Finance and Econ From the Web: growth decoupling from energy use, hedge fund fees and latest military spending

This week’s curated list brings you some macro articles on how less competitive housing markets are leading to less housing supply, the Fed is struggling to control interest rates and Trump tax cuts did help US growth. On markets, we have good pieces on the new fee structure of hedge funds, what could challenge the dollar’s dominance and how to trade liquidity risk. On politics: how demographics are undermining party policies, does democracy help growth and China’s impact on Africa.

Financial Industry

The past decade has brought a compliance boom in banking  “While swathes of banking has laboured under cutbacks and stiff capital requirements, compliance departments’ headcount and clout have grown”

The Labor Market for Financial Misconduct  “We find evidence that the presence of unsophisticated consumers is one of the central frictions enabling misconduct. Even though misconduct records are public information, such unsophisticated customers do not know either that such disclosures exist, or how to interpret them.”

Is 3 & 30 the new 2 & 20?  For hedge funds, “the infamous “2 & 20” – a 2 percent fee on the assets under management plus 20 percent of the net gains – now averages  1.45% and 16.9% respectively. “. A few are now charging “3 and 30”, but that is the exception. 

Central banking and innovation: partners in the quest for financial inclusionCentral banker Carstens gives the state-of-play with financial inclusion and the role of FinTech.

Markets and Investing

Asset Price Bubbles and Systemic Risk  In a median real estate bust, systemic risk increases by almost 70 percent of the median for banks with unfavorable characteristics (eg large banks)

Liquidity Risk After 20 Years  Good discussion on markets price liquidity risk, suggests it can be hedged but can’t be predicted

Have FSRs got news for you? Evidence from the impact of Financial Stability Reports on market activityHmm, the Bank of England finds that the reports doesn’t “reduces information asymmetry in financial markets”

Asia-Pacific fixed income markets: evolving structure, participation and pricing  Selection of BIS speeches on papers on topics ranging from term structure of global yields to measuring corporate bond liquidity. 

Tick Size Change and Market Quality in the U.S. Treasury MarketNY Fed studies recent tick size reduction in the U.S. Treasury securities market. They find that the bid-ask spread narrows significantly after the change, even for large trades, and that trading volume increases

Capital Flows

The International Monetary and Financial SystemVery thorough paper that touches on the dollar’s exorbitant privilege and reserve currency status. Shows that dollar liquidity is “backed by the fiscal capacity of the US government” and also “that the decline in the relative size of the U.S. over time may shift the economy from the no crisis zone to the self-fulfilling crisis zone. “

Global Drivers of Gross and Net Capital Flows Two global factors, the global financial cycle factor and a commodity price factor account for half the variance of gross flows in advanced countries and forty percent of the variance of gross flows in emerging markets.

Capital Flows: The Role of Bank and Nonbank Balance Sheets  IMF finds that the response of overall capital flows to global risk shocks is associated with the on-balance sheet foreign exposures of nonbanks, but not with that of banks. 

Growth Cycle

My Best Growth Forecast Ever  Robert Barro reminds us that he correctly predicted US growth would pick up to 3% after the Trump tax cuts. 

Measuring Global Economic ActivityGeeky paper that finds the index methodology of the Kilian economic index, which uses shipping costs to measure global growth, is flawed. Moreover, author finds that Baltic Dry index underperforms using industrial production to predict global GDP growth and commodity prices. 

Average annual change in total factor productivity between 1990 and 2014Tyler Cowen picks out some TFP numbers and finds the Sri Lanka and Poland numbers impressive. 

Misreading the Signs: Is Yield-Curve Inversion a False Alarm?  Argues that you need to also look at credit spreads, equity carry and equity quality. None of which are flashing red.

Labour Market

Older Americans are twice as likely to work now as in 1985  They don’t have enough money. Rickety social safety nets, inadequate retirement savings plans and sky-high health-care costs are all conspiring to make the concept of leaving the workforce something to be more feared than desired.

Shocks and labour cost adjustment: evidence from a survey of European firmsRecently firms respond to negative shocks by laying off workers, then cutting wages, while they respond to positive shocks by first raising wages and then hiring workers. 

Has the U.S. economy stagnated because its work force aged?  Minneapolis Fed finds that an aging labor force may have lowered job mobility, firm creation, and economic growth

Business and Housing Investment

Housing consumption and investment: evidence from shared equity mortgagesLooks at one of the rare instance of hybrid house financing products, where the UK government provided equity financing to house purchases. BoE finds that households took advantage of the increase to buy more expensive properties, and not to reduce their mortgage debt and house price risk exposure. 

How increasing local oligopolization has distorted the housing market  Interesting angle I haven’t seen before. Argues that fewer local construction companies have limited supply of new houses in the US.

Does the speed of production matter?Reasons could include “if you don’t act now the status quo is terrible” and “nominal interest rates are high”

The Manufacturer’s Dilemma  Today’s supply chains are so complex that it’s virtually impossible for Western companies to know exactly where everything they make comes from or is assembled. 

You Are Suffocating Me! Firm-Level Evidence on Crowding Out  IMF finds private firms operating in sectors with a high level of SOE concentration invest systematically less than businesses that are not competing directly with SOEs.

