This week, I have a bunch of good investor articles on why stock markets don’t follow economic growth, how tech unicorns are bubbles and the behavioural and modelling challenges of investing, . On the macro side, why it’s the service sector cycle, not manufacturing, that really matters, using weather data to measure consumption and will inflation accelerate. Some gems of articles as well; like one on who actually owns China’s Huawei and what does an electric car replace. Finally, a fun article on what the Democrat presidential candidates’ websites tell us about them.
Five Ways Active Managers Can Overcome Passive ResistanceClarion call for active investors. Top tip “Embrace Unconstrained Alpha”
Ten Behavioural Advantages Amateur Investors Hold Over ProfessionalsIncludes “There is no need to check your portfolio on a daily basis” and “You can make decisions consistent with your own time horizon”
The 7 Reasons Most Econometric Investments Fail Excellent presentation on how using a blunt tool like econometrics doesn’t work well for a complex system like financial markets.
Indicative Forward-Looking SOFR Term Rates Fed blog on presents indicative forward-looking term rates derived from end-of-day SOFR futures prices.
Broke Millennials Are Flocking to Financial Guru Dave Ramsey. Is His Advice Any Good? Not that familiar with his work, but apparently his “in the talk radio world,only Rush Limbaugh and Sean Hannity have bigger audiences.” His main advice is to reduce debt.
How the Wealth Was Won: Factor Shares as Market Fundamentals Paper finds that post-1989, just over half of US stock gains were due to a reallocation of rents to shareholders in a decelerating economy while only a quarter was due to Economic growth.
Recessions vs. Bear Markets “In some ways, overreactions in the markets are caused by how we feel others will feel in the future. And that has nothing to do with market or economic data and it never will.”
The unicorns bubble “While these unicorns have a valuation of more than a third of a trillion dollars, they have just $6 bn of fixed assets and not too many staff. Further, eleven out of twelve have no profits. In fact operating margins were minus 30%. “
Risky assets in Europe and the US: risk vulnerability, risk aversion and economic environment European households dier substantially from US households; but also inside Europe we document substantial dierences. Furthermore, average risk aversion is strongly correlated with the share of households holding risky assets across countries.
Weekly High Frequency Indicators: Key Updates For The Holiday Weekend Good summary and concludes : “Either the slowdown is already over, or else this is a rebound from a “mini-recession” caused by the government shutdown, after which the slowdown will be resumed.”
YoY Industrial production and structural changes to the US economy since 1980 One of the things that made the “Great Recession” so “great” was that it had the biggest ever downturn in jobs in the services sector, over -3%:
Fiscal Space and the Aftermath of Financial Crises Romers find that expansionary fiscal policy ensures less severe downturns and that “domestic and international policymakers should not let debt ratios determine the response to crises unnecessarily.”
Death and Taxes: Does Taxation Matter for Firm Survival? IMF finds ample evidence that a lower level of effective marginal tax rate improves firms’ survival chances.
Analysis of private consumption using weather data Bank of Japan comes up with “Macro Weather Index”. They find “a rise in the amount of precipitation depresses consumer spending and a rise in temperature has a positive effect on private consumption in the summer and a negative influence in the winter.”
Estimating the Marginal Propensity to Consume [MPC] Using the Distributions of Income, Consumption, and Wealth “The MPC is indeed lower at higher wealth quintiles, suggesting that lower-wealth households respond more to changes in income than do higher-wealth households”
Monetary Policy and Inflation
Will Inflation Accelerate This Year? Argues that inflation expectations hold the key.
“The” output gap doesn’t exist Output gaps are basically about policy counterfactuals. And because there are an almost infinite number of policy counterfactuals, there is no single true output gap, which we can precisely measure.
Communicating Monetary Policy Uncertainty The FOMC already has revealed there is only an even chance the policy rate will be between 1.0 and 4.2 percent by the end of 2021. That range probably far exceeds what most observers believe about FOMC policy uncertainty.
Changes in Monetary Policy and Banks’ Net Interest Margins [NIMs]: A Comparison across Four Tightening Episodes Fed fins that banks’ NIMs have increased overall since the beginning of the most recent tightening episode, whereas, in the prior three tightening episodes, by the end of each, NIMs had declined overall.
Institutional Investors, the Dollar, and U.S. Credit ConditionsFed finds an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks.
The Global Factor in Neutral Policy Rates: Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination Fed’s Clarida writes “there could well be significant costs to central bank communication and credibility under a regime of formal policy cooperation, but that gains to policy coordination could be substantial given that r*’s are unobserved but are correlated across countries. “
Liquidity Funding Shocks: The Role of Banks’ Funding Mix Banks’ funding seems to play a relevant role as periphery countries rely more on wholesale funding during normal times.
China and Trade
Who Owns Huawei? The Huawei operating company is 100% owned by a holding company, which is in turn approximately 1% owned by Huawei founder Ren Zhengfei and 99% owned by an entity called a “trade union committee” for the holding company.
Chinese expansion in Central Asia no threat, Russian ambassador says Russia wants more integration between ‘Belt and Road Initiative’ and Central Asian economic and security groups, envoy says.
China’s flexible belt and road approach leads to ambiguity Views of different countries on belt and road presented in this article.
Trade wars and global value chains: Shooting oneself in the footThe blog argues that a trade war hurts not only the targeted countries but also the country imposing the tariffs through global value chains and third country effects.
The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines “surprisingly, the 2012 antidumping duties against Korea led to relocation of production to China, actually resulting in lower washer prices in the United States. “
What Does an Electric Vehicle Replace?“Federal income tax credits resulted in a 29 percent increase in EV sales, but 70 percent of the credits were obtained by households that would have bought an EV without the credits.”
New York Moves to Tackle Emissions as it Wrestles with Climate Costs The centerpiece bill, Intro 1253, requires certain large buildings over 25,000 square feet in size to reduce emissions 40 percent by 2030 and 80 percent by 2050.
An Innovation Policy for the Green New Deal They argue that existing federal innovation programs should be scaled up significantly and reoriented to produce technology necessary for a carbon-negative economy…. [currently] R&D is oriented overwhelmingly toward military purposes
Making Carbon Taxation a Generational Win Win “Our model’s optimal uniform welfare increasing carbon tax starts at $30 tax, rises annually at 1.5 percent and raises the welfare of all current and future generations by 0.73 percent on a consumption-equivalent basis. “
In defense of Big Business, a scapegoat of our polarized age Review of Tyler Cowen’s new book “Big Business: A Love Letter to an American Anti-Hero”. The book includes lines like: “You’re more likely to be ripped off by your local TV repairman [than by McDonald’s.]”
Adam Smith’s one explicit use of the phrase “Invisible Hand” in his Wealth of Nations It wasn’t a situation in which the competitive market equilibrium is Pareto-optimal
Historians and Economists Good list of history books relevant for macro people.
Typography 2020: A Special Listicle For America. Fun article that tells what Democrat candidate websites tells us about them like Tulsi Gabbard’s (“makes the candidate look like a flight attendant on Tulsi Airlines”), Kamal Harris’ (“the colors are nauseating”) and Beto O’Rourke’s (“the website looks like it could’ve been made 15 years ago”)
Tariffs and politics: Evidence from Trump’s trade wars Retaliation against the Trump administration’s tariff hikes seems to be systematically targeted against the Republican voter base. They find some evidence suggesting that Republican candidates fared worse in the mid-term elections in the US counties most exposed to retaliation.
Populism: Roots, consequences, and counter strategy Solutions include: “Innovations have to be driven by societal goals and not focus merely on labour productivity… shifting taxes from labour to energy.”
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