Tuesday, January 26, 2016

notes from conferences

Took these notes about a year ago but forgot to publish them at the time. Here they are, mainly for my reference:



1.       Global growth remains at the 30y avg, although both DM and EM growth have slowed

a.       This is called Simpson's paradox, if you have both low-growth A and high-growth B growing at slower pace, but B is a bigger component, then A+B can grow at the same pace

b.      Structurally faster-growing EM is a bigger component now

2.       ECB has the biggest QE in terms of bond purchases divided by bond net issuance

3.       Oil prices will be lower for longer

a.       We are no longer in the 1974-1986 monopoly pricing regime where OPEC set arbitrary prices and adjusted supply accordingly

b.      We are now in a competitive pricing regime

c.       Supply

                                                               i.      Saudis are not going to give up mkt share

                                                             ii.      Middle East can't get much worse, tons of supply

                                                            iii.      Lots of storage is waiting for prices to come back, PE firms are buying energy corp distressed debt

                                                           iv.      No consolidation yet, but will happen if oil stays near $50

d.      Demand

                                                               i.      Demand intensity is going down, driven by China

                                                             ii.      China is now a price-setter not price-taker anymore, e.g. recent natural gas deal with Putin at 40% below mkt price, paid in CNY not USD

4.       Cheapest and most attractive major mkt is Japan

a.       Macro and FX are no longer the drivers

b.      Corps are using JPY depreciation to improve profitability rather than cutting prices

c.       Profit margin expansion is only half done

d.      18% of companies need more outside directors and to improve governance

e.      Institutional investors are placing more emphasis on ROE

5.       Asia - more easing to come

a.       Disinflation provides room for easing

b.      CBs are already behind the curve

c.       REER is actually up - USD appreciation was more than offset by EUR and JPY depreciation

d.      Asia is not as strongly affected by Fed or US growth as the rest of EM

e.      Relative growth is more favorable than the rest of EM

6.       China now is most similar to Taiwan in the 90s

a.       Taiwanese stocks grew 12x in 3y in the late 1980s

b.      Loss of competitiveness by 1990 due to rising labor costs led to slower growth

c.       Infrastructure investment led to credit growing by 100% of GDP

d.      Monetary policy was eased to maintain growth starting in 1995

e.      Rather than depreciate, the currency remained strong

f.        Current account surplus, protected financial system, fully domestically funded and strong external BS

g.       Reforms led to a smaller public sector and larger private sector

7.       China

a.       Next 5y, Asian African landmass will be hooked up with Chinese infrastructure

b.      Ricardian growth from infrastructure linkup for years to come

c.       Like Marshall plan, China is lending RMB abroad

d.      RMB internationalization: 30% global trade settlement is in RMB, up from 5% in 2012

e.      IMF may add CNY to SDR in November - China wants to maintain RMB bond stability

f.        Freer mkt - there have been 3 defaults including SOEs

g.       Mkt is mainly retail investors: all momentum-driven

h.      Govt has either cut rates or expanded stock connect program every time the mkt went down 5%






1.       US - attitude is more unilateralist

a.       Tech has allowed this: with drones and cyber, we can conduct war without allies

b.      Transatlantic relationship between US & Europe is the weakest since USSR collapsed - no chance of turning around in near future

c.       UK - no more special relationship

                                                               i.      UK is more nationalist, partisan and populist

                                                             ii.      No interest in leadership in the EU - in fact, it may leave the EU

d.      France - Hollande is a weak leader

                                                               i.      Largest, restless Muslim population in W. Europe

e.      Germany - de facto leader in EU

                                                               i.      More commercial and industrial focused than the US

2.       China - only country that has a "global strategy"

a.       No interest in fixing the Middle East

b.      No interest in military intervention

c.       Strategy is completely economic/mercantilist

d.      New Silk Road and Asia Infrastructure Investment Bank (AIIB) - Chinese version of the Marshall Plan

                                                               i.      $1 trillion in invest in infrastructure

                                                             ii.      This will align regional economies more closely with China and away from the US

                                                            iii.      IMF gives money only when you reform to look like the US - AIIB doesn't have such conditions

                                                           iv.      China is creating strategic relationships for their SOEs

                                                             v.      Even UK, Germany, and Korea are joining AIIB - they are hedging their US relationships

3.       Middle East - is going to a bad place

a.       US is not going to fix it

b.      China is not going to fix it

c.       Saudi was on a reform path - now it is more focused with military and regional problems

