Finance and Econ From the Web: Seth Klarman on Capitalism, Female Employment Explains Slow Recovery and AI Investing

Every week I get surprised by how much good quality work is available for free. This week, aside from the articles mentioned in the subject line, we have some articles on the poor performance of US university endowment funds, how climate change responsible companies see their stock prices go up, and some new data sources on uncertainty and partisan conflict. There are some insightful papers on house prices at the country and city level. A slew of articles on US monetary policy –  why hasn’t QT seen higher rates, is unmeasured productivity holding inflation down and should the Fed revise its framework.

For markets, there are some pieces on the structure of UST markets and some pieces on dollar challengers (euro, CNY?). Finally, we have a range of politics pieces, so make sure you scroll down. Plus I love the first graphic (I’d love be able to replicate it, but I fear Excel won’t let me).


Hard Choices Legendary investor Seth Klarman’s recent Harvard speech on the importance of thoughtful deliberation—and its implications for the future of capitalism 

Foundations Have a Not-So-Charitable Secret Philanthropic organizations invest about 93 percent of their money in Wall Street. But they are starting to make better choices.

How to Use Behavioral Finance in Asset Management, Part I Includes write publically for accountability, produce positive and negative weekly summations, write annual mea culpas and think of counterfactuals.

Stock Price Rewards to Climate Saints and Sinners: Evidence from the Trump Election Harvard paper finds that although carbon-intensive companies did see a stock price rise after the election President Trump so did climate change mitigating companies. Part of the explanation lay in investor demand moving more towards sustainability.

Not One Ivy League Endowment Beat a Simple U.S. 60-40 Portfolio Over Ten Years A new report shows that the complex and expensive endowment
model hasn’t proved its worth since the financial crisis. 



The Big Con: Reassessing the ‘Great’ Recession and its ‘fix’ The general consensus on what caused the Great Recession can be summed up as “bad banks full of bad bankers did bad things”. This column argues, however, that this narrative doesn’t fit the facts. And worse, it diverts attention from the real problem, which was regular use of a bad banking system – a banking system built to fail. 

Recession Watch Dashboard Love the graphics of this “Recession Watch Dashboard” (shown at top). It is showing an overall low risk of recession starting within the next year.

Cyclical and structural variation in resource allocation: evidence for Europe ECB paper on whether the 2008 downturn led to a “cleansing” where resources were shifted away from low productivity firms to high productivity firms as it normally the case in recessions (the silver lining). They find that Europe did not enjoy this cleansing and they cite another paper which showed the US did not either. They argue a collapse in trade and bank credit contributed on the lack of “cleansing”. However they did find the 2011-2012 sovereign crisis did lead to a “cleansing”

Fiscal Stimulus Impact on Firms’ Profitability During the Global Financial Crisis Some argue that fiscal stimuli crowd out private investment and raise wages so could lead to lower profits, while others argue that fiscal stimuli increase aggregate demand and boost profits. The IMF crunches the numbers for the period after 2008 across DM and EM countries. They find that fiscal stimuli do boost profits, and that spending increases have a bigger impact than tax cuts.

Women, Wealth Effects, and Slow Recoveries Excellent and original paper. Business cycle recoveries have slowed in recent decades and it appears this comes entirely from female employment: as women’s employment rates converged towards men’s over the past half-century, the growth rate of female employment slowed (see chart).  They estimate that 70% of the slowdown in recent business cycle recoveries can be explained by female convergence.


Why affordable housing is scarce in progressive citiesWhat Shaw found most eye-opening during writing and research was the widespread, entrenched power of homeowner groups. Between neighbourhood groups and councils that held power over zoning and land-use decisions and the spread of NIMBYism, these older groups have often controlled the dialogue around adding housing supply, all while reaping an oversized amount of the gains from rising land values.”

We broke down what climate change will do, region by regionNortheast: the region is looking at “the largest temperature increase in the contiguous United States” — 3.6 degrees Fahrenheit by the time 2035 rolls around. The region will be hit with the highest rates of sea-level rise in the whole damn country, and it will have the highest rate of ocean warming.

House Price Synchronicity, Banking Integration, and Global Financial Conditions IMF looks at 40 countries and 70 cities and finds that global financial conditions influence the synchronicity of house prices around the world. That is, looser financial conditions lead to house prices moving together. The also find that global cities move together even if their host countries move less together. For example, Tokyo and Rome are at the center of the global network, while Japan and Italy are not (see network chart below).




