Finance and Econ From Around the Web: Active Managers Do Outperform, Putin More Liked Than Trump, Robots Change Everything…

There are some excellent articles in this edition. There are some for the more quant-inclined like ones on nowcasting models using big data, bond order flow analysis and global risk aversion measures. While others are more macro looking at trade wars, Italian fiscal issues and what cause economic growth. Enjoy…

 

 

CHINA vs US (7)

Beijing’s Bismarckian Ghosts: How Great Powers Compete Economically A detailed comparison of today’s China-US rivalry with the 19th century one between Germany and the UK. In both instances there was a tech race (establishing global standards, innovation), and the fear of the financial power of the UK/US.

Three tariff lessons from US interwar history The interwar period featured the infamous Hawley-Smoot tariffs, which many argue prolonged/caused the Great Depression. The 3 lessons the writes find are: interwar tariffs were pro-cyclical unlike today, interwar tariffs affected a much larger share of global intermediate goods unlike today, the intensity level of tariffs (and consequent inefficiency) of interwar tariffs were worse than today.

The Algorithms of August The AI arms race won’t be like previous competitions, and both the United States and China could be left in the dust argues the author

Pakistan cuts Chinese ‘Silk Road’ rail project by $2-bn due to debt concerns Pakistan argues its debt load would be too high to permit China’s Silk Road project. Shows some of the strains in China’s Belt and Road Initiative. But not all news has been bad as   China’s Shandong wins 33-year highway concession in Bosnia . China built the road in Bosnia and will now manage the tolls.

China to introduce more measures to facilitate foreign investment Partly in response to US tariffs, China is introducing lower tariffs for other countries and a faster application process for foreign investment in China.

The Mandatory Canteens of Communist China Fascinating account of how the introduction of communal canteens and the banning of private kitchens in 1958 helped contribute to the famine. People over-ate to start with causing food stocks to dwindle, workers had little incentive to work efficiently and publishing inflated food production numbers was rampant.

 

INVESTING, MARKETS AND BANKING (8)

Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Actively Managed Mutual Funds Comprehensive review finds that active equity managers do add alpha after all – this comes as passive has exploded. They don’t bond managers add much value though L

The global effects of global risk and uncertainty  ECB derives global risk factor and finds increasing risk leads to persistent impact on growth for most countries. Notable exceptions Chile, China,  India, Italy and Russia.

The Tim Ferriss Show Transcripts: Howard Marks Warren Buffet recommends reading the letters of Howard Marks, the co-founder of Oaktree Capital. Tim Ferris interviews the investor and also provides a transcript. Lots of advice include “You can’t predict. You can prepare” and “you have to see things differently from others  [and] you also have to see it better than others”

Unlocking the Treasury Market through TRACE NY Fed describes the microstructure of the US Treasury market. Amongst other things, they that voice continues to play a meaningful role in the inter-dealer broker market.

Price Pressure and Price Discovery in the Term Structure of Interest Rates Fed paper finds that dealer inventories affect bond yields and that cash and futures positioning have differing impact on the yield curve.

Financial social trading networks: The case of copy trading platforms Finds that “social” trading platforms increases risk taking when you have the option to copy others.

Regulatory Changes and the Cost of Capital for Banks NY Fed finds that Dodd-Frank regulation has lowered the cost of capital for banks compared to non-banks.

Turnover Liquidity and the Transmission of Monetary Policy Argues that the monetary policy also works through affecting the liquidity of assets it “intervenes” in.

 

POLITICS (7)

Trump’s International Ratings Remain Low, Especially Among Key Allies. The US and Trump are becoming less popular overseas especially in Europe. China is seen as rising power, though most prefer US as leading power.

Brexit Has Brought Britain to a Standstill shows how the government’s focus on Brexit is preventing everything else to be delayed and ignored. Also, I found this article on Brexit useful too: Chequers vs Canada-plus Brexit trade plans – seven key differences explained

Hard Brexit, hard decisions, and ‘Irexit’ I didn’t realise that there was some chatter of an Irish exit from the EU. This study finds that Ireland would be worse off in all scenarios of an EU exit and Brexit.

Democracy Does Cause Growth  Looking at 175 countries between 1960 and 2010, the paper finds that democratisation boost growth by 20% partly due to more investment, schooling , better public goods provision and less social unrest.

A rational backlash against globalisation Argues that rational voters would pick populists when the economy is strong and inequality is high.

The effects of import competition on health in the local economy New study finds evidence of poor mental and physical health outcomes for workers in US labour markets which are exposed to Chinese import competition. The mental health dimension was noticeably strong.

