Our latest blog picks increasingly reflect market optimism: from a call that the US recession is already over and that the S&P is poised for further gains, to the case for value investing in the post-COVID world and likely resilience in the housing market.
We also feature more on the NIRP debate and the overall policy mix with a new monetary and fiscal conditions index from the IMF, and a piece on the likely success of Germany’s unconventional fiscal stimulus.
Poland’s former deputy PM and finance minister also provides an interesting case for a Eurozone (rather than EU) recovery fund to prevent parts of the frugal four and CEE countries from blocking the overall proposal.
We’ve also resumed our podcast playlists where we curate some of the best macro podcasts for the week. In this newsletter, we feature episodes featuring Dan Snow on COVID history and Cummings, Niall Ferguson’s take on the pandemic, and more.
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Our latest blog picks increasingly reflect market optimism: from a call that the US recession is already over and that the S&P is poised for further gains, to the case for value investing in the post-COVID world and likely resilience in the housing market.
We also feature more on the NIRP debate and the overall policy mix with a new monetary and fiscal conditions index from the IMF, and a piece on the likely success of Germany’s unconventional fiscal stimulus.
Poland’s former deputy PM and finance minister also provides an interesting case for a Eurozone (rather than EU) recovery fund to prevent parts of the frugal four and CEE countries from blocking the overall proposal.
We’ve also resumed our podcast playlists where we curate some of the best macro podcasts for the week. In this newsletter, we feature a talking politics episode with Dan Snow on COVID history and Cummings, Niall Ferguson’s take on the pandemic, and more.
Enjoy!
Bilal
How polarised US politics is affecting equities, and the health of the US housing market
Does Partisanship Shape Investor Beliefs? Evidence from the COVID-19 Pandemic (Marginal Revolution, 1 min read) New findings reveal stocks with the ‘greatest partisan disagreement’ had more trading volume and explain 20% of the increase in market volume during the COVID crisis. Also, Republican supporters were more optimistic about equities relatively.
A Brave New World for Value Investing (In the Long run, 6 min read) ‘Supply chains will shorten and diversify’ due to growing geopolitical factors influencing trade policy and the aftereffects of COVID. This robustness will come at a cost: firms will either increase the price or face reduced corporate profits. In this backdrop, ‘value-based investment analysis will be the best guide’ for investors. [Bullish value style]
Housing Markets and the COVID-19 Crisis (Econofact, 5 min read) The US Housing market was in better shape heading into this crisis relative to 2008. Recent data shows some recovery (YoY price growth has fallen but remains positive), but the way in which individual states deal with postponed mortgage payments will determine the level of defaults and market recovery. [Bearish housing]
A monetary and fiscal conditions index for the Euro area, and more on NIRP
How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area (IMF, 76 page read) A dynamic monetary and fiscal conditions index through 2007-18 confirms an overreliance on monetary support in the Euro area since 2014. This new model highlights the importance of a significant fiscal response to the COVID crisis. [Bearish bonds]
Negative Interest Rate Debate Needs Clarity (OMFIF, 3 min read) To achieve a more meaningful debate on negative rates, we need better consideration of the context (NIRP in itself is not the cause of low growth and inflation) and a fuller discussion on the operational consequences (cash hoarding and financial instability from pressure on net interest margins).
What’s the ECB Doing in Response to the COVID-19 Crisis? (Brookings, 10 min read) This is a fairly comprehensive recap of the ECB’s policy measures over the past several years including key differences between ECB and Fed governance. Last week’s upsizing of PEPP didn’t quite make it in, with the article published on the same day as the ECB meeting.
The case for a Eurozone (rather than EU) recovery fund, and Japan’s bloated stimulus headlines
Unconventional Fiscal Policy to Exit the COVID-19 Crisis (VoxEU, 8 min read) German’s unexpected (and temporary) VAT cut should effectively encourage spending, boost tax revenues, and raise inflation expectations. The piece shows it is more effective than forward guidance on interest rates which should, in theory, do the same thing. [Bullish inflation]
Europe’s ‘Hamiltonian Moment’ or ‘Fort Sumter Fusillade’? (Project Syndicate, 4 min read) Germany is finally coming to realise that for the Euro area to survive it must move towards joint fiscal policy, yet CEE countries and the frugal four of Austria, Denmark, the Netherlands, and Sweden are not. A Eurozone (rather than EU) recovery fund should instead be considered. [Bearish euro-area]
Financing Japan’s Record Stimulus (OMFIF, 3 min read) The announced fiscal stimulus measures include reallocated spending, government guarantees and contingent lending, yet only part of the support package represents new budgetary spending. And higher net issuance will be easily absorbed into a market where the BoJ holds nearly 50% of outstanding bonds. [Bullish JGBs]
NBER calls the US recession, and quantifying lockdown impact on employment
NBER: February 2020 Was Peak in US Economic Activity (Calculated Risk, 2 min read) A short, sharp economic contraction may avoid the technical definition of recession but it will not avoid being classified as a recession by the NBER’s business cycle dating committee.
The Recession Is Over (Advisor Perspectives, 2 min read) A declining unemployment rate (no matter the exact definition) and improving tax receipts point to the US economy bottoming out. And with monetary policy set to remain extremely expansionary and profits likely to recover, the S&P is set for further gains. [Bullish equites]
COVID-19 Doesn’t Need Lockdowns to Destroy Jobs: The Effect of Local Outbreaks in Korea (NBER, 20 page read) A 1 per 1000 increase in infections translated into a 2-3% drop in local employment in Korea, versus 5-6% in the US and UK, with mass testing and contact tracing used rather than lockdowns. Even when lockdowns are lifted, job losses will not be fully prevented if infections are still rising. [Bearish growth]
Why the world needs Sino-US cooperation, and the secret behind the World Bank’s influence
American Exceptionalism in the Age of Trump (Project Syndicate, 5 min read) A poll highlights that more than two-thirds of Americans want an ‘outward-oriented foreign policy’. But with the rise of China, this means that the US will have to cooperate with them to help deliver global public goods like a solution to climate change.
