For Your TGIF Procrastinations – April 3, 2015

SwitzerlandHere is what I read on Thursday and early Good Friday. Hope you will find these interesting and useful. Some are market related, some relate to geo-politics and some are for fun.

  1. Central Bank Solvency and Inflation – When the Fed buys long-term Treasuries by issuing interest-bearing reserves, it effectively retires this long-term debt, at least temporarily, and replaces it with very short-term (overnight) debt reserves. Seen from this vantage point, the hyperinflation fears mentioned above appear misplaced: Why should a change in the maturity structure of the federal debt generate hyperinflation as long as the central bank continues to follow a Taylor-type rule for setting interest rates?
  2. Why are interest rates so low, part 2: Secular stagnation – Suppose that, because of secular stagnation, the economy’s equilibrium real interest rate is below minus 2 percent and likely to stay there. Then the Fed alone cannot achieve full employment unless it either (1) raises its inflation target, thereby giving itself room to drive the real interest rate further into negative territory by setting market rates at zero; or (2) accepts the recurrence of financial bubbles as a means of increasing consumer and business spending.
  3. Why are interest rates so low, part 3: The Global Savings Glut – There is some similarity between the global saving glut and secular stagnation ideas: Both posit an excess of desired saving over desired capital investment at “normal” interest rates, implying substantial downward pressure on market rates. Both can account for slower US growth: Secular stagnation works through reduced domestic investment and consumption, the global savings glut through weaker exports and a larger trade deficit. However, there are important differences as well.
  4. Traders Are Now Expecting the Fed to Raise Rates Later Than Ever Before – As of Wednesday’s close, Federal funds futures implied liftoff from zero in the final week of November, according to an index maintained by analysts at Morgan Stanley. That’s been pushed back from September as of two weeks ago, before the policy-setting Federal Open Market Committee’s March meeting.
  5. Trading Floors Can’t Feed Africa – Trading floors have flopped in Zambia, Uganda, Nigeria, Zimbabwe, and Kenya. Each one, analysts say, suffered from the same flaw: a top-down approach that’s better at attracting foreign aid than at improving farming practices and developing transportation and communications networks. Donors like exchanges because they look like institutions in their own countries, says Peter Robbins, a former commodities trader in London who’s studied African exchanges. And “African leaders like to show off trading floors to show how modern their countries have become,” he says.
  6. Power and Paychecks – Most people would surely agree that stagnant wages, and more broadly the shrinking number of jobs that can support middle-class status, are big problems for this country. But the general attitude to the decline in good jobs is fatalistic.
  7. The Chinese Billionaire Zhang Lei Spins Research Into Investment Gold – To outsiders, Hillhouse is a mysterious firm led by a secretive man who happened to strike gold early on. To his investors — which include the endowments for prestigious universities like M.I.T. and Yale, sovereign wealth funds and wealthy entrepreneurs — he seems incapable of making a bad bet. But as China’s economy hits a series of economic road bumps, his next set of investments could define his legacy.
  8. On Human Fertility, Part 4 – The Arab world is also slowing in population growth. When Saudi Arabia is near replacement rate at 2.17, you can tell that the women are gaining the upper hand there, which is notable given the polygamy is permitted. In the Developed world, who leads in fertility? Israel at 2.62. Next is France at 2.08 (Arabs), New Zealand at 2.05, and the US at 2.01, slightly below replacement. We still grow from immigration, as does France.
  9. Output, Employment and Unemployment: Some Updated and Some New Results – This Chart confirms what Janet Yellen has repeated a number of times in her speeches, especially during the period of quantitative forward guidance from December 2012 to December 2013, namely that the unemployment rate is not the only variable to be taken into account by the FOMC in its monetary policy decisions. Indeed, the prescriptions of a standard Taylor rule, based on the total unemployment gap, would have implied a rate increase from the second half of 2013, while a measure of the short-term gap would have implied a rate increase already in 2010. At this point, the specification using the long-term unemployment rate would still prescribe a negative policy rate.
  10. Oil sands outlook – A couple of factors have cushioned Canadian oil producers slightly from the collapse in oil prices in the U.S. First, while the dollar price of West Texas Intermediate has fallen 45% since June, the Canadian dollar depreciated against the U.S. dollar by 18% over the same period, and now stands at CAD $1.26 per U.S. dollar. Since the costs of the oil sands producers are denominated in Canadian dollars, the currency depreciation is an important offset. There has also been some narrowing of the spread between synthetic and other crudes.


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