Finance and Econ From the Web: Gigantic US Housing Boom, Piketty On Yellow Vests and Is China Trade Unfair?

The Fed has released interactive charts on where long-term Fed policy rates should be (or r*). There are also a range of papers that look at how the Fed could have conducted policy differently through the crisis (target money not interest rates), some techniques on discerning the impact of Fed policy on the economy and the conditions needs for hyperinflation. Meanwhile, Robert Shiller is worried about a huge US housing boom, Thomas Piketty is worried that Macron has catered too much to the rich and Jeremy Grantham is worried about climate change.

There are a bunch of papers on equity trading strategies. A good one on understanding NAFTA 2.0. I’ve included a few articles on Merkel’s successor AKK (hint: she’s not the same as Merkel). A good chart on the US labour market (lots of health, education and leisure jobs, but not many manufacturing and retailing jobs). Enjoy!


Just Released: Interactive R-star Charts NY Fed: “we’re providing quarterly estimates of r-star and related variables on our public website in downloadable Excel files plus the replication code and documentation for both the Laubach-Williams (“LW”) and Holston-Laubach-Williams (“HLW”) models” Current finds the LW estimate for US r* is 0.8%, while HLW is 0.6%. There are also HLW estimates for UK (1.5%), Euro  (0.2%) and Canada (1.4%). They also have trend growth and output gap estimates.  

Everyone loves Paul Volcker. Everyone is wrong. Yes, Volcker successfully tamed inflation, but the question is whether there was a better way to do it than setting off a massive recession.

Monetary Regimes, Money Supply, and the US Business Cycle since 1959 Implications for Monetary Policy Today A clever paper that models the US economy using money supply and demand as well as interest rates. They also argue that monetary policy that follows a strict interest rate–targeting regime (like now) renders central bank balance-sheet expansions ineffective. This implies that in the context of the 2007–2009 Great Recession, a more flexible interest rate–targeting regime would have led to a significant monetary expansion and more rapid economic recovery in the United States.

Measuring monetary policy shocks  Another very good paper. This one tries to determine the effect of Fed actions. The challenge is to separate the changes in fundamentals that led to the Fed actions from the subsequent impact of the Fed’s actions. The author constructs a clever surprise index that takes out the fundamentals known to the Fed (and not known by the market). This can be used to determine the effects of Fed actions. 

The Modern Hyperinflation Cycle: Some New Empirical Regularities The IMF uses a database of up to 62 variables for 196 countries over 57 years, and finds a hyperinflation cycle occur in contexts where there are (i) depressed economic freedoms, (ii) deteriorated socioeconomic conditions and rule of law, as well as (iii) high levels of domestic conflict and government instability. 

The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area Most short-term interest rates in the Euro area are below the European Central Bank deposit facility rate. . This unexpected development coincided with the start of the Public Sector Purchase Program (PSPP), which led to the scarcity of bonds.  Some financial intermediaries may need these bonds for non-economics purposes (eg regulatory reasons). So they may willing to lend their cash at a lower rate (ie as “specialness”). In the presence of specialness, repo rates can decline below the deposit facility rate.The authors estimate that purchasing 1 percent of a bond outstanding is associated with a decline of its repo rate of 0.78 bps.


The Housing Boom Is Already Gigantic. How Long Can It Last? Robert Shiller: “My data shows that this is the United States’ third biggest housing boom in the modern era….It can’t go on forever, of course. But when it will end isn’t knowable. The data can’t tell us when prices will level off, or whether they will plunge catastrophically. All we do know is that prices have been roaring higher at a speed rarely seen in American history.”

Have Yield Curve Inversions Become More Likely? Richmond Fed: The recent flattening of the yield curve has raised concerns that a recession is around the corner. Such concerns stem partly from the fact that yield curve inversions have preceded each of the past seven recessions. However, other factors affect the yield curve’s shape besides the expected future health of the economy. In particular, a low term premium — as has been observed in recent years — makes yield curve inversions more likely even if the risk of recession has not increased at all.

Optimal timing of unemployment benefits: evidence from Sweden The study finds that contrary to recent reforms that push towards making the generosity of benefits decline over the unemployment spell, it is more socially desirable to reduce benefits for the short-term unemployed in order to raise them for the long-term unemployed.

Abenomics Is Working, Don’t Stop Now Japan is on track for its longest postwar economic expansion, with female labor force participation and corporate profits at record highs and unemployment at a 25-year low. All this good news has caused many observers to question whether the goal of raising inflation to 2 percent is really necessary. 

