• Demographics are driving wages lower, which is negative for investment returns

    For managers of money, the post-crisis low growth world has had major implications for asset allocation strategies. Assumptions about returns are greatly affected by the both monetary easing used to counteract the slowing and the yield curve flattening indicative of that easing’s ineffectiveness. Recent research on demographic trends and wage growth suggest trends now in place may continue, with grave implications on returns.

    Demographics are driving wages lower, which is negative for investment returns
  • Monetary policy is at the end of the line

    The last few days have made clear that monetary policy is having less and less impact as time goes along.In particular, the latest salvos from the Bank of Japan smack of desperation, as if BOJ Governor Kuroda has decided to throw everything but the kitchen sink into his grab bag of unorthodox monetary policy. Because the Bank of Japan is so far along the curve toward both secular stagnation and unorthodox policy to counteract that slowing, we should pay attention to how their experiments go. I do not expect good results.

    Monetary policy is at the end of the line
  • The problem at euro banks

    As the Brexit worries began two weeks ago, I flagged Italian banks – more than the UK economy – as one of my principle concerns, because of the potential to cause systemic damage to the euro system. And now the contagion is spreading, with Deutsche Bank the most obvious weak link. The question now is twofold. First, does the Italian banking crisis solve itself without a major overhaul of EU institutional arrangements. Second, if not, how does the EU solve this problem? Some brief thoughts below.

    The problem at euro banks
  • Why Britain might not leave the EU and the next Prime Minisiter could be female

    This is a quick run through of the post-Brexit vote decision tree. The opportunities and constraints after the UK vote to leave the EU are now coming into view. It is clear that the UK is likely to leave the EU given not only statements by Prime Minister Cameron but also the Home Secretary Theresa May, both of whom campaigned for ‘Remain’. But it is also clear that the EU will not broker formal or informal discussions with the UK until the UK has invoked Article 50, which can only be done by an act of Parliament. Below, I want to run through some of the constraints in order to build a few scenarios that I see as possible now that we are a week into the post-Brexit era.

    Britain's Home Secretary Theresa May delivers her keynote address on the second day of the Conservative party annual conference in Manchester, northern England September 30, 2013.  REUTERS/Phil Noble (BRITAIN  - Tags: POLITICS SOCIETY) - RTR3FFSM
  • The downside risks introduced by the UK Brexit referendum

    The unexpected ‘Leave’ victory in the recent referendum on EU membership introduces considerable political risk by elevating tail risk scenarios to reasonable worst case status. However, in a global economy that is already slow and already lacks policy space, the referendum outcome also introduces economic and financial risk. Below I have some general thoughts on those risks, with the US dollar, Italian banks, and Japanese deflation foremost among them. At a later point, I hope to also go into some more detailed scenario handicapping.

    The downside risks introduced by the UK Brexit referendum
  • Why I’m on US recession watch despite 2% growth

    As I start this post, I am naming it “Why I’m on US recession watch despite 2% growth”. I don’t know if that name will stick when I publish this piece; nonetheless, that is the theme I am trying to get across. When I look at the economic data, it shows a near-term in the 2% growth range – stall speed or slightly below. But when I look at the same data for medium-term clues, I still see reasons to be concerned, and, therefore, I continue to be on recession watch. Finally, I am not at all sure the Fed sees the picture as I do. December was a policy mistake. And I can’t rule out others going forward.

    Why I’m on US recession watch despite 2% growth
  • Low interest rates and banks’ net interest margins

    Since the Global Crisis, interest rates in many advanced economies have been low and, in many cases, are expected to remain low for some time. Low interest rates help economies recover and can enhance banks’ balance sheets and performance, but persistently low rates may also erode the profitability of banks if they are associated with lower net interest margins. This column uses new cross-country evidence to confirm that decreases in interest rates do indeed contribute to weaker net interest margins, with a greater adverse effect when rates are already low.

    Low interest rates and banks’ net interest margins
  • Negative interest rates are just a tax on reserves that lowers net interest margins

    The primacy of monetary policy continues unabated as central banks go further and further down the rat hole of increasingly desperate measures to boost demand. First, it was quantitative easing. Now, the latest scheme is negative interest rates. They tell us that monetary policy is not exhausted and that still more policy initiatives lie ahead, particularly helicopter money. However, we should be sceptical that any of these policies will gain meaningful traction before another economic downturn. Brief comments below

    Negative interest rates are just a tax on reserves that lowers net interest margins
  • The German current account surplus requires deficits elsewhere

    Germany is a member of a currency union over which it has no monetary authority. So no one can accuse the country of ‘manipulating’ its currency. Yet, Germany is displaying huge current account surpluses that are illustrative of a dangerous imbalance which when corrected will cause violent disruptions to trade and lead to populist and autarkic political rhetoric. This is what awaits us when the global economy slows further.

    The German current account surplus requires deficits elsewhere
  • Bill Gross on helicopter money and Universal Basic Income

    Technological advancement in a world of high private debt means a substitution of capital for labor without big increases in demand. It is a recipe for low or negative growth. Add in demographic challenges in many countries and you have a public policy problem that has been building and will become acute in the coming years. Below I want to say a few words about this problem, inspired by Bill Gross’ most recent investment outlook at Janus Capital.