Climate Change and Energy

The decoupling of GDP and energy growth: A CEO guide  McKinsey looks at the supply and demand of 55 types of energy across 30 sectors in some 146 countries. Their study finds economic growth and energy demand, are starting to de-couple which in the decades ahead will become even more pronounced.

Thinking outside the box: how and why to invest in a climate change strategy.GMO’s Jeremy Grantham recommends climate change strategies as portfolio diversifier. It would consist of investing in sectors likes solar, wind, batteries & storage, electric grid, energy efficiency, agriculture, and water. 

Energy, hierarchy and the origin of inequality Clever paper that proposes a)  societies that use more energy tend to have larger institutions and b) modern institutions are hierarchicallyorganized and income increases rapidly with rank. From these, one can model inequality over time. 

Monetary Policy 

Is the Fed’s Floor System Beginning to Fold?Good piece trying to understand why the Fed effective is rising above the IOER rate. Also worth reading with Fed Funds Rate Ticks Up To 2.44%–Highest Since 2008

Why Your Inflation Rate is Different From Mine Looking back, you can see that the tooth fairy’s spending jumped from 2012 to 2014 and again, just before the end of 2017.[just discovered the tooth fairy index!]

Explaining Monetary Spillovers: The Matrix Reloaded  RBA finds the strongest determinant of interest rate spillovers is financial openness. Economies that have stronger bilateral (and aggregate) financial links with the United States or euro area are susceptible to stronger interest rate spillovers. 

Impact of targeted credit easing by the ECB: bank-level evidence  Dutch central bank finds that a more restrictive benchmark rate used by the ECB’s tLTRO programme is associated with more total net lending and net lending to non-financial corporates by relatively large banks. 

Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies  Dallas Fed estimates the natural interest rate for six small open economies (Australia, Canada, South Korea, Sweden, Switzerland and the U.K.) with a structural New Keynesian model using Bayesian techniques. 

Money, Credit, Monetary Policy, and the Business Cycle in the Euro Area: What Has Changed since the Crisis?  NY Fed finds long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Meanwhile. short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis.

Quant and behavioural economics

Let’s not emphasize behavioral economics  “If even the “masters of the universe” on Wall Street struggle to come up with behavioral finance theories capable of beating the market, does anyone seriously believe that bureaucrats in Washington will be able to “market time” well enough to spot asset price bubbles and regulate accordingly?

What’s the issue with sentiment analysis? Commonly obtained from natural language processing, it suffers from one major drawback: it is context and language specific. Eg “Being ‘aggressive’ in most situations is not considered a very nice trait. However, being aggressive when you are a forward in football can be a very good thing.”

The Contribution of Jump Signs and Activity to Forecasting Stock Price Volatility  Geeky paper that finds that incorporating  jumps in financial prices (rather than assuming continuous prices) generates significantly better real-time forecasts than some of the better volatility models (such as the Heterogeneous Autoregressive Realized Vol or HAR-RV model)


Reporting on China in Africa is too binary. What needs to be done to fix it  Individual relationships between China and particular countries differ. Also worth reading with African leaders and the geography of China’s foreign assistancewhich finds that African Political leaders’ birth regions receive more Chinese aid.

China’s African swine fever crisis ‘very serious’ with stocks falling and pork prices set to hit all-time high  China has culled 1.02 million pigs since August, with a total of 129 cases discovered, according to the Ministry of Agriculture and Rural Affairs

What else China can do to support growth in the short term  Thinktank, Bruegel, uses media-based big data to analyse the sentiment regarding how shadow banking evolved in China. They find that sentiment on structured products in China has been negative since 2017 but with a noticeable improvement recently. 

Identity Politics

Identicide: How demographic shifts can rip a country apart  Looks at what happens when countries cherish a central national identity – invariably made up and maintained by groups in power – and that identity is challenged by the reality of differential demographic growth rates. Rather than face “identicide,” most representatives of that mythic identity will fight back, either subtly or with violence.

There Are No Permanent Majorities  Democrats waiting for the Republican Party to destroy itself are bound to be disappointed.

SNP members support new currency as soon as practicable  They have voted for a “fast-track” plan to scrap the pound in an independent Scotland, defying the wishes of the party leadership

We Analyzed 40 Years Of Primary Polls. Even Early On, They’re Fairly Predictive.  “As primary season draws nearer, we’ll be keeping an eye on any candidates with low name recognition who still manage to win a significant chunk of support in the polls.”


Revisiting the causal effect of democracy on long-run development  Recent evidence suggests that a country switching to democracy achieves about 20% higher per capita GDP over subsequent decades, but the true number is likely to be closer to 10% after common shocks are corrected for. 

Economic geography bites backAuthor points to Indian growth shifting to its southern states [I didn’t know this], the rise of Anglo-US populism and China’s external outreach. 

World military expenditure grows to $1.8 trillion in 2018  Total world military expenditure rose to $1822 billion in 2018, representing an increase of 2.6 per cent from 2017…The five biggest spenders were the US ($650bn), China ($250bn), Saudi Arabia ($68bn), India ($67bn)  and France ($64bn), which together accounted for 60 per cent of global military spending.

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