As the COVID crisis drags on, we notice it reach areas of the economy and society where its effect was not initially evident. We feature some of the more immediate examples, from Sir John Redwood’s view on diminished central bank independence to the longer-term interplay between capital flows and income inequality from the San Francisco Fed.
On politics, we feature an article on the difficulties of organising postal voting for the US presidential election and another on what may happen to US-North Korea relations should Kim Jong-un die.
We also feature articles on Bitcoin’s lack of safe have status and China’s U-shaped recovery.
In our COVID tracker today we highlight the high daily death rate in Singapore (17%), while Russia remains on top in terms of daily case rankings.
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As the COVID crisis drags on, we notice it reach areas of the economy and society where its effect was not initially evident. We feature some of the more immediate examples, from Sir John Redwood’s view on diminished central bank independence to the longer-term interplay between capital flows and income inequality from the San Francisco Fed.
On politics, we feature an article on the difficulties of organising postal voting for the US presidential election and another on what may happen to US-North Korea relations should Kim Jong-un die.
We also feature articles on Bitcoin’s lack of safe have status and China’s U-shaped recovery.
In our COVID tracker today we highlight the high daily death rate in Singapore (17%), while Russia remains on top in terms of daily case rankings.
Enjoy!
Bilal
Global COVID-19 Tracker In the DM world, Canada and Japan saw 5%+ jumps in daily cases, while Spain and UK stayed at 4% and 3% respectively. As for deaths, Canada leads today with 7%, followed by Sweden at 4%. All other countries are below 3%…
(Bilal Hafeez | Stefan Posea | 28th April, 2020)
How Bitcoin is not a safe haven like gold, and making sense of the recent stock market rally
Grandpa, Grandpa, tell Me the One About Bitcoin Being a Haven: Evidence from the COVID-19 Pandemics (Arxiv, 7-page read) A study using quantile correlations of Bitcoin against S&P500 and VIX – and comparing the currency with gold as a safe-haven asset. It finds that Bitcoin fails to function adequately as a tradition safe haven like gold.
Effects of MiFID II on Stock Price Formation (Arxiv, 26-page read) This paper compares the properties of European stocks before and after the introduction of MiFID II – turns out regulation has made stock prices more efficient.
Making Sense of a Stock Market That Doesn’t Make Any Sense (Wealth of Common Sense, 4 min read) The stock market showed substantial gains through both world wars, which were possibly the most uncertain of times. We could see new all-time highs even as the economy is experiencing the worst of the current crisis. That’s simply because economic data is backwards-looking, and the stock market is forward-looking.
How central banks have lost their independence, and why inflation can make a comeback
What Role Does the Housing Market Play for the Transmission Mechanism? (DIVA, 23-page read) A study modelling Sweden’s economy finds that interest rates have both a direct effect on housing prices and an indirect impact through the bank lending channel. Over time, the importance of the interest rate channel has been stable. However, the role of the bank lending channel has increased. On aggregate, this implies interest rate sensitivity has increased.
End of Myth of ‘Independent’ Central Banks (OMFIF, 3 min read) The Fed and other central banks of leading advanced countries have been working closely with finance ministries on joint monetary and fiscal packages, their main aim being to offset the enormous hit on incomes and output from the shutdowns. If they are collaborating and serving the same state – are central banks really independent? Sir John Redwood thinks not.
High Inflation is Unlikely But Not impossible in Advanced Economies (PIIE, 6 min read) Inflation return has a low probability (3%) but should not be dismissed. Fiscal dominance of monetary policy, a large increase in the debt-to-GDP ratio, and the possibility of an increase in the neutral rate of interest can all bring back inflation.
Why coronavirus will exacerbate existing inequalities in the US, and how capital flows can lead to income inequality in EM
5 Lessons from the Coronavirus About Inequality in America (The Conversation, 5 min read) Only 12% of workers with a high school degree can work from home, 40% of Americans cannot cover a $400 emergency expense, and a large portion of low-income communities have no health insurance. Coronavirus will exacerbate existing inequalities in the US and lessons learned will help solve it.
CAPITAL CONTROLS AND INCOME INEQUALITY (FRBSF, 32-page read) Increases in EM private capital inflows raise income inequality, while rising outflows reduce inequality. However, in the long run, liberalisation of either inflows or outflows reduces inequality.
BIG G (NBER, 31-page read) New research into the fiscal transmission mechanism (assuming some particulars about government spending) finds fiscal shocks hardly impact inflation, there is little crowding out of private expenditure, and the multiplier is much larger (factor of four) than previously thought.
How forecasting recession is a hit and miss exercise, and how a V-shaped recovery followed the 1918 pandemic
Forecasting Recoveries is Difficult: Evidence from Past Recessions (VoxEu, 6 min read) Forecasters have little ability to predict whether a recession will end in a rebound or continue for another year.