What Makes the World Bank so Influential, Its Money or Its Ideas? (Brookings, 6 min read) Through the use of AidData’s micro-level survey data, new findings reveal that World Bank analytical and advisory products had a statistically significant impact on government policies. In contrast, that was not so for their investment lending services.
Trump’s Sudden and Dangerous Troop Withdrawal from Germany (Council on Foreign Relations, 4 min read) Trump is effectively signalling that an attack on a NATO ally would not necessarily be met with a US response. That should be deeply troubling not just to Germans but to all Europeans.’ [Bearish risk]
Data considerations during COVID, and what’s driving house prices
There’s More to House Prices than Interest Rates (Bank Underground, 6 min read) Low interest rates have been one factor behind rising house prices, but inconsistencies in timing and variations across the UK suggest this cannot fully explain price gains. Credit conditions and supply constraints have also played an important role.
Data Rights and Data Protection During COVID-19 (San Francisco Fed, 5 min read) Data collection is key to mitigate the spread of the virus. But considerations such as anonymisation, data security, individual rights and use of the data must all be thought through carefully.
Why EU-China summit has been delayed, and what COVID has meant for Xi’s power
EU-China summit: What really happened? (DW, 7 min read) The meeting has been postponed due to the pandemic. But this may not be the real reason, as China and the EU have started to open up their economies of late. It may be a delaying tactic ahead of the 2020 US election, since EU will have to re-calibrate relations with Beijing depending on whether Trump or Biden wins.
How Has the Coronavirus Crisis Affected Xi’s Power: A Preliminary Assessment (China Leadership Monitor, 20 min read) ‘…adverse economic and geopolitical consequences of the coronavirus pandemic have greatly complicated his ambitious agenda and made it nearly impossible for him to present a record of significant domestic and foreign policy achievements as justification for a third term at the Twentieth Party Congress in 2022.’
China’s ‘Peaceful Rise’ Vanishes in Thin Air (Project Syndicate, 8 min read) ‘Chinese troops have been establishing fixed positions in areas that even it considers to be on the Indian side of the disputed Line of Actual Control. The message is clear: China is now the region’s preponderant power, and everyone else should fall in line.’ The longer the border settlement is delayed, the more negotiating power China gets and the more likely it is to acquire the border size it wants.
Uncertainty around climate change, and three things all ESG investor can agree on
What We Know and Don’t Know about Climate Change, and Implications for Policy (NBER, 35-page read) First, climate change uncertainty creates insurance value, which will push us for earlier action. Second, the CO2 emission is ‘irreversible’, which will also propel us towards earlier solutions. However, reducing theses emission has ‘sunk cost’, which will push us away from more rapid resolve.
3 Things About ESG Investing We Can All Agree On (MorningStar, 6 min read) ‘ESG risks can have a material financial impact’ ranging from climate change to violation of privacy – they impact the majority of firms. ‘Historically, there has been neither a material payout nor penalty for investors in global stocks that earn top ESG marks’. Many firms will use ESG rating primarily for marketing purposes without any value add. [Bearish ESG]
World vs Virus, Niall Ferguson – A Historian’s View (World Economic Forum) (18 min listen) Throughout history, humans have learnt to adapt. “I don’t think we should assume there’ll be a post-COVID-19 era, any more than there’s a post-influenza era, or a post-tuberculosis era, or a post-AIDS era.” The Economic historian is not in the V-shaped recovery camp and instead sees ‘’high-speed depression’’…
(Mehdi Farooq | 9th June, 2020)
Daunting Debt Dynamics (Top of Mind) (33 min listen) Kenneth Rogoff thinks that it was an appropriate move to increase debts levels to sustain the economy during the pandemic. He does not see the global economy back to the 2019 levels for at least the next five years. Goldman Sachs’ Jan Hatzius agrees and does not see debt crisis brewing in the US, UK or Japan either…
(Mehdi Farooq | 9th June, 2020)
Has China Won? Part 2 Of Our Conversation With Singapore’s Kishore Mahbubani (Sinica) (1 hr listen) Alliances with other countries will primarily determine the outcome of the Sino- American tussle. American thinkers failed to understand the Chinese mindset, which is the preservation of their people, excelling in the world economy without conflicts and avoiding humiliation…
(Mehdi Farooq | 9th June, 2020)
What The Weak Recovery In Japan Can Teach Us About Re-Igniting The US Economy (Odd Lots, Bloomberg Markets) (53 min listen) The prolonged recession in Japan (starting from the 1990s) could have been avoided if more emphasis was placed on credit creation (bank lending). Instead, Japan focused on dramatically increasing fiscal spending at the onset of the recession, by issuing government debt to the non-bank private sector…
(Mehdi Farooq | 9th June, 2020)
Dan Snow On COVID History And Cummings (Talking Politics) (49 min listen) Recent pandemics (i.e. Spanish flu 1919 and Russian influenza of 1889) had deadlier second and third waves. If that is repeated in the current pandemic, food and utility distribution of our society could collapse due to the centralized nature of modern society. Existing trends get “Turbo Charged” during pandemics…
(Mehdi Farooq | 9th June, 2020)
(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.)