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Sunday, November 23, 2014

Musings On Top-Down Macro

I wrote a review of the book Investing from the Top Down: A Macro Approach to Capital Markets, by Anthoni Crescenzi (now at Pimco), on the Personal Finance section of my web site. The book is relatively old (published in 2009), but it is one of the few books (that I know of) that cover top-down macro investing. (That is, making asset allocations based on a view on the macroeconomy and aggregate market pricing, as opposed to bottom-up security picking, where you scour corporations' financial statements to find good buys.) The book's main audience is retail investors, but it may be of use for people working in finance that are unfamiliar with top-down macro.

What I find interesting is how under-served this approach to finance is when compared to other methodologies.

Thursday, November 20, 2014

Abenomics - Mission Accomplished?

The news that Japan has entered technical recession was viewed as a "surprise" in the financial press, when it really should not have been. (Although to be fair to those who produce quarterly GDP forecasts, the timing of a recession would not be obvious.) This has prompted a few articles discussing the failures of Japanese policy. My feeling is that the Japanese may have accomplished their true objectives (which were not the ones publicly announced).

Wednesday, November 19, 2014

Equities Are A Burden On Future Generations

One corollary of the analysis in my recent article is that government bonds are not the only source of potential inflationary pressure that is inherited by future generations – corporate equities also have the same effect. In fact, they would appear to be an even greater “burden” than government bonds. Although we see “(government) debt clocks” ticking away, warning us about government debt, the risk posed by the equity market attracts no hand-wringing.

Sunday, November 16, 2014

Why Analysts Should Not Be Paranoid About Economic Data

There is considerable distrust of official economic data coming out of the United States statistical agencies, at least in internet discussions. (Such doubts are not a concern for "serious" economists, as they are familiar with the points that I discuss here.) Although it is possible to be misled if you are not familiar with the data, I see little grounds for analysts who have access to the full economic data sets to be concerned.

Thursday, November 13, 2014

Burden Of Government Debt, Part 2: An Example Of Real Effects

How deficits and debt are interrelated is fairly straightforward, and the message from Evsey Domar – nominal GDP growth reduces debt ratios – is fairly definitive. (This was discussed in the first part of this essay.) The interesting question is how debt and deficits can affect the ‘real economy’ in the long term? There are a lot of potential avenues for government debt to influence economic growth, and the distribution of incomes. Unfortunately, it is also an area of large controversy within economics, and so there are a variety of theories to work with.

I will now give an extended example to show how a long-term effect is possible. The example is based on a scenario that could happen in a modern economy, and it is not based on fables based on the premise of individuals bartering on a desert island. I also aim to make the example agnostic with regards to economic theory, although the lack of theory means that I cannot give an estimate of the size of the effect.

Tuesday, November 11, 2014

Looking At The October Canadian Job Surge

Chart: Canadian Employment Rate
The Canadian labour market - as measured by the Labour Force Survey - has been in fire for the last two months, creating 107,000 jobs. Monetary policy hawks could argue that this represents a change in trend, and that the labour market will start to rapidly tighten, hence the Bank of Canada's policy stance is too loose. I would argue that it is too early to draw such a conclusion, but this bears watching. I give one method to demonstrate that this is not the result of seasonal adjustment issues, unlike what happened recently in Australia.

Sunday, November 9, 2014

High Debt Levels Will Not Prevent Rate Hikes

One theory that I have seen floating around is that the "high" Treasury debt levels will prevent the Fed from raising interest rates. As someone who is in the "secular stagnation" camp (although I dislike the term), I can think of a lot of reasons why interest rates could stay low. But the level of debt is not one of those causes (as my earlier article noted, the high debt level is a consequence of slow growth). That said, the Fed has put itself into a position that it cannot hike rates extremely rapidly without paying a political cost.