What Happened to the US Economy During the 1918 Influenza Pandemic? A View Through High-Frequency Data (Chicago FED, 34-page read) The 1918 pandemic caused a mild recession from which the economy rebounded quickly (V-shaped). Output was affected mainly through a negative labour supply shock, demand picked up quickly, and there was little damage done to the balance sheets of both the nonfinancial and financial sector.
After Covid, international cooperation or anti-globalisation? And what will happen if Kim Jong-un dies?
Few States Are Prepared To Switch To Voting By Mail. That Could Make For A Messy Election (FiveThirtyEight, 12 min read) Mail voting is one solution to conducting the US election safely amid COVID. But switching to mail voting may be hard for most states: it will be expensive, drain states resources, and create logistical problems and legal challenges.
The International Order After COVID-19 (Project Syndicate, 7 min read) The COVID crisis could either deepen international cooperation (i.e. faster the treatment is created via shared knowledge, the quicker the pandemic will be defeated) or create anti-globalist nativism (i.e. open borders create vulnerabilities to viruses). Whichever narrative prevails will have far-reaching consequences for the future of world governance.
What If Kim Jong Un Dies? (Defense One, 3 min read) U.S.-North Korea relations won’t change should Kim Jong-un die. North Korea will not surrender its nuclear deterrents even in a post-Kim world. Further, new leadership – just like the old – will still be dependent on China for political cover, trade, and supply chains.
The role of Skewness in factor investing, and how individual transaction-level data can be used in tracking consumer behaviour during COVID-19
Low‐Risk Anomalies? (The Journal of Finance, 42-page read) This paper shows that low‐risk anomalies in the CAPM and traditional factor models arise when investors require compensation for co-skewness risk. It also confirms that the returns of beta‐ and volatility‐sorted portfolios are primarily driven by a single principal component, which in turn is explained mainly by skewness.
Crisis Dashboard: Big Data Helps Paint the Big Picture (Advisor Perspectives, 4 min read) A crisis dashboard that includes signals from three areas: public health, households/consumers and financial markets. It was constructed by using big data from traditional sources (e.g. earnings growth and GDP) and non-traditional sources (e.g. Google Trends and Glassdoor). In essence, the current state does not signal any improvement.
Tracking the COVID-19 Crisis Through the Lens of 1.4 Billion Transactions (VOXEU, 11 min read) Individual transaction-level data can be used to map real-time tracking of economic consumer behaviour in response to the COVID-19 lockdown measures. The authors find evidence sizeable anticipatory spending (stockpiling) and a positive relationship between the prevalence of the pandemic and the degree of economic collapse in Spain.
U-shaped recovery in China, and how China’s CBDC could be a game-changer
Macro Outlook 2Q2020: No Swift Recovery as Demand Remains Weak (Macro Polo, 11 min read) Weak consumer demand, liquidity shortage in the private sector, and export drops will weigh on Q2 growth, with the recovery resembling more a ‘U’ than a ‘V’. Beijing is likely to take more time to consider a medium-term strategy for making growth more sustainable; consequently it has been more conservative on stimulus in the short-run (as that may be a waste of ammunition).
The End of the US-China Relationship (Project Syndicate, 7 min read) Both are trapped in a blame game with no easy escape. The relationship ending could lead to adverse economic and geopolitical consequences. Both economies are deeply codependent. China will lose its largest source of foreign demand and the US a significant supplier of low-cost goods. Politically, the fight for global power may usher us in a new cold war.
Peking University Professor Says Launch of China’s Central Bank Digital Currency Will Be History-Defining Event (China Banking News, 3 min read) Launching the CBDC will help China transition to a cashless society. Compared to paper cash, digital cash can reduce transaction costs and the usage costs of enterprises and residents in other countries. This will promote the internationalisation of the renminbi.
How employee welfare is now taking centre stage of ESG criteria, and how is ESG attracting more flows amid a broader sell-off
COVID-19 Shines Spotlight on Employee Welfare as ESG Issue (Karma Impact, 3 min read) Before the coronavirus outbreak, climate change dangers had prompted an upsurge of interest in ESG. Now, investors are pressuring companies to ensure that social responsibility and the proper treatment and safety of employees are priorities.
European ESG Funds Attract €30bn Amid Wider Sell-off (City Wire, 3 min read) Europe’s sustainable funds showed resilience during the Covid-19 downturn, with €30bn of inflows recorded over Q1 2020, while the wider European funds universe shed €148bn.
ESG Performing Positively: MSCI (Financial Standard, 5 min read) MSCI compared four global MSCI ESG indexes to their parent indexes during the COVID-19 sell-off. The four selected indexes outperformed the parent index in Q1 2020, with the SRI index showing the most substantial outperformance. However, it noted some underperformance in EM countries (ESG Universal and SRI Indexes).
(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.)