This week, I have some good articles on monetary policy with one arguing that high US rates before 2008 pushed people into shadow financing, while another argues that recent low interest rates are leading to monopolistic industries ( Seems like central bankers can never get it right). Larger companies are also apparently weakening the wage bargaining power of workers. To make matters worse automation will make many jobs redundant, and there’s an excellent article with shiny graphics that runs through the sectors that will decline (or grow).
On markets, there’s a few articles on trading models that stood out – one arguing for a better approach to backtesting trading models and another on using volatility signals to trade FX. I include a bunch of articles on China including some on China’s relationship with India and Pakistan. Finally, I have some great pieces on Democratic presidential candidate Beto O’Rourke, the ongoing yellow vest protests in France, and a fascinating piece on US military spending excesses. Lots more good articles, so make sure to scroll all the way down.
Nothing Happens, Then Everything Happens Like the way, the author captures the fits and bursts of stock markets (see chart)
The Twenty Craziest Investing Facts Ever Includes: “Since 1916, the Dow has made new all-time highs less than 5% of all days, but over that time it’s up 25,568%.”, “The Dow has compounded at less than 3 basis points a day since 1970. Since then it’s up more than 3,000%.[power of compounding]” And “U.S. one-month treasury bills went 68 years with a negative real return.”
Research Review: Nowcasting Good selection of papers on nowcasting models from the last six months
The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices “It turns out that in particular combined shocks to the balance sheet dimensions and not so much isolated shocks matter. Specifically, the interaction effect of size and duration has a significant negative impact on both the bond yield and exchange rate. “
Time-Series Momentum: A Monte-Carlo Approach The paper develops a Monte-Carlo backtesting procedure for risk premia strategies and employs it to study Time-Series Momentum (TSM). They create 10,000 paths of different TSM strategies based on the S&P 500 and a cross-asset class futures portfolio. The simulations reveal a probability distribution which shows that strategies that outperform Buy-and-Hold in-sample using historical backtests may out-of- sample i) exhibit sizable tail risks ii) underperform or outperform.
Implied Volatility Term Structure and Exchange Rate Predictability Good paper that uses the slop of the implied volatility curve to generate trading models. For DM, buying low slope currencies and selling high slope currencies delivers a Sharpe of 0.3 vs 0 for carry (2002-2016). For EM, buying high slope currencies and selling low slope currencies delivers a Sharpe of 0.4 vs 0.3 for carry.
How Monetary Policy Shaped the Housing Boom Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. The authors show that Fed tightening induced a contraction in new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. They also find a re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.
The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World Philly Fed finds a lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of sales. [does that mean higher rates would help start-ups?!]
Does monetary policy affect income inequality in the euro area? Dutch central bank finds “that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries.”
FX intervention and domestic credit: Evidence from high-frequency micro data BIS finds “ sterilised FX purchases have a significant and persistent dampening effect on new domestic bank lending.”
Liquidity Management under Fixed Exchange Rate with Open Capital Account IMF paper that looks at how central banks manage liquidity and issues around cross-currency basis. Takes a look at the DKK and HKD pegs.
How Puerto Rico’s financial storm is washing over the mainland “municipal bonds finance two-thirds of all infrastructure across the US. Cities, states, and public agencies all turn to the “muni” market for funds to build schools, bridges, sewer systems, and much else besides.The fallout from Puerto Rico’s bankruptcy threatens to make it harder, and costlier, to raise the money needed for such projects. Put simply, that means taxes could go up.”
JOBS, JOBS, JOBS
Exploitation of Labor? Classical Monopsony Power and Labor’s Share Authors look at China and India and that large firms did substantially lower the labor share of aggregate income: by up to 10 percentage points in China and 15 percentage points in India. The impact has fallen over time in both countries as firm concentration in these labor markets has decreased. [US data is showing increasing concentration, so is going the “wrong” direction for workers] This piece is worth reading with this on the US side: Some Peculiarities of Labor Markets: Is Antitrust an Answer?
Who Creates and Destroys Jobs over the Business Cycle? Looks at US employment data and finds that age of firm rather size of firm is more important in determining job cyclicality (young firms are more cyclical in their job cyclicality)
Why the tech sector may not solve America’s looming automation crisis Great interactive page that gives the story of how and which jobs will disappear
The Impact of Rapid Aging and Pension Reform on Savings and the Labor Supply IMF finds that pension reform and rapid aging together contribute 55 percent of the increase in China’s household saving rate from 1995 to 2009, and they jointly capture about 64 percent of the drastic increase in the labor supply for the same period.
