State of the global economy (ANU Crawford Leadership Forum, 1hr 23min). Several good talks on at the forum. RBA governor Lowe speaks between minute 13 and 23. He’s not as pessimistic on the global growth as rates markets suggest, and he questions the effectiveness of global coordinated monetary easing as countries would not see benefits from currency weakness. He argues for more fiscal stimulus through infrastructure spending.
At 32 minutes in another panellist, Warwick McKibbin, Professor at Australian National University, argues that policymakers are mistakenly responding to trend/structural changes such as the rise of EM and tech innovation as if they were cyclical forces. These forces will lead to trend moves lower in inflation. Productivity has been low due to measurement issues, with market structure and zombie firms being kept alive by ultra-easy policy. History suggests, however, that productivity takes time to pick up after big tech revolutions, so we will have to wait on that one. He also cites the dramatic rise of anti-microbial resistance as a big potential negative shock to the world.
Is bipartisan support for infrastructure reform a myth? (Brookings Events, 1 hr). Policy wonks from the Republican and Democrat parties exchange views on the impediments to implementing infrastructure programmes in the US. Many are calling for such spending to boost US growth or as a trigger for larger fiscal deficits and hence a bond sell-off, but this podcasts pours cold water on the odds of any major infrastructure programmes happening soon. The main challenge is that the majority of infrastructure spending and decision-marking comes at the fiscally constrained state and local level, not the Federal level. And when the Federal government does get involved, the number of agencies involved goes up, which dramatically slows down the process and reduces the odds of implementation.
Louis-Vincent Gave: Hong Kong Protests & Chinese Yuan Outlook (Macro Voices, 17min). Louis-Vincent Gave of China specialists Gavekal Research gives his latest views. At 6 minutes, he talks on the Chinese yuan (CNY) and argues that it is on a strengthening trajectory. He argues that China is not seeing the currency through a trade policy filter, which would imply currency weakness. Rather, they are viewing it through a Cold War/geo-political filter, which implies dislodging the dollar and internationalizing the CNY (helped by currency strength).
Chris Brightman Discusses the Investment Industry (Masters in Business, 53 min). Interview with the CIO of the smart beta fund Research Affiliates. Brightman argues that retail investors tend to underperform the stock market by 2% annually due to a tendency to act on fads. A smart beta approach which incorporates valuation factors removes that emotion, but smart beta, valuation strategies (Warren Buffet), and hedge funds have underperformed a simple buy-and-hold over the past ten years. Private equity, which Brightman views as long equities with leverage, has performed. The current gap between valuation and growth performance is almost at the 2000 dot-com extremes, which makes him cautious about ruling out smart beta.
Brightman believes corporate profits could get hit if an anti-trust administration takes power at the US elections next year. He also notes that one of the latest factors to be used in smart beta strategies is ‘low investment’ – that is, buying companies that invest less tends to be a profitable strategy. This pushes companies even further towards buy-backs and focusing on creating barriers to entry. He also has found that the best trading/investing talent can be found in family offices, which often comprise former prop traders from banks, and which, due to the legal set-up, are much less constrained in their investments.
Research Triangle (Grant’s Current Yield Podcast, 29 min). Another Research Affiliate interview, but this time with the founder, Rob Arnott. He’s bullish on EM to the extent that half his personal wealth is invested there. His approach to finding value is that there is no such thing as a bargain in absence of fear, on the way to a bargain, he suggests, there is pain and potential losses. The risks are real, so you need to diversify. Currently EM stocks are very cheap (outside of tech). DM stocks using the Shiller P/E ratio are expensive partly due to an endless QE and Chinese credit binge.
Arnott believes recession risks are low if policy rates stay below ten-year yields as companies can still borrow cheaply relative to likely investment returns. He also finds that US bonds are not in bubble territory, but rather negative-yielding bonds like bunds and JGBs are. Buyers of those bonds have no regard for valuations. One challenge for equity investors today is that low volatility stocks are the overvalued tech stocks, so most factors have an anti-valuation bias.
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