The New Risks in Risk Regulation Former UK bank regulator Howard Davies is worried. He writes: “The received wisdom among financial regulators is that they are better off being able to say, “We told you so” if something goes wrong, and that there is little downside in occasionally issuing dark warnings. So should we be genuinely anxious about a spate of recent warnings from central banks and international financial institutions?… We can, however, be less certain about the shadow banking sector, almost by definition. We may be about to discover whether the new credit creators, some of whom do not have to live under a rigorous regime of capital regulation, have priced risk correctly.”

Equitable Growth’s Jobs Day Graphs: November 2018 Report Edition I like the way these people show charts of the US labour report. Like the one below, which shows booming education, health and leisure jobs markets and stagnant manufacturing and retail jobs markets…


“Yellow vests” and Tax Justice Piketty critiques President Macron’s fiscal policy notably Macron abolishing France’s wealth tax early on in his term.

Two Roads for the New French Right “Something new is happening on the European right, and it involves more than xenophobic populist outbursts. Ideas are being developed, and transnational networks for disseminating them are being established.” Excellent overview of the political right in Europe

Rough Road Ahead for the Merkel Dynasty  Spiegel article that arguesAngela Merkel’s successor, Annegret Kramp-Karrenbauer (AKK), has her work cut out. She only narrowly beat Merz in the leadership election and critically needs the CDU to gain ground in East Germany where AfD is the dominant force.

A weakened Merkel still gets her way  “AKK has been portrayed as a mini-Merkel. But she is much more of a traditional CDU politician than the chancellor. A Catholic, she joined the party in her late teens and worked her way up through local and regional politics to become premier of Saarland, in Germany’s far west. She is socially conservative, opposed to gay marriage, and has taken a tougher line than Merkel on migration — the issue that has become a lightning rod for the chancellor’s critics”.

Angela Merkel’s CDU successor: Annegret Kramp-Karrenbauer Nice bio and some instructive quotes from AKK: “ we worked to make sure that what happened in 2015 [Syrian refugee influx] would not happen again, something I saw and helped work towards as state premier.”


Monetary Policy and Reaching for Income The authors use data on individual portfolio holdings and on mutual fund flows, and find that a transition to a low-interest-rate monetary policy increases investors’ demand for high-dividend stocks, and drives up their prices. They construct a dynamic long-short strategy that buys high-dividend stocks and shorts low-dividend stocks following periods of monetary loosening (i.e., following negative Fed Fund rate shocks), and reverses the positions following episodes of monetary tightening. Over the 1987–2015 period, this strategy generates an annualized Sharpe ratio of about 0.18, comparable to that of the “High-Minus-Low” portfolio designed to exploit the value premium in the cross-section.

Overconfidence, Information Diffusion, and Mispricing Persistence Good paper that looks at how momentum trading strategies in equities get affected if a stock cannot be fully shorted. They find that short-sale constrained past winners can underperform for up to 5 years after their reversal. A portfolio of such stocks could generate an information ratio  of -1 (ideally one would short them and generate a positive information, but there are short sale constraints, so I guess one should drop these stocks from one’s portfolio).

Investment Returns and Distribution Policies of Non-Profit Endowment Funds The study looks at 28,000 U.S. non-profit endowment funds for the period  2009-2016. Endowments badly underperform market benchmarks, with mean annual returns 3.86 percentage points below a 60-40 mix of U.S. equity and Treasury bond indexes, and statistically significant alphas of -1.01% per year. Smaller endowments perform better than larger ones, but all size classes significantly underperform.

Shares Buybacks Hit Diminishing Marginal Returns The blog looks at a share buyback stock index and finds its’s no longer outperforming the overall US index. Meanwhile in the blog, The Relative Advantage of Buybacksthe author provides the pros and cons for companies doing buybacks, though he doesn’t talk about the recent underperformance of the buyback index.

Media Sentiment and International Asset Prices Using more than 4.5 million Reuters articles published across the globe between 1991 and 2015, the study finds that news sentiment robustly predicts daily returns in both advanced and emerging markets. But not all news-sentiment is alike. A local (country-specific) increase in news optimism (pessimism) predicts a small and transitory increase (decrease) in local returns. By contrast, changes in global news sentiment have a larger impact on equity returns around the world, which does not reverse in the short run. We also find evidence that news sentiment affects mainly foreign – rather than local – investors.


Hall of Mirrors: Corporate Philanthropy and Strategic AdvocacyPoliticians and regulators rely on feedback from the public when setting policies. For-profit corporations and non-profit entities are active in this process and are arguably expected to provide independent viewpoints. But Policymakers (and the public at large) may be unaware of the financial ties between some firms and non-profits. The authors use IRS forms submitted by the charitable arms of large U.S. corporations to unveil possible conflicts. They find that corporations strategically deploy charitable grants to induce non-profit grantees to make comments that favour their benefactors, and that this translates into regulatory discussion that is closer to the firm’s own comments.

