This week, I have a varied selection of articles including a bunch on cities. Additionally, there a few on how US monetary policy may not work as fast you think, some new sovereign risk measures from the ECB, the UK’s Brexit experience from Roman times, China’s rich list and much much more. Enjoy.
Tech and Intangible Economy (8)
America Is Losing Its Edge for Startups It used to be that 95 percent of global startup and venture-capital activity happened in the U.S. Today, it’s just over one-half.This mainly because of China over the past few years.
A methodology for measuring the collaborative economy I had a link to a report on estimating the size of the US online platform economy a few weeks ago. That one used bank balance data, this one for Europe uses survey and platform data. The authors find that the collaborative or online platform economy makes up around 0.15% of EU employment with the transport (Uber-type) and accommodation (Airbnb-type) the largest sectors.
How digital platforms reduce moral hazard: Uber vs Taxis The column compares matched pairs of taxi and Uber journeys in New York City to investigate how often drivers took unnecessary detours. Uber drivers were less likely to do this, suggesting that Uber’s innovations in fare structure and digital feedback have reduced moral hazard. Sounds like a win for out-of-towners for sure!
The Bali FinTech Agenda The IMF acknowledges the importance of FinTech and in this report provides a framework for governments to think about it. Not very much on specific FinTech, but rather frameworks.
The Changing Nature Of Work Book-length report on automation, superstar firms and changes in labour markets. Also, includes Human Capital Index (HCI), where Singapore comes out at #1 followed by Korea and Japan. The UK is #15, Germany is #11, France is #22, US is #24 and China is #46
Taxation and innovation in the 20th century[US] and The Impact of Corporate Taxes on Firm Innovation: Evidence from the Corporate Tax Collection Reform in China. Both papers using different methodologies and time scales find that high taxed negatively impact innovation.
Trade and Globalisation (5)
Will the New NAFTA Deliver? Wharton Business School prof finds USMCA “a shockingly reasonable agreement”. The article gives a good summary of the deal. It is noteworthy that the new agreement drops the Investor-State Dispute Settlement (ISDS) mechanism, which many of the left have criticised as being too favourable to multinationals.
The Coming North American Digital Trade Zone While most have focused on the traditional goods and services parts of NAFTA 2.0 , this article focuses on the digital trade provisions. The author argues that this is the first of its kind in any trade agreement. Ironically much of it is take from the TPP template. The provisions include things like restrictions on countries forcing the revelation of source code and data localisation.
Is apparel manufacturing coming home? Looks like poster-boy of offshoring clothes manufacturing could be in for disruption. Fashion tastes are becoming more diverse and faster changing, so time to market is becoming more important. Coupled with automation, near-shoring may become the new norm as costs and time savings have an advantage over manufacturing in Asia. So with the US will use Mexico more and Europe could use Turkey more (see chart).
New Technologies, Global Value Chains, and Developing Economies Dani Rodrik, perhaps of the most prescient academics on globalisation and its backlash, writes on new tech and EM. Argues that EM will lose out : “In particular, new technologies present a double whammy to low-income countries. First, they are generally biased towards skills and other capabilities. This bias reduces the comparative advantage of developing countries in traditionally labor-intensive manufacturing (and other) activities, and decreases their gains from trade. Second, GVCs make it harder for low-income countries to use their labor cost advantage to offset their technological disadvantage”
US-China trade war weaponizes liquefied natural gas China is the second largest importer of LNG after Japan and now with the trade war it is likely to turn to Russia and Iran for more of their imports. This also means that stalled pipeline projects between Russia and China are likely to resume. Meanwhile the US will pressure Europe and Japan to take up more US LNG exports.
Markets and Investment (6)
Managing Public Wealth Some great new data from the IMF on public sector balance sheets. They are that just looking at government debt levels misses out the full public sector balance sheet. On the asset side these could include, financial (reserves, mortgages, pension assets) and non-financial assets (infrastructure) and public corporation assets (oil companies, banks). On the liability side, these could include government debt (federal and local), non-debt (pension liabilities) and public corporation liabilities. They find that most DM countries have negative public sector net worth: US (-16.7% of GDP), UK (-125% mainly due to pensions, and remember this excludes future tax revenues), Germany (-20%), Japan (-6%). Many EM have positive net worth: China (only financial 8%), India (7%), Russia (403%) but Brazil is negative (-14.5%). They also find that balance sheet strength contains additional information that is useful in forecasting bond yields.
Beyond spreads: measuring sovereign market stress in the euro area ECB presents an alternative to using bond spreads to measure sovereign stress. Their measure, SovCiSS, uses bond spreads, volatility and bid-ask spreads as inputs.
Peeling back the curtain: How the Economist is opening the data behind our reporting The Economist magazine plans to releases its data used in articles. It will start with its Big Mac Index and release it on GitHub. A new trend?
The Pricing of FX Forward Contracts: Micro Evidence from Banks’ Dollar Hedging A bit technical, but good for FX, STIRT, cross-currency basis junkies. The Boston Fed report finds that non US-bank dollar hedging costs vary depending on the banks’ FX funding gap, the source of funding, it’s internal capital markets and the bank’s shadow cost of capital. It also finds that spillover effects to broader markets can be quite significant if the market is shocked.