Quantitative easing lowered interest rates. Why isn’t quantitative tightening lifting them more? BoE Deputy governor Ben Broadbent argues that unlike QE, QT is not being linked to future monetary policy as a result the balance sheet change doesn’t impact long-term yields. 

Less Inflation Gives Fed Room to Pause Ed Yardeni argues that productivity could be higher than currently measured, which would explain why higher wages are not passing through to inflation and profit margins remain high. Makes the point that productivity often gets revised up years after the event. 

Some Alternative Baskets of Goods for Measuring Inflation This approach raises an obvious question: What about if someone is not a member of an average household?

A Review of the Fed’s Unconventional Monetary Policy Clear review of the Fed did

Should the Fed Regularly Evaluate Its Monetary Policy Framework? From San San Fran Fed: The Fed has adjusted its approach based on changes in the structure of the economy, and lessons learned from past policy failures and successes. For instance, the high inflation that the United States experienced beginning in the late 1960s prompted Congress to pass the Humphrey-Hawkins Act in 1978, which directed the Federal Reserve to pursue the “dual mandate” of achieving price stability and maximum employment…since 2012, no alternative framework or new direction has been seriously considered. The authors propose that initiating a more comprehensive formal reevaluation of the Fed’s monetary policy framework. 

How the U.S. military became the exception to America’s wage stagnation problem  Over the last 18 years, active duty military pay increases significantly outpaced their civilian counterparts. A combination of economic forces and political obligations inverted the earning potential for uniformed personnel. With very little fanfare, military service became one of the last bastions of middle class social mobility.

Assessing inflation expectations anchoring for heterogeneous agents: analysts, businesses and trade unions Using data from South Africa, the BIS finds that analysts inflatiion forecasts do fall in to the central bank’s target range, but business and trade union forecasts are typically above the range. The paper suggests that central banks need to focus more on actual inflation setters in the economy.



China’s petroyuan is going global, and gunning for the US dollar,argues that trading volumes in Shanghai are now larger than that of Dubai and Singapore, which means the China contracts are successful. Meanwhile, this article, China’s Oil Benchmark Fails Its First Big Test , argues that the Shanghai contract which is linked to medium sour crude oil should be trading at a premium to WTI (sweet light), but it hasn’t been, so it is not successful! And another article: China’s Bonds Get a $2.5 Trillion Test Run Should the country join the Global Agg bond index, as expected, Chinese yields may have much more impact on the world — and vice versa.

Here’s How Europe Plans to Challenge the Dollar’s DominanceIncludes EU to propose energy contracts denominated in euros by default. Worth reading with this from Bruegal The international role of the euro 

Is the United States Relying on Foreign Investors to Fund Its Larger Budget Deficit? New York Fed finds that most the increasing in government borrowing recently has been funded by an increase in domestic business savings, but this could change and the US current account deficit widening would be the signal to watch.

Market liquidity, leverage, and regulation ten years after the crisis The financial system has undergone far-reaching changes since the 2008 Global Crisis. This column casts those changes in terms of shifts in the way financial intermediaries manage their balance sheets, and also discusses the regulatory reform agenda and reviews the impact of regulations on market liquidity and credit availability. The current evidence suggests that the financial system has become safer, at limited unintended cost.

The Structure of the Treasury Market: What Are We Learning? The Fed’s Brainard tells us what they have learnt. This includes 1) policy normalization and reduction of the Federal Reserve’s balance sheet do not appear to have sparked a deterioration in Treasury market liquidity. 2) Some segments of the market seem much more active than observers may have feared before the collection of TRACE data. Eg  off-the-run trading accounts for 27 percent of overall trading volume. 3) Although there was speculation that proprietary trading firms had already eclipsed bank dealers in benchmark Treasury trading, we can now state with a reasonable amount of confidence that dealers generally–and primary dealers particularly–still intermediate the majority of activity in all Treasury securities



Twitter versus Traditional News Media: Evidence for the Sovereign Bond Markets  “Overall, our results suggest that the information that appears and is shared on Twitter plays a vital role over and above the traditional news outlets.”

