First, real interest rates are falling – since 2008, the correlation between gold and real rates has been -0.5. Second, we have dollar weakness – between 1974 and 2019, the dollar was down 15 out of the 26 years, and during those years, gold’s average annual return was 18%. Finally, investors could be using it as an inflation hedge – when inflation in the US was over 3%, the average return on gold was 10%. [Bullish Gold]
The US dollar comes up smiling (The Expert Investor, 3 min read) Jen reiterates his dollar smile thesis. He argues that recent dollar weakness is temporary, and US growth out-performance will mean the dollar bounces back. [Bullish dollar]
From Bond Glut to Bond Drought: A Strategic Fixed Income View (Janus Henderson, 6 min read) After the $1.2 trillion of corporate bond issuance since 2020 (up 95% versus 2019), Henderson see lower investment-grade net issuance in H2 2020. They believe companies will be more aggressive in managing their ratings and leverage levels to ensure they qualify for central bank-backed bailouts in the future. [Bullish credit]
Central banks are trapped with low rates
Time inconsistency in recent monetary policy (Vox EU, 15 min read) Goodhart highlights the problems with low and negative rates such as debt traps, bubbles and financial imbalances. But he also argues that exiting negative rates may bring their own problems in terms of higher defaults. He also suggests that structural deflationary forces are about to turn. [Bullish rates in short-term]
Sovereign Debt Portfolios, Bond Risks and the Credibility of Monetary Policy (Journal of Finance, 45 page read) This paper finds that governments whose local currency debt could theoretically provide the best hedging benefits actually end up borrowing more in foreign currency. This is partly due to poor monetary policy commitments, which then requires foreign currency issuance to attract investors. [Bearish local EM]
Stock Market Evidence on the International Transmission Channels of US Monetary Policy Surprises (SNB, 25 page read) SNB finds that historically dovish Fed surprises boost foreign stock markets on lower expected real rates. More recently, QE surprises boost foreign stocks through better expected cashflows. [Bullish equities]
Joseph Stiglitz calls for EM debt buybacks
How to Prevent the Looming Sovereign-Debt Crisis (Project Syndicate, 8 min read) Joseph Stiglitz highlights how around 100 low- and middle-income countries have to pay a combined $130 billion in servicing debt. But with COVID, this may prove hard to do, so a global debt crisis could be looming. He argues for voluntary debt buybacks, which worked for Latin America in the 1990s and Greece more recently. [Bearish EM frontier debt]
Economic Consequences of High Public Debt: Evidence from Three Large Scale DSGE models (ECB, 26 page read) ECB wades into the fiscal debate. They simulate the effects of high public debt levels and find that economies lose more output in a crisis, spend more time at the ZLB, face a crowding out of private debt, and have less scope for countercyclical fiscal policy among other issues. Essentially, it argues for greater EU fiscal risk sharing.
How commodity prices explain economic activity
Does the Commodity Super Cycle Matter? (NBER, 26 page read) It doesn’t, really, when it comes to world growth. Yet the paper does find that commodity super cycles do exist.
The Trump Record on Unemployment (CEPR, 2 min read) A short piece that argues that the improvement in employment under Trump was a continuation of the trend from the Obama years.
Brazil: Will This Emerging Market Ever Emerge? (Aberdeen Standard Investments, 5 min read) The large asset manager paints a bearish picture on Brazil. The list of reasons is long and includes slower global trade, lower commodity prices, corruption, political malfeasance, and supply weakness caused by inadequate public investment. [Bearish Brazil]
Nouriel Roubini on 2020 white swans, and how postponement of elections could make Biden president
Revisiting the White Swans of 2020 (Project Syndicate, 7 min read), Nouriel Roubini re-states major risks for 2020. These include: Russia using cyber warfare to interfere in the US election, the US-China cold war turning hot, tensions between Iran and Israel as a Biden presidency revives the 2015 nuclear deal, and sanctions by Trump to seize and freeze China’s Treasury holdings. [Bearish equities, bullish bonds]
Postpone the Election? That Could Mean President Biden (Politico, 6 min read) A provocative read. In the absence of an election, Trump’s presidency would end on 20 January 2021. By statute, the person next in line would be the House speaker, but without an election, the term of every member of the House of Representatives will end on 3 January. Now, this could imply (in theory) that the Democrats who control the Senate can elect whoever they want, and Joe Biden becomes president.
Google Trends as a proxy for investor sentiment, and using options to predict Japanese stock performance
Informed Trading in Government Bond Markets (BOE, 25 page read) A great paper that uses regulatory data to assess the predictive power of hedge fund and mutual fund trading behaviour. They find hedge funds’ daily trading positively forecasts gilt returns in the following one to five days – largely because they anticipate investor flows. Meanwhile, mutual fund trading positively predicts gilt returns, but over a one- to two-month horizon. Their ability to forecast changes in short-term interest rates partially explains this.
Stock-induced Google Trends and the Predictability of Sectoral Stock Returns (JOF, 16 page read) Using Google Trends as a proxy for investor sentiment can enhance stock market forecasting accuracy and outperforms a random walk model.
Tail Risk and Return Predictability for the Japanese Equity Market (JOE, 25 page read) Option market data is usable to forecast returns in the dollar-denominated Japanese stock markets. It works less well in local currency terms.
Does Joining the S&P500 Index Hurt Firms? (NBER, 26 page read) An excellent paper. It finds ‘positive announcement effect on the stock price of index inclusion has disappeared and the long-run impact of index inclusion has become negative.’
How better Iran relationship can give China more control of Asia, and why Biden is bullish for Chinese equity.
China Plays the Iran Card (Project Syndicate, 5 min read) Former senior adviser to US state department Vali Nasr and scholar Ariane Tabatabai make the case that, as the US leaves Afghanistan, China will partner with Iran to gain more control in Central Asia and the Middle East.
A Biden Victory Could Be Bullish for China (WisdomTree, 4 min read) Shows that the performance of Chinese equities and the probability of a Biden victory have been positively correlated. [Bullish Chinese equities]
Google issues ESG bond
Environment, Social and Governance Risks Are Financial Risks (Russell Investments, 8 min read) Selecting securities without considering ESG is risky. For example, the BP spill was predictable because it had a poor historical safety record; after the spill, BP lost 51% of its market value in 40 days and had to pay $28 billion in clean-up efforts.
Alphabet Borrowing $5.75 Billion in Largest Corporate ESG Bond (Washington Post, 2 min read) ‘Alphabet Inc. is selling $5.75 billion of bonds with rock bottom yields, in the largest corporate bond sale dedicated to environmental, social and governance purposes. The parent company of Google is looking to fund organizations that support black entrepreneurs, small and medium businesses impacted by Covid-19, as well as affordable housing.’
(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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