As for my curations for this week, Ed Yardeni remains bullish on bonds even if we get a vaccine, while Morgan Stanley turn negative on stocks. The Fed had a bunch of good papers: one on how economies behave around pandemics, and another on how companies’ increasing market power is problematic. The IMF was also productive with a paper on how monetary policy is less useful for companies with intangible assets (think Facebook or Google), another on how fiscal policy is ineffective for ageing countries, and a final one on how EM funds behave.
Podcast Review: Macro Hive Conversations With Dr Reza Baqir (7 min read) We were delighted to have serving Governor of the State Bank of Pakistan (2019-current) and 18-year veteran of the IMF Dr Reza Baqir as our podcast guest this week. We had an insightful discussion around Pakistan’s economy, markets, COVID and EM debt reduction, the thoughts from which we have distilled below.
(Bilal Hafeez | 11th August, 2020)
US Election Tracker: China Bashing Helping Trump 73% of Americans have an unfavourable view towards China, which is a sharp increase from earlier years (see Chart). Part of this is due to faulting China in its handling of COVID-19.It also helps explain, President Trump’s recent hard-line against China.
(Bilal Hafeez | 10th August, 2020)
Ed Yardeni on bullish bonds and Morgan Stanley on bullish USD
May the Bond Vigilantes Rest in Peace (Dr Ed’s Blog, 8 min read) Long-time bond follower Ed Yardeni argues that the Fed won’t raise rates even if inflation returns because hikes would hurt the US Treasury (as interest payments surge). Instead, the Fed may even pin bond yields to 1%. This would, in turn, be bullish for US stocks, SPACs, precious metals, and overseas assets. [Bullish equities]
Global Markets: Are the Easy Gains Behind Us? (MSIM, 4 min read) Morgan Stanley believes the positive momentum in US economic data will soon reverse. Temporary unemployment is likely to become permanent as the furlough scheme expires. They are bearish stocks and the dollar. [Bearish US stocks, USD]
How firms with intangible assets respond less to changes in monetary policy
Financial Markets and News About the Coronavirus (Vox EU, 8 min read) During the early stages of the pandemic, markets overreacted to ‘uninformative news’. Fed announcements in March provided a structural break. After that, markets became more ‘normal’ in pricing future disease incidence. This suggests an additional benefit of monetary policy. [Bullish bonds]
Monetary Policy and Intangible Investment (IMF, 25 page read) Monetary policy does not affect businesses linearly. Firms with more intangible assets respond less to monetary policy shocks compared to those with tangible investments. This is because they have less collateral and so are not as affected through the credit channel.
Financial Intermediation and Technology: What’s Old, What’s New? (IMF, 25 page read) Technological change in the financial industry is accelerating. Innovations in information and communication are allowing start-ups to disrupt the industry. How is this changing the traditional bank business model? Read our weekly Deep Dive to find out.
Yanis Varoufakis on why the EU recovery fund will divide Europe and how ageing economies benefit less from fiscal stimulus
Solidarity With the Germans (Project Syndicate, 5 min read) Former Greek finance minister Yanis Varoufakis believes the EU Recovery Fund will divide Europe, not least because German workers will divert their anger towards their Italian, Spanish, and Greek counterparts as they feel they are paying for other countries even as inequality in Germany increases. [Bearish euro]
Aging Economies May Benefit Less From Fiscal Stimulus (IMF Blog, 2 min read) The IMF finds thatfiscal policy is less effective in aging economies. Meanwhile, countries with larger working populations benefit because there is more scope for corporate hiring. [Bearish Japan, Europe]
Modern Pandemics: Recession and Recovery (Fed, 30 page read) The COVID-19 pandemic shares characteristics of previous health crises. Those other ‘modern pandemics’ have caused real GDP growth to fall, bounce back, but remain below pre-shock levels for at least five years. Unemployment also falls, especially for females and the less educated. What are the positives? Countries with larger first-year government spending responses have felt the negative effects less.
Market Power, Inequality and Financial Instability (Fed, 29 page read) The secular rise of firms’ market power can explain a number of trends in the US economy: the decrease in both the labour and capital share, the increase in the profit share, the increase in income inequality, the increase in the credit-to-GDP ratio, and the associated rise in financial instability.
