Finance and Econ From Web: Renaissance Technologies’ Jim Simons Talks Money, Fear Helps Econ Development and Millennials Are Not Special

Some very good  pieces on investing including one: tips from the top investors, an equity trading model and the ins-and-outs of initial (crypto) coin offerings (ICOs). On the macro side, we have some good pieces on how to model financial crises, the inflation of smartphones and how debt doesn’t cause inflation. We have Mankiw writing about writing textbooks, policymakers worried about climate change and why everyone does not value university education. There’s also a bunch of articles on China including some on its currency regime and reserve management. Enjoy…

The United City-States of America, Mapped “Both to satisfy my own curiosity and set out a vision for what a city-oriented United States might look like, I decided to make a map that dispensed with the continental 48 states and instead divvied up the land into 100 city-states.”

Markets and Investing

World’s Most Successful Hedge Fund Manager Ever Reveals Some Of Medallion’s Secrets There’s a link to a 1hr 20min video. Haven’t watched it yet, but I’m sure it will be good. Renaissance Technologies’ Jim Simons last week spoke on “Maths,Money and Making a Difference” at MIT

The Leading Premium Study finds positive excess returns of 4% can be made from going long firms in leading (business cycle) industries and shorting firms in lagging industries   Our results show that firms in leading industries pay an average annualized return 4% higher than that of firms in lagging industries. The Sharpe ratio would be around 0.25 to 0.35. The finding can be rationalized in a model in which (a) agents price growth news shocks, and (b) leading industries provide valuable resolution of uncertainty about the growth prospects of lagging industries.

The Investing Meta-Game “the most successful investors are not those who succeed within a single regime, like the tribe of the value investor, but those investors who are successful across regimes,” (great bits of advice)

Accounting for macro-finance trends Most developed economies have experienced large declines in risk-free interest rates and lacklustre investment over the past 30 years, while the profitability of private capital has increased slightly. Using an extension of the neoclassical growth model, this column identifies what accounts for these developments. It finds that rising market power, rising unmeasured intangibles, and rising risk premia play a crucial role, over and above the traditional culprits of increasing savings supply and technological growth slowdown.

Determinants of Currency Composition of Reserves: a Portfolio Theory Approach with an Application to RMB IMF paper finds one major trend for central banks is managing reserves in two or more tranches—liquidity tranche and investment tranche. Using this idea they build a model to determine the currency composition of reserves. They estimate that the CNY could see its share of EM reserves (ex China) go up to 35%.

Initial Coin Offerings This paper provides a conceptual and empirical overview of the ICO market. Stylized facts such as initial returns, gross proceeds, money left on the table, time-to-market, and cryptocurrency failure are documented and the determinants of ICO success explored.

Money, digital cash and cryptocurrencies: Privacy matters Alongside liquidity and store of value, is privacy an important attribute of money? Using laboratory experiments, the column shows that privacy matters, and increases the overall appeal of money. The experiments suggest that future competition between alternative currencies will depend on how the three properties are mixed.

China

The Race Is On For Control Of 5G Wireless Communications — And China Is In The Lead NPR’s Audie Cornish speaks with Harvard Law professor Susan Crawford about why that’s a national security threat. (podcast and transcript). Worth reading with The Huawei Case Signals the New US–China Cold War Over Tech “In that light, Washington’s fight against Huawei looks less like a clear case of defending against Chinese government espionage and cyber threats. It looks more like a cyber version of a new Cold War, where the United States and China are both attempting to line up proxies and divide the world into technology spheres of influence.”

China sells arms to more countries and is world’s biggest exporter of armed drones, says Swedish think tank SIPRI But arms exports grew by just 2.7 per cent in 2014-18 from the previous five years, according to Stockholm International Peace Research Institute report. China has expanded its customer base to 53 countries

China’s Evolving Exchange Rate Regime Useful IMF paper on the history and future of the currency. 

Demystifying Debt Along China’s New Silk Road Is Beijing really seeking to buy political influence abroad?