                                                               i.      Trying to consolidate the GCC

d.      Low oil is going to make things more dangerous

e.      Lebanon, Jordan and Egypt still need foreign aid which they are no longer going to receive

f.        ISIS and al Qaeda are becoming more attractive to young Muslims

g.       Sunni vs. Shiite sectarian tensions are center stage - rather than anti-US, Asia and Latam sentiment

h.      EU and Russia have disenfranchised Muslims

4.       Asia has real leadership, in particular: India

a.       Modi is the real deal, FM Arun Jaitley is very competent, industrial corridor states are fully aligned with BJP party






Q. Given Q1 GDP, where do you see economic growth for the rest of the year?

A. Q1 in general was disappointing. Most have attributed the weakness to transitory factors. While there is no question that weather, port strikes and residual seasonality have contributed, these 3 combined do not account for the majority of slowdown. Looking at the weak data pts since Q1, it can't just be seasonality.


Contrast this weak Q1 with last year's. Just as last year, Q1 weakness was largely unexpected. However, by May 2014, rest-of-year Q2-Q4 2014  growth was revised up. That is not happening this year and in fact, rest-of-year Q2-Q4 2015 growth has been downgraded. This year is not a repeat of last year, due to disappointing consumption numbers, an energy capex decline that was more than expected. We have lost some momentum in underlying performance, perhaps due to strong USD. Yes, there has been some bright spots such as autos and housing. Furthermore, there may be a lag of low gasoline price being passed through to consumers. Our data-dependent orientation is particularly important at this point, since there are more questions at this point in 2015 than in 2014.


Q: Thoughts on wages?


The rather strong sustained job creation has not resulted in wage increases above current modest levels. While surveys have said for 2y that wages would increase, every uptick has disappointed and come back down. Other measures of labor force slack may guide us here. If you look at the LT unemployed, they are very gradually coming back into employment. The natural rate is lower than we thought.


Q: What do you need to see to make your rethink what you've done?


A market event like the October 15 phenomenon (recall that there was an intraday peak-to-trough swing of 40 bps in the 10y yield). This was due to a multiplicity of factors. There has been a lot of changes in micro-market structure. 1) Expansion of bond funds, 2) reduction of dealer balance sheet capacity, 3) acceleration of HFT entry into the FI markets, 4) very low IR for 7y now. Anecdotally, we are hearing that it is harder to move large positions.


However, what's the correct point of comparison? I would argue that while markets in 2006 were very liquid, it was illusory liquidity. You could make the case that the superabundance of liquidity could also be negative for market structure health, because the pricing didn't correctly include illiquidity premium or incorporate sharp changes in creditworthiness. The eternal problem is that when daggers are falling, very few people are willing to catch. This doesn't change no matter how much liquidity there is. People fundamentally and behaviorally do not want to catch daggers.


Draghi said "get used to vol". Risk needs to  be pushed out to the end users.


We've been through this market change before. In the late 70s, money center banks were facing the rapid growth of capital markets, which was competition to them. Growth of MMFs gave people more savings options. This was a business model challenge. Another comparison: 12-14y ago, the funding mechanism for securitization faced similar challenges. The growth of capital markets will always continue and disrupt the existing paradigm.


Q: The international regulatory patchwork is confusing and creates challenges. There is fragmentation of international regulatory jurisdictions. How can the Fed help manage harmonization of standards?


Need to realize that Basel sets minimum standards. National regulations should exist on top in order to supplement them. We don't create ceilings, we create floors.






There are two predominant explanations for today's low demand:


1) the Reinhart/Rogoff story - there is significant debt overhang in both public and private sector and growth will suffer until the deleveraging process is done. I think this has some truth to it, but it's not obvious in places such as the US where banks and households have better balance sheets and private firms are swimming in cash.

2) the Larry Summers "secular stagnation" story - the future is not that exciting in terms of growth for structural reasons. I put more weight in this story. There is a slowdown in productivity growth. While this is bad news for the future, it also affects decisions today. Firms look forwards to the future and see low demand and choose not to invest today and consumers choose not to consume. This is a supply side phenomenon, but it explains low demand today.


The correct policy for our economy depends on which story you believe in. In the former, you need to restructure debt. In the second, you need to foster total factor productivity growth.