The Benchmark Inclusion Subsidy More of theoretical piece, but makes the interesting point that a company’s cost of capital is lowered if it is included in a benchmark as asset managers are forced to hold their stock irrespective of the risk characteristics of the firm. This provides a “benchmark inclusion” subsidy for potential investment projects for the company. Therefore, a firm inside the benchmark would accept some projects that an identical one outside the benchmark would decline. 

Pouring Oil on Fire: Interest Deductibility and Corporate Debt  The IMF uses a database of 14mn observations of SMEs to determine whether they have debt bias (ie as interest is tax deductibale, debt is issued more than equity). They find the debt bias boosts non-financial firm leverage for SMEs as well as for large firms. Firms react to tax incentives favouring debt finance by increasing leverage. This behaviour is also observed in small, unlisted SMEs. They show the importance of collateral in the form of tangible assets for levering up, and find evidence that firms with more volatile revenues are less able to do so. They demonstrate that more capital-intensive firms are more sensitive to debt bias, while firms that are able to self-finance through higher revenues respond less to debt bias.

The Rise in Corporate Saving and Cash Holding in Advanced Economies: Aggregate and Firm Level Trends The IMF uses flow-of funds and national accounts data for nine advanced economies. They find that the corporate sector swung from being a net borrower of funds from the rest of the economy to a net lender starting in the early 2000s across advanced economies. The secular increase in corporate gross saving across major advanced economies has been accompanied by stagnating or declining investment in physical capital. The increase in gross corporate saving mostly come from a combination of higher profitability and lower interest payments that have not been matched by higher taxes and dividends. These excess saving have been most consistently stored in very liquid assets, such as currency, deposits and short-term debt


Jeremy Grantham (GMO) Interview: Podcast and Transcript. Wide ranging interview with the famous investor that ranged from markets to climate change

Leverage-induced fire sales and stock market crashes A good overview of how broker-financed and shadow-financed stock accounts operate in China, especially during the 2015 stock crash. The authors find that for accounts with exposure to fire sale risk, shadow-financed accounts account for a much higher proportion of the total stock market capitalisation than brokerage-financed accounts in 2015.

Drivers of commodity price booms and busts in the long run A study looking at commodity data for grains, metals and softs from 1870 to 2015 finds that almost 80% of price variation is due to demand shocks, and the remainder to supply shocks.

Commission outlines plan to boost euro’s global role The European Commission argues that EU governments should promote the international role of the euro by underpinning energy agreements and contracts with countries outside the bloc in the single currency. Chart below actually shows less use of euro today than in 2012! 


Can anything hold back China’s economy? Larry Summers: “At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent.”

The Long-Run Trend of Residential Investment in China The IMF analyses the fundamental drivers of China’s residential investment as a share of its GDP. Their analysis indicates that the economic structural changes that led to rebalancing toward consumption were the key driver of the rising residential investment to GDP ratio in China. They project that residential investment would moderate from the current level of 9 percent of GDP to around 6 percent by 2024, and its contribution to real GDP growth would decline gradually from currently about half percent of GDP to slightly negative over this period, barring policy intervention. The decline in the growth contribution of residential investment reflects the projected somewhat slower pace of rebalancing going forward and the envisaged increases in labor costs due to demographic changes.

Inside China’s audacious global propaganda campaign Beijing is buying up media outlets and training scores of foreign journalists to ‘tell China’s story well’ – as part of a worldwide propaganda campaign of significant scope and ambition.


Labour market flexibility during financial crises: Firm-level evidence from Spain Using data from Spain during the 2008–09 credit crunch, the writers  show that credit-constrained firms grow faster if they are subject to less strict firing and hiring restrictions, as long as they are technologically able to substitute labour for capital. The findings provide an argument in favour of more flexible labour laws.

Estimating migration changes from the EU’s free movement of people principle Intra-EU migration stocks more than doubled between 1960 and 2015, with the EU’s principle of free movement of people seen as one of the main drivers. The column shows that free movement on average increased the stock of intra-EU migrants by 28%, representing around one quarter of total intra-EU migration during this period. The free movement of people has had a substantial impact on migration originating from both old and new member states, with the vast majority of migrants going to the old member states. 

Inequality in life expectancies across Europe: The socioeconomic and gender dimensions Useful comparison across countries of life expectancy and disability. They find 1) the education effect on life expectancy is larger for males than females. In particular, the average education effect on life expectancy across our 12 countries is 3.4 years for males and 2.2 years for females. 2)  that women live longer than men but spend more years in disability( ‘women get sicker but men die quicker’) 3) Eastern and Western Europe exhibit the largest education effects on life expectancy for males (4 and 3.9 years, respectively), the US and England are in the middle (3.6 and 3.4 years), and the Mediterranean and Scandinavia present the smallest gradients (3 and 2.1 years). 4) correlations suggest that public spending in health allows less-privileged individuals to live longer but not in better health.