China’s ‘daigou’ shock hits luxury goods sales in Japan Beijing’s crackdown on private importers has bulk buyers cutting back

Indian invasion of Chinese social media apps like TikTok, SHAREit and Helo sparks fear and loathing in New Delhi As Chinese social media apps like TikTok take India by storm, they stand accused of everything from spreading sexually explicit material to spying and crowding out local competitors. With government alarm bells ringing and calls for outright bans, the clock could be ticking on their time in the sun

Growth

The underrated role of fear in economic development “A lot of what drove China’s daring early economic reforms was fear of falling back into the chaos of the Cultural Revolution. Fear can motivate political leaders to do things that are out of the ordinary, and motivate the population at large to accept them. It is not a coincidence, in Overholt’s view, that the miracles of economic growth in Asia followed national catastrophes”

Was World War II good for economic growth? I always assumed it was good for US growth, but this article provides a convincing argument that it didn’t. 

Modeling Financial Crises San Fran Fed: research has revealed several facts about financial crises based on historical data. Crises are rare events that are associated with severe recessions that are typically deeper than normal recessions. They are usually preceded by a buildup of system imbalances, particularly a rapid increase of credit. Financial crises tend to occur after prolonged booms but do not necessarily result from large shocks. 

Tracking Financial Fragility San Fran Fed finds that In constructing an indicator of financial fragility, the choice of which filter (or transformation) to apply to the data series is often considered a technicality, but in fact turns out to matter a great deal. They go through shortcomings of the most common filters used in the literature and policy circle, and propose a fairly simple and intuitive alternative – the local level filter. 

Economic Ideas

Who Values Access to College? Fed paper finds that “, nearly half of high school completers place zero value on access to college. Subsidies to college currently flow to those already best positioned to succeed and least sensitive to them…redirecting subsidies away from those who would nonetheless enroll—towards a stock index retirement fund for those who do not even when college is subsidized—increases ex-ante welfare by 1 percent of mean consumption”

The Sharing Economy Was Always a Scam ‘Sharing’ was supposed to save us. Instead, it became a Trojan horse for a precarious economic future.

Reflections of a Textbook Author Greg Mankiw, the author of one of the standard econ textbooks (I used it!), talks about writing a textbook. I like this bit: “The person I always kept in mind while writing my principles text was my mother. She is not a college graduate but has always been interested in following the news and financial markets. As I wrote, I regularly asked myself, “How would Mom react to this passage? Would she understand it? Would she find it engaging?”

La valeur de l’action pour le climat Special French commission set up to determine the cost of de-carbonising the French economy. Finds that estimated cost has now risen to EUR250 per tonne by 2030 compared to an estimate of EUR100 made ten years earlier. The report is in French, so I Google translated it – hopefully I understood it correctly!

Climate Change and the Economy RBA deputy governor Debelle: “The response to such a shock is relatively straightforward if the climate events are temporary and discrete: droughts are assumed to end; the destruction of the banana crop or the closure of the iron ore port because of a cyclone is temporary;…The recent IPCC report documents that climate change is a trend rather than cyclical, which makes the assessment much more complicated. What if droughts are more frequent, or cyclones happen more often? “

Uninstalling Hayek  Hayek recognized that the argument for capitalism had to be won on moral and political grounds through the political arts of persuasion… Morals are not really morals if they are not material, Hayek believed. ..  Hayek insisted, and if it [an agreement on the purpose of society] is presumed to exist, nothing will reveal its non-existence more quickly than the attempt to implement it in practice, in the distribution of finite resources toward whatever end has been agreed upon… Hayek translated moral and political problems into an economic idiom. What we need now, I would argue, is a way to uninstall or reverse that translation.

Inflation

Getting Smart About Phones: New Price Indexes and theAllocation of Spending between Devices and ServicesPlans in Personal Consumption Expenditures The authors develop a new mobile phone price index to better capture quality/feature  improvements. It falls at an average annual rate of 17% during 2010-2018 – similar to the decline in the GDP deflator price index. They also  propose a methodology to disentangle purchases of phones and wireless services when they are bundled together. Their adjusted estimates find that real consumption spending in the Cellular Phone Services category increased 4% faster than is reflected in published data.

Why American [construction] Costs Are So High  very interesting read. Topics include (subway) station construction methods, US stations having mezzanines, and procurement issues. 