Idiosyncrasies and challenges of data driven learning in electronic trading Nice practical summary paper on machine learning techniques for finance. Produced by a US bank – I forget their name J.T. Marlin, PJ Morning, JP… 

Global uncertainty is rising, and that is a bad omen for growth The paper resents a new quarterly index of uncertainty for 143 countries. The World Uncertainty Index reveals how uncertainty in the world has evolved over time, whether it is synchronised across countries, and how it compares across income groups and political regimes.

Level Shifts in Beta, Spurious Abnormal Returns and the TARP Announcement More for stats geeks, using this method, they estimate abnormal returns for the Troubled Asset Relief Program (TARP) announcement and find that its abnormal returns are largely realized on the first day. The abnormal returns in the remaining post event period, which show up as a drift using standard methodology, are attributed to level shifts in beta. 

Machine learning and economics Machine learning (ML), together with artificial intelligence (AI), is a hot topic. Economists have been looking into machine learning applications not only to obtain better prediction, but also for policy targeting. The paper reviews some of the contributions.

Partisan Conflict Index Philly Fed produces the Partisan Conflict Index. It tracks the degree of political disagreement among U.S. politicians at the federal level by measuring the frequency of newspaper articles reporting disagreement in a given month. Higher index values indicate greater conflict among political parties, Congress, and the President.


The Problem With Our Democracy Isn’t Gerrymandering. It’s Integers A clever solution to deal with gerrymandering and the lack of political representation – give the two top vote winners in a district a fraction of a voting right in Congress. The fraction would be the share of vote they win. Elegant, but will never happen!

Are Millennials Different? Fed paper: “relative to members of earlier generations, millennials are more racially diverse, more educated, and more likely to have deferred marriage; these comparisons are continuations of longer-run trends in the population. Millennials are less well off than members of earlier generations when they were young, with lower earnings, fewer assets, and less wealth.”

Insuring Against Drop in Chinese Students The University of Illinois at Urbana-Champaign has paid $424,000 to insure itself against a significant drop in tuition revenue from Chinese students.

Switchers: Who changed their vote in 2018? But fully 42 percent of Obama-Trump voters who returned to the Democratic Party in 2018 identified as conservative, compared with 33 percent who identified as liberal. Fully 54 percent of Romney-Trump voters who defected to a Democratic candidate in 2018 identified as conservative or very conservative. 

Why Is Your State Red or Blue? Look to the Dominant Occupational Class States with more working-class voters are solidly red; those with a dominant creative class are solidly blue; service-class heavy states aren’t easily defined.


Rest Of World Politics

A Series of Miscalculations Has Brought Britain to the Brink  From Germany’s Der Spiegel: Brexit was to allow the United Kingdom to reclaim its former glory. Instead, the country’s leaders have bumbled their way into catastrophe. Built on a false premise from the start, the UK’s move away from the EU has been dominated by mistakes and miscalculations.

Why 536 was ‘the worst year to be alive’ Ask medieval historian Michael McCormick what year was the worst to be alive, and he’s got an answer: “536.” Not 1349, when the Black Death wiped out half of Europe. Not 1918, when the flu killed 50 million to 100 million people, mostly young adults. But 536. In Europe, “It was the beginning of one of the worst periods to be alive, if not the worst year,” says McCormick, a historian and archaeologist who chairs the Harvard University Initiative for the Science of the Human Past.

The Feminization of African Politics Ethiopia and Rwanda are leading African governments’ efforts to boost gender parity in politics, but other countries on the continent are not far behind. These countries’ deliberate policies are essential not only for the sake of fairness, but also for ensuring Africa’s long-term prosperity.

The geographic evolution of political cleavages in Switzerland: A network approach to assessing levels and dynamics of polarization between local population Results suggest that political congruence between Swiss local populations increased in the last forty years, while regional political factions and linguistic alignments have lost their salience to new divides

Political connections, innovation, and firm dynamics Corruption, especially rent-seeking behaviour by politicians and firms, has adverse consequences for competition and ultimately growth. This column explores how political connections influence firms’ outcomes in Italy. The results point to a ‘leadership paradox’, whereby market-leading firms are more likely to be politically connected than their competitors, but less likely to innovate. At the aggregate level, political connections tend to be associated with worse industry dynamics, including lower entry, reallocation, growth, and productivity.




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