What’s Wrong with Contemporary Capitalism? Nobel laureate Angus Deaton writes: “Like Rajan, I think that community is a casualty of an elite minority’s capture of both markets and the state. But unlike him, I am skeptical that stronger local communities or a policy of localism (inclusive or not) can cure what ails us. The genie of meritocracy cannot be put back in the bottle.”
Monopoly in history “Guilds, patents, monopolies, and the primary function of economic regulation being to create rents in return for political support, seems a pattern with deep roots.”
Bretton Woods at 75 Arminio Fraga, a former president of the Central Bank of Brazil, writes: “The framework of multilateral economic cooperation established in 1944 is under serious strain, if not broken. Nevertheless, the Bretton Woods institutions, together with more recently established international and regional forums, still have a meaningful long-term role to play in global economic governance.”
The deep roots of development Honest account looking at what causes some countries get rich and others don’t. Concludes: “Does being trusting and patient make you developed? Or does development make you trusting and patient? I am unaware of any clear evidence that answers these questions with any confidence.”
SCHOOL OF ECONOMICS
Alan B. Krueger, Economic Aide to Clinton and Obama, Is Dead at 58 “A labor economist by training, Mr. Krueger was part of a new wave of economists who pushed the field toward a more empirical mind-set, with an emphasis on data rather than theory. “ [A loss for the profession] Also worth reading: The loss of a great economist and a great man
Amazon gets an edge with its secret squad of PhD economists “In the past few years, Amazon has hired more than 150 PhD economists, making it probably the largest employer in the field behind institutions like the Federal Reserve, which has hundreds of economists on staff. It was the only company with a recruiting booth at the American Economics Association’s annual conference in January,”
The Most Influential Academic Books in the Last 20 Years Includes The New Jim Crow: Mass Incarceration in the Age of Colorblindness , Paying for the Party: How College Maintains Inequality and Bowling Alone: The Collapse and Revival of American Community:
Daniel Kahneman on Intuition “The guy won a Nobel Prize for his work on behavioral psychology and basically created the field as we know it today and he still doesn’t believe it’s helped him overcome his built-in biases.” [This may also the case of someone who knows the theory, doesn’t necessarily mean they can practise it. A bit like academics on business strategy/entrepreneurship]
Technology: From Copycats to Innovators “Yet China is doing far more than copy, steal, extract, and imitate. It is hell bent on taking over the world’s leadership in innovation, and is well on track to accomplish this.”
How to Cheat at Xi Jinping Thought “A study app named 学习强国 (Xuexi Qiangguo) was released by the Publicity Department of the Central Committee of the Communist Party of China on Jan. 1. “ The app has been heavily downloaded and users are quizzed on topics from Chinese history to China politics. But inventive Chinese are finding ways around it or to take advantage of it.
China’s Still-Too-High Savings Makes China 2025 a Bigger Global Risk “China’s high national savings rate—one of the highest in the world—is at the heart of its external/internal imbalances. High savings finance elevated investment when held domestically, or lead to large external imbalances when they flow abroad”
China overinvested in coal power: Here’s why “The column examines the effects of the 2014 devolution of authority from the central government to local governments on approvals for coal power projects. It finds that the approval rate for coal power projects is about three times higher when the approval authority is decentralised, and provinces with larger coal industries tend to approve more coal power.”
The PAK-INDO-CHINA BLOC
India follows China’s lead, bans plastic waste imports Effective March 1, all imports of foreign solid plastic waste and scrap have been banned. The move is meant to “close the gap between waste generation and recycling capacity,” and to help keep the country on track for its goal to phase out all single-use plastics by 2020.
China’s “South Asia challenge” for the Belt and Road Initiative “Scholars have expressed astonishment that India has not only intensified its ties with the US and Japan, who in turn are supporting a bigger role for India in South Asia, but has also maintained close relations with its traditional friend Russia, which wholeheartedly supported India’s entry into the Shanghai Cooperation Organisation “
China’s J-10 Fighter Jets to Take Part in Pakistan’s National Day Parade Contingents from countries including China, Saudi Arabia and Turkey will participate in Pakistan’s national day parade, with Malaysian Prime Minister Mahathir Mohamad being the guest of honour, the report said.
China ‘helped defuse Pakistan-India tension’ after Kashmir attack Beijing promoted peace talks as New Delhi and Islamabad threatened to fire missiles at each other, Chinese foreign ministry says
US POLITICAL DRAMA
Why Bernie Sanders is the only candidate going directly after Trump Others are arguing “This is going to be a positive campaign that seeks to bring out the very best from every single one of us, that seeks to unite a very divided country” [O’Rourke]
How To Write A Political Puff Piece “Vanity Fair teaches you how to make politics about personality rather than policy…” [Unfortunately too true]
Who’s afraid of taxing the rich? Seems like most politicians according to Scott Sumner. I also didn’t know that private jets were now tax deductible under Trump’s tax changes.