How the economic outcomes from the COVID recession are counterintuitive and the value of luck for CEO’s in the labour market
The Most Counterintuitive Recession Ever (A Wealth of Common Sense, 4 min read) In 2Q household debt and delinquency of these debts has fallen in the US. Personal saving remains high. The stock market is near all-time highs. The real estate market is in good shape, too. Unprecedented fiscal and monetary stimulus released in record time made this the strangest recession.
The Value of Luck in the Labour Market for CEOs (NBER, 27 page read) CEOs of S&P 500 companies typically receive $14 million a year for their expertise. Sometimes, however, firm values swing regardless of CEO actions (i.e. ‘luck’). When this happens, lucky CEOs are more likely capitalise by moving to firms with low analyst coverage and that operate in less competitive industries. The result for them is higher pay, but the result for the new firm is poorer performance.
Potential Consequences of Post-Brexit Trade Barriers for Earnings Inequality in the UK (IFS, 29 page read) Who is set to miss out most following Brexit? Blue collar and lower-paid workers. These individuals are exposed to the negative consequences of higher trade costs and are less likely to have good alternative employment opportunities available in their local labour markets.
How Turkey is acting like Russia and how tackling fake news requires us to recognize our own misperceptions
Regional Variations in the Brexit Vote: Causes and Potential Consequences (IZA, 18 page read) It has been extensively documented that age and education were important drivers in the Brexit vote. More nuanced findings suggest that national identity and concerns over immigration also had a quantitatively large and highly significant affect.
The Other Putin on Europe’s Doorstep (Project Syndicate, 5 min read) Mark Leonard, Director of the European Council on Foreign Relations highlights, ‘By weaponising immigration and launching new foreign adventures, Turkish President Recep Tayyip Erdoğan is increasingly acting like his Russian counterpart. And though such behaviour speaks to a deteriorating political situation at home, Europeans can no longer assume that Turkey will remain firmly in the Western fold.’ [Bearish EU]
Facts and Myths about Misperceptions (JEP, 14 page read) Recently, countries have sought to criminalise misinformation. These draconian interventions are fuelled by false claims that suggest an earlier fictitious golden age in which political debate was based on facts and truth. In fact, no evidence exists to demonstrate that the prevalence of misperceptions today is worse than in the past…a fantastic read.
Investment implications of a weaker dollar
Which Investments Benefit From a Weaker Dollar? (A Wealth of Common Sense,3 min read) ‘In years of dollar weakness [since 1978], foreign stocks have risen 85% of the time, gold is up 80% of the time, and emerging markets have advanced 65% of the time.’
Do Multi-Sector Bond Funds Pose Risks to Emerging Markets? (IMF, 45 page read) Empirical evidence shows that multi-sector bond funds (MSBFs) are highly concentrated – both in their positions and in their decision-making. Furthermore, data from EMs shows that the asset allocation decisions of large MSBF portfolios is associated with the performance of the markets in which they invest.
Why Chinese bond yields are rising whilst global yields are falling and how the US may lose the TikTok War
China’s Higher Bond Yields Buck the Global Trend (Advisor Perspectives, 4 min read) Chinese bond yields are rising while global bonds are falling due to three factors, according to Alliance Bernstein. First, a stabilising economy has caused a rotation from bonds into equities. Second, forward-looking investors reduced their exposure to the increasing supply of government bonds during COVID. Third, PBoC has signalled a neutral policy. Going forward, they see China’s bond yields declining and RMB stable/appreciating. [Bullish Chinese Fixed Income]
The US May Lose in Trump’s TikTok War (Project Syndicate, 5 min read) Shang-Jin Wei, a former chief economist at ADB, outlines that US investment in China is about twice as large as the Chinese investment in the US. 30% of US MNCs’ global profit stems from China. Any retaliation from China has the potential to hurt the US more. After this ban, US administrations may have also lost support with regards to improving human rights, intellectual property rights and information flow from China.[Bearish US MNC’s]
Global sustainable fund achieves record level inflow
Global Sustainable Fund Assets Leap to All-Time High (Expert Investor, 6 min read) Morningstar reports assets in sustainable funds achieved a record level at $1.06tn in 2Q – this was also 23% higher than the 1Q. Additionally, sustainable fund flows now account for about a third of overall European fund flows – outpacing traditional investments. [Bullish ESG]
(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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