Excessive debt doesn’t cause inflation While big budget deficits lead to hyperinflation in places like Zimbabwe and Venezuela, in the US the deficits are likely to place a burden on future taxpayers, slowing growth.  Sharp future tax increases are the actual risk, not high inflation.

The Challenge of Monetary Independence Chile’s former Finance Minister: “By shadowing the US Federal Reserve so closely, Latin American countries are foregoing the policy flexibility that their floating exchange-rate regimes are intended to allow. They also risk relying too heavily on possible US interest-rate cuts to boost their economies, and not enough on deeper, long-term reforms.”

Labour Market

Aggregate Nominal Wage Adjustments: New Evidence from Administrative Payroll Data Using administrative US payroll data, the authors separate base pay from other forms of compensation such as bonuses. They find nominal base wage declines are rare with only 2% of job-stayers getting a cut. However, shifts in base wages of job-changers implies that aggregate nominal wages are more flexible than the nominal wages of job-stayers. Finally, base wage adjustments are state-dependent: downward aggregate nominal wage adjustments were much more common during the Great Recession than in the subsequent recovery period.

Immigrants’ Earnings Growth and Return Migration from the U.S.: Examining their Determinants using Linked Survey and Administrative Data Using a novel panel data set of recent immigrants to the U.S. (2005–2007), the authors find that 10 years after arrival almost 40 percent have return migrated (emigrated out of the US). They show that return migrants experience downward earnings mobility over2-3 years prior to their return migration. This finding suggests that economic shocks are closely related to emigration decisions.

The Persistent Employment Effects of the 2006-09 U.S. Housing Wealth Collapse Richmond Fed – localities that had a larger loss in housing net worth during that period had more depressed employment as late as 2016. They estimate that a 10 percent change in housing net worth between 2006 and 2009 causes a 4.5 percent decline in local employment by 2016. They not find a long-term causal impact of the shock on wages.

Why Has the Share of US Prime-Age Women in the Labor Force Fallen Behind Other Economies? The answer is that work-family policy has largely stalled in the US, which has no federal laws guaranteeing workers a few paid sick days or paid family and medical leave for a worker’s own or family members’ serious illness or to welcome and bond with a new child.

Europe

Europe in the Shadows Sigmar Gabriel, former German Minister of Foreign Affairs: with the world increasingly dominated by the US and China, Europe must develop a much stronger common voice on economics, defense, and trade. But this will require Germany, in particular, to rethink some of its long-held positions.

Greek economy: From bailout program exit to recovery? The recent upgrade of Greece’s long-term foreign credit rating by Moody’s from B3 to B1 is expected to encourage investor uptake of a 10-year, 2.5-billion-euro Greek government bond launching this week. At odds with this cautiously encouraging development was the European Commission’s (EC) enhanced surveillance report issued on February 27. Layered over this are persistent political economy challenges that continue to stymie financial sector and other structural reforms. (good summary of what’s happened since the euro crisis)

Millennials aren’t that different. Economists at the Federal Reserve Board have published exhaustive research on Millennial spending patterns and generally find that they are similar to those of other generation. “Using data on household spending from the CE survey, we find little evidence that millennial households have tastes and preference for consumption that are lower than those of earlier generations, once the effects of age, income, and a wide range of demographic characteristics are taken into account.”

Why is the far right obsessed with gold? It started with a community of “gold bugs” on the fringes of the internet. Now, far-right politicians across Europe are stockpiling the precious metal.

US

Here’s What We Know About the Pentagon’s 2020 Budget Request “The Overseas Contingency Operations budget request is $165 billion:, which includes a mix of war funding and items that would ordinarily be in the base budget…The massive OCO request is sure to get blowback from Democrats and Republicans alike. Historically, the OCO budget has been used to fund war operations. However, the Trump administration has chosen to use that account, which lawmakers have long called a slush fund, as a way to circumvent federal spending caps that run through 2021.”

Why Americans Don’t Cheat on Their Taxes Apparently the US has an over 80% compliance rate compared to Europe’s 70%. Some countries like Italy are much lower at 60%. The higher US rate is partly due to lower taxes , a smaller black economy and perhaps some kind of civic pride to pay. The article argues that the latter may be eroding. 

Bilal

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