Why the Left Can’t Stand The New York Times “the New York Times is the flagship publication for liberal triumphalism; it holds the line of Francis Fukuyama’s “End of History”—the notion that all serious ideological conflict crashed to a halt with the suspension of the Cold War, with very little at stake in future political disputes beyond regional trade accords and fine-tuning of currency regimes.” [Owch! The article also sings the praises of the FT]
The Pentagon’s Bottomless Money Pit When the Defense Department flunked its first-ever fiscal review, one of our government’s greatest mysteries was exposed: Where does the DoD’s $700 billion annual budget go? [Includes this actual email a US military base in 2001: “Wanted to keep you all informed of the massive inventory adjustment processed at [Ogden] on Wednesday of this week. It isn’t as bad as we first thought ($8.5 trillion). The hit . . . $3.9 trillion instead of the $8.5 trillion as we first thought.”]
Nearly Half of Voters Support FTC’s New Task Force to Examine Tech Monopolies “Republican voters are 5 percentage points more likely than voters overall to favor the creation of the FTC task force” [Looks like Republicans are becoming more anti-tech than Democrats]
THE NEW NEW THING: Beto O’Rourke
Beto O’Rourke pulled in a massive fundraising haul — and 2020 competitors are noticing O’Rourke’s fundraising numbers are an early test of grassroots energy.
Beto O’Rourke’s secret membership in America’s oldest hacking group As the Texas Democrat enters the race for president, members of a group famous for “hactivism” come forward for the first time to claim him as one of their own. There may be no better time to be an American politician rebelling against business as usual. But is the United States ready for O’Rourke’s teenage exploits?
Here are the biggest endorsements all the 2020 Democratic presidential candidates have received so far Of the celebs, Rosie O’Donnell is backing Kamala Harris, Danny Devito is backing Bernie Sanders and Bill Nye is backing Jay Inslee.
Beto O’Rourke Was Right, and Democrats Might Not Forgive Him “Among other things, the former Texas congressman has expressed regret for having made light of his negligent parenting, for the extent to which he had benefited from “white privilege,” and for having penned a gruesome murder story as a teenager. Given the mood of the Democratic Party’s activist base, however, I suspect all these will be considered venial sins in comparison to the fact that he once flirted with entitlement reform.”
Is Beto O’Rourke Learning How To Troll The Media? “O’Rourke’s fundraising numbers — as the most tangible sign to date of how his campaign is performing — were a fairly big deal, but so was his campaign’s apparent awareness about the importance of managing expectations.”
What Europe’s Populist Right Is Getting Right “Authoritarian nationalists such as Hungarian Prime Minister Viktor Orbán win support not only by attacking immigrants, but also by delivering economic policies that benefit the poor and middle class. Western analysts and, more important, Westernleaders need to learn this lesson before it’s too late.”
Among the Gilets Jaunes “Another is the pace at which a provincial revolt about fuel prices and speed limits broadened into a radical rejection of Macron, the office he holds, the National Assembly and the political parties, including Marine Le Pen’s Rassemblement National – formerly the Front National – and Jean-Luc Mélenchon’s La France Insoumise”
France’s Yellow Vests Are Rebels Without a Cause The problem goes deeper, Pisani-Ferry argued, in that 20th-century ideologies—communist, socialist, Gaullist—have collapsed and have been replaced by socioeconomic strata. “Now what’s dangerous for democracy is the feeling that half of the population has been shunted aside. The absolute priority has to be to find some common ground,” he said.
The European Union’s response to the trade crisis The global trading system is under attack on various fronts. In this Policy Contribution, the authors examine the root causes of the current problems, develop good and bad scenarios for what could happen next, and provide recommendations for how the EU should respond.
EU accelerates moves to block China’s market access European countries want ‘reciprocity’ in big projects from power lines to metros
Online retail fuelling rapid rise in sales of fake goods, says OECD Counterfeits worth $590bn a year made up 3.3% of global trade in 2016, report finds
Beautiful City: Leisure Amenities and Urban Growth Urban population growth in the 1990-2010 period was about 10 percentage points (about one standard deviation) higher in a metro area that was perceived as twice more picturesque. This measure ties with low taxes as the most important predictor of urban population growth.
Sonification: turning the yield curve into music Sounds like the type of thing you’d hear at an art exhibition in a hipster part of town.
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