Q. Why has growth slowed in EM?

There are two reasons. You need to identify places where previous growth was "fake" (above potential GDP and not improving potential GDP) and where growth was for real, the economy was growing at potential. In the former, places such as Latin America were clearly growing above potential, and they did not do anything to improve their potential. Now they are merely giving back their above-potential gains. In the latter, in places such as China and sub-Saharan Africa, a slowdown is mainly due to a naturally falling potential.


Q. Should we concerned about rising levels of inequality?

There has been some effect on growth but that is not the main reason to worry about inequality. The problem is that there is a tech-based skills crisis. There is a large mismatch between those are willing to work and the type of people that firms are looking to hire. Krugman once said that all lawyers will be eventually replaced, I think that he's right. In solving this, institutions matter enormously. For example, CEO/avg wage differs hugely among countries. US has a much larger divergence in CEO/avg pay and I don't believe there is THAT much of a difference between US and French CEOs.


Q. Thoughts on globalization and international capital flows?

The idea that trade is a global growth machine is, to a first order, wrong. When you buy from someone else, your domestic industries suffer. The idea that a slowdown in global trade hurts global growth is something that I don't buy. Stan Fischer said, who needs ST capital flows. I agree, less financial flows is better.


Q: How has financial regulation over last 5y affect credit and growth?

More regulation leads to institutions to take less risk, this decreases first and second moments.  Do we want to live in a high reward high risk world or a low risk low reward world? After the crisis, we voted for the latter.


Q. Do you have any advice for the Fed? The IMF seems to like to give it. Should the Fed wait until 2016?

I was not involved in article 4, the IMF piece on Fed policy that is currently in the news. By the way, this commentary is something that we do all the time. This is part of our job. We talk about correct fiscal and monetary policies for all our member countries. The US should not be an exception.


Q. Is liftoff priced in? Is talk overdone?

This is one of the most anticipated Fed moves of all time. This is a data dependent decision. Will there be problems as the Fed raises rates? Perhaps. The plumbing may clink for a while. However, I doubt that this will create any global macro problems. This won't derail growth anywhere, US or otherwise.


Q. Was QE effective?

Yes, it showed that even when the policy rate is zero, you can still do a lot, although there are some side effects. CBs can get rates negative, but it shouldn't be too negative.  This can help on the margin. Rogoff wanted to make cash illegal and force everyone into an electronic monetary system, then there would be no ZLB (zero lower bound). In the absence of such a system, having a bit more inflation will decrease the probability of hitting ZLB. For this reason, I have advocated for a higher inflation target, something like 3-4%.


Q. Wouldn't a higher inflation target create a credibility issue?

Well, think about all the changes in policy targets in past years. The markets always adapt. Moving inflation target from 2->4% would not lead to hyperinflation.


Q. What's the difference between financial regulation and macroprudential policy?

Financial regulation: high capital requirement ratios but don't move it around

Macroprudential: low capital requirement ratios but have the flexibility to move it up and down in accordance to the macro scenario. This is essential for policymakers.


Q. Will there be spillovers into the emerging markets from the actions of the Fed/ECB/BoJ? RBI's Raghuram Rajan said that we need to rethink rules of game.


How bad is the equilibrium when every CB focuses on itself? It's not so bad. The Fed should focus on its impact in the US, not the impact outside the US. Yes, EM should consider various capital flow management tools: capital controls and FX interventions should be de-stigmatized and utilized more frequently. EM should be allowed to interfere with market mechanisms when they are bad. This is because some capital flows are bad, namely ST flows.


Q. Real capital accumulation is going down, is this due to uncertainty?

In school, you learn about the accelerator theory of investment. This says that investment decisions depend only on 1) current sales and 2) expected sales. I have found this to be mainly true; you don't need additional theories about uncertainty, other factors, etc. Combine this with low potential growth and you have a good explanation of today's current low investment.


Q. Thoughts on Greece?

There has been too much incorrect info. Institutions (i.e. IMF) have drawn a proposal that we presented to the Greek authorities, which included a very substantial easing of the pace of fiscal adjustment and pace of structural reform. VERY SUBSTANTIAL. It is completely feasible if accepted. This would require more financing from Europeans and some debt relief.







The average US growth for the decade has been 2.2%. We survey 1000 households per month: still a majority of people think the economy is on the wrong track.