 

GROWTH, INFLATION AND LABOUR MARKET (9)

Bots vs Tots Google’s Hal Varian presents on robots and the labour market. “US labor market is already beginning to tighten. Expect a tight labor market for the next 15-25 years.  Retirees continue to consume. Robots don’t consume. Labor supply is growing more slowly than labor demand. Old intuitions no longer helpful”

Big Data Econometrics: Now Casting and Early Estimates I  missed this paper when it came out in June. It’s an excellent overview of using big data to build nowcasting estimates.

QE: A User’s Guide Excellent summary of QE programmes, with particular focus on the US. “For the United States and some other countries, research suggests that a purchase of long-term bonds equivalent to 1.5 percent of GDP has a simulative effect roughly equal to a cut in the policy rate of 0.25 percentage point”. A reference guide to keep.

Domestic and global output gaps as inflation drivers: what does the Phillips curve tell? Yet another Phillips Curve paper. This time on the importance of the global output gap rather than the domestic one for advanced economies. For EM, domestic output gaps and FX matter more.

Unemployment Risk Finds that since the 1980s, credit swings provide most upside risk to unemployment (in the 1970s it was inflation that triggered unemployment)

The Most Important Least-Noticed Economic Event of the Decade The invisible mini-recession of 2016 in the US. This was caused by a China slowdown, a fall in oil prices and a strong dollar and it led to a collapse in investment. This likely impacted politics, but also resulted in the mini-boom we’re seeing now. And here are some additional supportive comments from econ prof Menzie Chinn.

Demographically Adjusting the Wage Growth Tracker A discussion on the Atlantic Fed’s wage growth tracker which looks at a people-constant measure of wage-growth. The blog argues that the ageing of US workers has exerted downward pressure on wages. It looks at different versions of the tracker, but ultimately finds: “any version of the Tracker tells a pretty similar overall story: median wage growth is significantly higher than it was five or six years ago, but it hasn’t shown much acceleration over the last couple of years”

The homebody economy, explained. How women who stay in became a prize demographic. “Younger Americans who are ensconced in their homes and uncharmed by nightlife, with all its associated “effort,” are also spending more money on food delivery than they are in restaurants and talking about self-care in terms of the products it involves.

 

FISCAL AND SUPPLY-SIDE (5)

Fiscal Freedom in the Eurozone? Former director of research at ECB argues that the EU’s fiscal rules are broken – Italy and recently France are breaking the rules. She argues instead that an alternative rule could be a cap on foreign holdings of domestic bonds thereby aligning risks to those that benefit from fiscal expansion.

The Insolvency Regime for Large Enterprises in Italy: An Economic and Legal Assessment An IMF deep dive one of the quirky Italian bankruptcy laws for large companies, which increases the costs (including to creditors) of winding down large companies. The paper recommends repealing the law.

Fiscal space, government-spending, and tax-rate cyclicality patterns: A cross-country comparison, 1960–2016 Finds that it is better to look at tax base to GDP ratios, rather than debt to GDP ratios, to determine fragility of countries to interest rate shocks. The paper finds EM is therefore more vulnerable than debt stats would suggest.

Uncertainty and Fiscal Cliffs Large pending fiscal policy changes, such as in the United States in 2012 or in Japan with consumption taxes, often generate considerable uncertainty. The possibility of fiscal cliffs lowers economic activity even in periods of relative certainty.

The Albanian Miracle  Once the “North Korea of Europe,” Albania now has an income level that is 25% that of Germany, double-digit export growth, and a strengthening currency. Nice overview of what they did.

 

INEQUALITY AND INNOVATION (6)

Measuring human capital: a systematic analysis of 195 countries and territories, 1990–2016 This Lancet study uses education and health measures to calculate human capital across a range of countries. Finland comes out on top followed by Iceland and Denmark. The US is 27th having been 6thin 1990. China  is 44th. Tyler Cowen takes issue with the extrapolation from health/education to innovation and argues that the US should be #1.

Innovating in less developed regions of Europe and North America More-developed Europe has now caught up with more-developed North America in terms of innovation, but less-developed Europe still lags less-developed America. This is due to less investment and a poorer ability to absorb skilled young labour into the workforce.

Measuring unfair inequality The authors come up with an interesting measure of unfair inequality so they try to glean how much of inequality is due to poor circumstance rather than poor effort. They also look at limiting extreme negative outcomes – ie living below the poverty line. They find that unfair inequality is higher in the US than anywhere in the Europe. In Europe, they find that Lithuania, Italy and Romania have the highest rate of unfair inequality. At the other end, the Netherlands, Finland and Norway have the least unfair inequality.

Moved to Opportunity: The Long-Run Effects of Public Housing Demolition on Children In the US, displaced children from demolished projects housing to less disadvantaged neighbourhoods ended up having better labour outcomes than children who remained in non-demolished projects housing.,

Why the distribution of wealth has more to do with power than productivity The UK is wealthier than Germany despite having lower productivity. This article argues that shows that wealth is more linked to how land and capital is divided and rights assigned than actual performance.

Bilal

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