A Decade after the Global Financial Crisis: Are We Safer? As usual the IMF’s Financial Stability Report contains some excellent charts. Their Growth-At-Risk (GaR) measure which derives growth estimate distributions finds that near-term estimates are fairly contained, but medium estimates have larger left-tails (more recession risk). They global non-fin debt continues to rise, household debt is rising in China, levered loan issuance looks worrying in the US and Euro-area and the quality of credit indices is deteriorating (ie share of lower rated names).
The Slope of the Yield Curve and the Near-Term Outlook San Fran Fed finds that there is a one-in-three chance that the US curve will invert in the next 3 months. From that point, history would suggest that between 9 and 18 months later, a US recession could occur.
Political Economy (5)
Varied and Changing Attitudes on Immigration in America Fascinating in-depth survey of US voter attitudes to immigration. The type of immigration elicits different responses from voters. The vast majority of voters “believe legal immigrants contribute”, believe in “many cultures vs one primary culture” and favour pathway to citizenship for illegal immigrants”. On the flip side most voters oppose increasing immigration. On the general topic, support or opposition runs along partisan lines (Democrats are pro- and Republicans are anti-). However, within the Republican party, younger voters are less anti-immigration and within the Democrat party, voters with less education are less pro-immigration.
The economic effects of Brexit: Evidence from the stock market How did the stock market react to the Brexit referendum of June 2016? This column shows that initial stock price movements on the day after the Leave vote were driven by fears of an economic slowdown in the UK and by a sharp devaluation of the pound. Later movements following two speeches by Theresa May in October 2016 and January 2017 were more closely correlated with potential future changes to tariffs and non-tariff barriers on UK-EU trade. This indicates that these speeches led investors to update their assessment of the likelihood of a hard Brexit.
The Roman ‘Brexit’: how life in Britain changed after 409AD After 350 years of Roman rule, Britain left that empire in 409 AD. What happened after? “One of the remarkable things about the first decades of the 5th century was the apparent speed with which the things we associate with Roman life disappeared.”
SWIFT Action Risks Unintended Consequences Argues that the US using SWIFT, the messaging system for financial flows, as a tool to punish other nations could results in the emergence of rival systems, which in turn could harm financial flows.
Investing based on how you vote is still a terrible idea The blog is based on recent academic finds that Democrats shifted their equity allocations (lower) compared to Republicans after Trumps elections. A mistake in the months after.
Economics of Cities (4)
Europe’s Capital Cities Keep Getting Richer and Younger Latest Eurostat data shows capital cities attracting more wealth and young wealth and increasing the gap with rural areas.
Inequality in Silicon Valley is getting worse: Wages are down for everyone but the top 10 percent In America’s tech capital, the rich are getting richer and the poor are getting poorer (see chart at top).
Countries are dead, so it’s time to think differently. Argues that the basic political unit is the city. So cities should create free trade deals with each other. The city idea makes a lot of sense.
Inequality in and across Cities More-skilled workers tend to live in larger cities where they earn higher wages. Less-skilled workers make lower wages and do not experience similar gains even when they live in those cities. This dynamic implies that larger cities are also more unequal.
Climate Change and the Environment (4)
Water, Water, Everywhere But Not A Drop To Drink Climate change has started to impact water supply in many parts of the world, including the US. The biggest problem, though, often arises when it is not known who is responsible for water issues. For example, when New Orleans experienced extreme flooding last August, the city couldn’t figure out who to blame. Some states/cities, like Texas, do it well, though. Also worth reading with this on Delhi: The slum residents trying to prevent a water crisis
A City That Takes Climate Change Seriously: Paris Interesting case study. Paris is introducing more trees and vines to provide shade and absorb heat, limiting polluting cars and introducing more pedestrianisation.
Ecosocialists Believe the Only Way to Stop Climate Change Is to Abandon Capitalism The belief is that environmental protection is not consistent with capitalism. The movement started in the 1980s. Apparently, it is becoming more popular.
Monetary Policy (4)
The effectiveness of large-scale asset purchases Prof James Hamilton criticises the use of high-frequency event studies to assess the impact of QE. Such studies typically isolate Fed announcements of QE and look at bond moves around the event. He argues that it is unclear whether the move is due to information about monetary policy or information about economic fundamentals. The latter implying that the Fed has information on the economy that investors may not have. Good blog and useful for researchers like me!
Mortgage Prepayment and Path-Dependent Effects of Monetary Policy The presence of substantial household debt in fixed-rate prepayable mortgages means that the ability to stimulate the economy by cutting rates depends not just on the level of current interest rates but also on their previous path. The paper concludes that “even if the Fed raises rates substantially before the next recession arrives, it will likely have less ammunition available for stimulus than in recent recessions”.
State Dependent Effects of Monetary Policy: the Refinancing Channel Another paper looking at the interaction between monetary policy and mortgages. This paper focuses on the rise of FinTech and its impact ono lowering the cost of switching mortgages. This should make it easier to refinance, which should make monetary policy more effective.
The effectiveness of the Bank of Japan’s large-scale stock-buying programme A former BoJ Board member argues that the stock buying programme has introduced distortions into the Japanese stock market including an overvaluation of certain small caps and corporate governance slippage.
2018 LEXUS/Hurun China Rich List Jack Ma tops the chart at USD39bn, followed by real estate company Evergrande’s Xu Jiayin ($36bn) and Tencent’s Pony Ma Huateng ($35bn). Average age of rich list 55 years. Women made up 29% of the list. Most common birthplace was Zhejiang and most common university was Zhejiang University. I guess Zhejiang is the place to start from.