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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The extent of the stock market recovery may have surprised some over recent weeks, but not Paul Krugman. We feature his latest NYT column, which reiterates the loose relationship between stocks and the real economy and reminds us to focus instead on the rising joblessness.
On economics and policy we also feature Kenneth Rogoff’s unconventional take on the need for deeply negative rates, Philip Lane on the latest tweaks to ECB stimulus, and Joseph Stiglitz on the return of the doom loop between sovereign and banks. We also feature a VoxEU paper looking at the positive international spillovers from QE, including from emerging markets.
On politics we feature an article on what the handling of the COVID crisis means for populism.
We also update our daily COVID tracker, which shows India and Japan with the highest increase in reported deaths.
Enjoy!
Bilal
Global COVID-19 Tracker In the DM world, US, UK, Canada, Denmark, and Sweden saw a small 2% increase in cases. Others barely saw any increases. On reported deaths, Japan stands out with a 10% increase, which could partly be due to structural healthcare problems. It is followed by Canada at 6% and Finland at 4%…
(Bilal Hafeez | Stefan Posea | 5th March, 2020)
Krugman on why stocks are not the economy, and earning forecasts during COVID.
Crashing Economy, Rising Stocks: What’s Going On? (NY Times, 4 min read) NYT columnist Paul Krugman believes there is no disconnect between the stock market and the economy. It is the lack of viable alternatives available to investors, primarily due to a weak economy, that has driven stocks higher.
Why Value Died (A Wealth of Common Sense, 5 min read) Japanese and European stocks have performed poorly not because of low rates but because they are weighted towards value stocks, and value stocks underperform when inflation is low (and vice versa). US stocks have overperformed in a low interest rate environment because they are geared towards growth.
Earnings Expectations in the COVID Crisis (MIT, 16-page read) Downward analyst revisions in earning growth can explain a large portion of the recent decrease in stock prices.
Lane on the latest ECB stimulus, and Rogoff on the case for deely negative rates.
The Monetary Policy Response to the Pandemic Emergency (ECB Blog, 12 min read) ECB executive board member Phillip Lane writes that the ECB estimates a contraction of GDP between 5 and 12% this year. To boost demand and protect the productive capacity of the economy, they deemed further easing of the interest rate on TLTRO III (from June 2020 to June 2021) to be essential.
The Case for Deeply Negative Interest Rates (Project Syndicate, 6 min read) Kenneth Rogoff argues this would prevent defaults (with less need of debt structuring, too), increase aggregate demand, lower unemployment, and help EMs with their current economic distress stemming from capital flight. He believes significant measures would have to be taken first to ensure no cash hoarding, which in effect prevents the policy transmitting smoothly.
International Spillovers of Quantitative Easing (VoxEU, 7 min read) QE policy in an advanced economy can transmit internationally. In the short term, QE can reduce the competitiveness of other economies via exchange rate adjustment; but in the long run, it can stabilize and boost an economy via demand channel.
Explaining asymmetric fiscal multipliers
When a Pandemic Collides With a Leveraged Global Economy: The Perilous Side of Main Street (VoxEU, 18 min read) To ensure the CARES program delivers as promised, it should target businesses at risk of limited financing from the private market. The government should also alleviate the moral hazard that stems from bailing out highly levered corporates.
Why Are Fiscal Multipliers Asymmetric? The Role of Credit Constraints (McManus, Ozkan, Trzeciakiewicz, 33-page read) This study finds fiscal effectiveness can vary across the business cycle. Higher spending and lower taxes are more productive during an economic downturn compared with during an expansion.
Avoiding a W, and the spectre of stagflation.
How to Avoid a W-Shaped Recession (Project Syndicate, 7 min read) History lessons from the previous crisis. 1918 Spanish flu shows relaxing social distancing too early led to a devastating second wave. President Roosevelt’s administration in 1936, pleased with recovery from depression, introduced austerity. This caused the economy to contract into another recession in 1937. To avoid a W-shaped recession, remove public health measures and/or economic stimulus slowly.
Welcome to the World of Stagflation (OMFIF, 3 min read) The column argues that we will face 1970s style cost-push inflation due to massive debt levels. Policymakers will face a dilemma: reduce inflation by allowing higher unemployment, or let inflation run higher but save jobs and reduce the cost of debt. The author believes the latter would prevail.
Labor Demand in the Time of COVID-19: Evidence from Vacancy Postings and UI Claims (NBER, 15-page read) Job vacancies in the US have crumpled (in the latter half of the March) and are now 30% fewer than at the start of the year. The collapse in the job market has affected all US states, irrespective of the intensity of the virus spread or the timing of the lockdown. However, essential retail and nursing jobs are significantly sought after.
The COVID crisis, and the changing face of politics.
The Fascist Politics of the Pandemic (Project Syndicate, 7 min read) Political leaders of some of the largest democracies in the world, namely the USA, India and Brazil are using the pandemic to impose their political beliefs and ideology further. Whether it’s maltreatment of ethnic minorities in India or a ban on immigrants in the USA, an uncanny resemblance to fascism is emerging.
The Populists’ Pandemic (Project Syndicate, 7 min read) Populists could gain politically from the pandemic if the crisis worsens, leading to greater distrust in democratic institutions. However, if society is able to navigate this crisis successfully it would restore confidence in political establishment and institutions.
BIS on FX swaps during COVID, and Stiglitz on the doom loop.
Dollar Funding Costs During the Covid-19 Crisis Through the Lens of the FX Swap Market (BIS, 6-page read) Dollar funding cost in the FX market has increased during Covid-19. Reasons are twofold: increasing demand (hedging needs of firms and asset managers to pay back dollar-denominated obligations); and reduction in supply (financial intermediaries find it risky to lend). However, the cost has narrowed after central banks set up swap lines.
Optimal Bailouts and the Doom Loop with a Financial Network (NBER, 31-page read) Joseph Stiglitz, Agostino Capponi and Felix C. Corell examine interbank network structures and banks’ exposure to domestic government debt. They find that rescuing banks is an optimal strategy if they have sizeable sovereign exposure and are vital within the network even if this requires a larger bailout package.
The disappearing trade surplus.
Why China Isn’t Sending Money to Everyone (Andrew Batson’s Blog, 5 min read) The worst of the crisis is over in China, unlike in the West. China has practised fiscal conservatism since on per capita basis its budgetary space is still limited. It can also be argued that it tends to prioritize production over consumption due the prevalence of socialism.
China’s Vanishing Trade Surplus (Milken Review, 13 min read) China’s trade surplus is trending lower and could potentially turn into a deficit in the future. This is because demand is transitioning towards domestic consumption and demographics are ageing rapidly (saving rate will decline which will, in turn, have significant repercussions for the US to run a budget deficit at low-interest rates).
Not all ESG funds are green.
How Chinese Asset Managers are Leveraging ESG to Gain Alpha (The Asset, 4 min read) Chinese ESG-focused stocks have outperformed their peers from June 2013 to June 2019 and now also during the pandemic. Their ability to generate excess returns and reduce tail risk has meant that the leading Chinese asset managers are now increasingly applying ESG research and frameworks to pick stocks.
ESG Funds Can Have a Net Negative Impact, Report Claims (City Wire, 3 min read) ESG funds do not always have a positive impact on society. For example, one popular ESG fund omits 10% of companies with the lowest ESG scores but still has an investment in oil and the alcoholic beverage sector, which negatively impact society.
(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.)