.Germany, France, Italy: How History Forms the Future – Part 1 and Part 2 Nice comparison of Germany’s economy to France and Italy’s. They find that German investment and consumption is low thanks in part to low wages.

How Does the E.U. Think This Is Going to End? Good discussion on EU vs Italy. Makes the point that the Italian economy is struggling under austerity and that a fiscal stimulus could help as long as Italian yields don’t spike.


The Psychology of Memory and the 2016 Election An intriguing new study uses the 2016 US Presidential election as a tool to examine the organization of human memory.

The results show that events that occur around the same time are linked in memory (even if there is no cause-and-effect). Remembering one past event tends to trigger the recall of other memories from that time…Apart from the election results themselves, the most recalled event was Trump’s “Grab Them” tape being released, with ‘Peak of FBI Probe into Clinton’s emails’ a close runner-up.

Is the Internet to Blame for the Rise of Authoritarianism? The author identifies three competing camps on this topic: the ‘denialists’ (internet reflects society only), the ‘narrativists’ (internet prevents social cohesion and keeps us into our own bubbles) and the ‘architecturalists’ (the original internet was great until the big corporations took over).

What Trump Could Do If He Declares a State of Emergency A president’s emergency powers are extensive, and largely unchecked.

The Leadership of Cities To meet the complex challenges of the twenty-first century, the strengths and expertise of every level of government must be leveraged. That is why cities have emerged as leaders in the effort to tackle issues like climate change and migration.

Helping the left behind: its (economic) geography, stupid Makes the good point on regional divergences where increasing returns and positive external economies make cities a great place to set up a new business, and rural backwaters a place where businesses stagnate (see chart). This in turn leads to political outcomes like Brexit. Argues for a return of state-led regional policies.


It’s getting increasingly difficult for psychology’s replication-crisis sceptics to explain away failed replications Lots of studies have failed to replicate. In a large-scale replication study of 28 classic studies only half could be replicated. Ones that failed included: the hypothesis that copying an unethical action would increase desirability of cleaning products compared to copying an ethical action, the hypothesis that willingness to pursue goals is higher after exposure to structured versus random events and the hypothesis that temperature priming alters concern about global warming.

Econ Envy A psychology researcher compares his field with how economics is taught at university. He praises economists emphasis on understanding causality, deep discussions and use of maths. Fun read

Trends in economicsAcademic looks at language trends in economic papers since 1975. He finds that papers talk less about tax than they used to, they mainly talk about the US ( though that is declining), use of experiments, machine learning and behavioural economics has surged, and much more government administrative data is used.

Explaining S=I: Inventories vs Adding up Individuals Remember IS/LM from school? Well part of that is that investment (I) = savings (S). This article explains the intuition behind S=I by talking about the difference between individual saving and aggregate saving; some types of individual saving don’t add up to aggregate saving.

Economic Policy Uncertainty in Turkey IMF creates an index for Turkey and discusses its impact on the economy


How should we think about the theft of intellectual property? “Here’s a question for those who think American industry is being devastated by Chinese IP theft. How would the US stock market react to a sudden agreement that ended the threat of trade war, at the cost of Trump achieving only minor concessions from the Chinese? Would stocks plunge in disappointment about us not doing anything about IP theft? I doubt it; “ The writers argues that valuing IP and its theft is slippery at best.

Are China’s Trade Practices Really Unfair? Even if China’s non-tariff barriers remain high, they are lower than in the past. In fact, current complaints about unfair Chinese trade practices are actually complaints about the mismatch between the slow pace of economic opening and the very fast pace of modernization. That is, Chinese firms can now compete with foreign ones in non-Chinese markets, while non-Chinese firms do not have complete access to Chinese markets.

Brexit Uncertainty and Trade Disintegration The paper estimates the impact of Brexit uncertainty on UK trade. They finds that a persistent doubling of the probability of Brexit at the average disagreement tariff of 4.5% (WTO rules) lowers EU-UK bilateral export values by 15 log points on average, and more so for EU than UK exporters.

Demographics, Old-Age Transfers and the Current Account  The IMF paper looks at the life cycle savings, investments and current account balances. They find that current account balances increase with life expectancy and the share of middle aged cohorts (proxied by the share of workers ages 45-64), yet falls with the share of elderly and young (proxied by old-age dependency and population growth, respectively).

Under the Hood, the USMCA Is a Downgrade for North America From Peterson Institute: Consumers may see higher prices for cars at a time when auto sales are flagging. Ford and GM are already laying off workers. Many core features of NAFTA remain, but overall, the USMCA limits trade more than promoting it. Nice infographic on the deal


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