Housing is improving slower than Fed would like. This is not a demographic issue. Alleged behavioral differences of millennials is a myth. Surveys show that millenials want homes, just like previous generations. A large number are renting single family homes, which means that they will eventually buy. Gen X is small proportion of population, they are step up buyers as baby boomers leave. Millennials are more conservative; they are merely awaiting real income growth. This will eventually come and provide housing demand.



Generally I don't take GDP data seriously. It is so heavily revised and there are problems with measurement... But let's take it seriously for the moment. If you take out residual seasonality, Q1 was 1.25%, which is a still a deceleration considering that the trend is 3% and potential growth is around 1.5-2%. Clearly there were transitory factors such as oil. However, I think it will be hard for Q2 to be lower than 3.5%.


The large fall in net exports (NX) in Q1 must be noise. Anyway, USD appreciation is not big enough and the US economy is not open enough for NX to really hurt. NX has contributed negatively to growth 19 out of last 25 years. A 10% REER appreciation leads to GDP levels falling by 0.3% in first year, 1.5% in second year.



Private growth (Total GDP minus Govt, or C+I+NX) remains close to 3%. Wage inflation pass-through is limited and takes time.


Q. Where is productivity growth? Isn't it a bit of a paradox that we're having all this tech innovation but there's no productivity?

Marcello. Yes, it's been dismal since 2004. Now the Bureau of Economic Analysis (BEA) has changed its GDP methodology to capture tech by including semiconductors. However, statistics cannot pick up managerial organizational improvements in logistical processes. The debate of real value-add of tech is ongoing. It could be that tech has huge value-add and we're not measuring it. Or it could be that there simply isn't that any value. Think about conf calls. Now we can see each other's faces on iPhones. Does that actually improve anything?


Kathy. More optimistic about extraordinarily low productivity growth. There are areas or pockets where productivity is stronger than measured. There will be huge advances in areas such as in healthcare and biotech, which will experience incredible change with new tech such as drugs and big data. This is not captured very well in data.


Q. While real disposable income is up 3.5% YoY. However, despite the sharp decline of gasoline prices, most of this has been saved than spent. Is this permanent shift towards saving more, or is consumption just lagging?


Doug. Surveys show conservative behavior.


Marcello. Scars still there. Oil tax cut will be here for 2y. Quite optimistic about C going fwds. Ignore Q1 data. Strong C in q4.


Kathy. Disposable income is growing faster than consumption. We will see more C. More sanguine abt consumers spending gasoline windfall.


Q. Reinhart Rogoff. Debt run up and crisis leads to 7-8y of slow GDP growth. Michael Bordeaux said same abt housing crisis.


Doug. US demographic profile is one of the best in the world. Construction is 1.6mm annually. Our forecast is 1.15mm, way below normal, some ways to go. Directional path is right. Growth will accelerate.


Kathy. Look at Nordic countries. Took a decade to come back to reasonable growth. Finland saved by Nokia, need positive tech dynamic to help economy recapture prior growth capacity. Yes we go back to trend but at slower level. Going fwds other issue is that divergence of MP has implications. We see Fed lift rates this yr maybe Sept, ECB and BoJ continue QE, we will see development of MP clusters. Latam Canada can't fight the Fed. EU can't fight ECB. Asia is complicated, deal with BoJ and PBoC.  Regional trade blocs instead of previous global trade dynamics.


Q. Last time Fed hiked rates, no iphone. When hike rates and what impact on US eco.

Doug. September is our forecast for 2y.

Marcello. I think Sept. Look at NFP and UE today. Fed focuses on labor.  Most telegraphed hike on the face of earth. There will be no surprise.


Look at all Fed hikes in last 30y. USD goes down as often as it goes up. Stocks are sideways or up. Crazy things can happen.


Q. NAIRU is still important? What chg in labor mkt that makes it so low?

Marcello. 0.3 decline in NAIRU. More old ppl


Q. Low rates? Curve flatter?

Doug. Yes the fed will be low for long.

Marcello. Way too flat. Fed has to hike faster than signaling. Potential for upward surprise. Close to PGDP, not much room to grow fast. 2.5 in 2017 instead of below 2.


Q. Pent up demand for housing is huge. Deficit is significant. Housing starts to go up?

Doug. Hhld formation is half of LT avg. long run is driven by demographics. 25-34 cohort there are 6m more than when boomers were that age. There's been some pick up in formation. Largest share of young adults living at home. Survey parents if they love them and how long, love them for 2-5y. 70% were happy but exp them to move out. 

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