    Bill Gross on helicopter money and Universal Basic Income

All Content

Britain's Home Secretary Theresa May delivers her keynote address on the second day of the Conservative party annual conference in Manchester, northern England September 30, 2013.  REUTERS/Phil Noble (BRITAIN  - Tags: POLITICS SOCIETY) - RTR3FFSM

Theresa May: Britain will definitely leave the EU

British Prime Minister Theresa May set out details for her vision regarding the UK’s relationship with the EU In a speech today that will please those that campaigned to leave the EU. The Prime Minster, as expected, made clear that this will be a ‘hard Brexit’ because there will be not attempt by government to maintain Britain’s access to Europe’s single market. The biggest piece of new news in her speech was her acquiescence to a vote by Parliament on an EU deal, something that pre-empts a decision by the high court on the government’s ability to use Royal prerogative to bargain on the Queen’s behalf

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Hammond’s ‘whatever it takes’ strategy for a hard Brexit

On Friday, I wrote why, unlike Bank of England Governor Mark Carney, I believe the economic threat of Brexit to the British economy is now higher. The gist of my remarks was that an actual trigger of Article 50 under hard Brexit circumstances is when we should expect any economic impact from diminished consumption and investment. Some brief comments below

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Why the Brexit risk is now higher, not lower

When the Brexit vote first happened, I indicated that I didn’t see the huge risk to the UK that others did. In fact, I thought the initial tail risks were elsewhere, like the Italian banking system. The economic risks for the UK were always overstated because of monetary, fiscal and currency offsets. But now that a hard Brexit comes closer, the risks have increased, not decreased, as Mark Carney, the Bank of England Governor contends. Some thoughts below

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The potential for military confrontation due to Trump’s foreign policy

A few weeks ago I was writing about a likely pivot away from China toward Russia in the Trump administration. And my conclusion was that a violent pivot created a lot of unknown unknowns – to use a Rumsfeld phrase. It is the uncertainty and unpredictability that is the biggest problem in my view. I was mostly talking about trade and the economy though. But given China’s latest statements about potential military confrontation, I wanted to follow up with some brief thoughts on the geopolitical side of things.

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The country to watch in 2017 is Turkey

The country to watch in 2017 is Turkey

If I could name three countries that will be particularly difficult for the US to deal with geopolitically, I would pick Russia, China and Turkey. The first two are obvious choices but the third is going to be equally tricky because of the increasingly heavy-handed way Turkish President Erdogan is cracking down on alleged Gulenists in the aftermath of last summer’s attempted Coup d’etat. It is Turkey’s unique relationship to the West via NATO and the increasingly authoritarian rule which will make the relationship tricky in 2017.

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Monetary offset, the strong dollar and China’s currency manipulation

Monetary offset, the strong dollar and China’s currency manipulation

With the Fed talking up the likelihood of three rate hikes in 2017 while other central banks are still in easing mode, the potential for a US dollar rout and a concomitant closing of the US trade deficit is pretty low. Therefore, given Donald Trump’s hawkish rhetoric on China, the potential that the US government labels China a currency manipulator for the first time since 1994 is high.

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No one talks about Eurobonds anymore. Here’s why

Eurobonds are one way of tying the fortunes of eurozone countries together by eliminating – or at least greatly reducing – default risk. The thinking is that if you have a common currency and free labour movement and you still don’t have economic convergence you need to go further in uniting Europe politically and economically. No one is talking about eurobonds though. That’s because they won’t happen.

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Donald Trump the risk taker, trade war edition

Donald Trump the risk taker, trade war edition

This is a follow-up to yesterday’s post about Donald Trump and confirmation bias. But it’s going to be a different beast altogether because here’s where I am going to lay out my thinking about Trump and trade. Let me cut to the chase. I think there is a high likelihood that Trump starts a trade war with China. I’ve written about this before – twice! But now I want to outline some possible economic and geo-strategic outcomes based on this. Some of these outcomes are pretty good. But some are catastrophically bad.

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Republican presidential candidate Donald Trump speaks to supporters as he takes the stage for a campaign event in Dallas, Monday, Sept. 14, 2015. (AP Photo/LM Otero)

Donald Trump the risk taker, confirmation bias edition

My narrative is going to be that Trump is a risk taker. And the conclusion I have drawn is that this risk taking will lead to big surprises — some of them negative, but some positive. Afterwards, rather than give you a bunch of confirming information though — I’m going to tell you about my search for non-confirmatory data, because that’s how my process works.

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More on the coming trade war with China

More on the coming trade war with China

On Monday, I wrote a piece outlining how the US has pivoted away from China toward Russia. And the conclusion I drew from the circumstances was that this pivot will create a lot of geopolitical and economic uncertainty depending both on the importance of the actors on the world stage and the violence of the pivot. As US President Obama is constantly at pains to stress, Russia is not a major player economically. So the pivot toward Russia is one of geo-strategic importance. But the pivot away from China has economic implications. And China-hater Peter Navarro as Trump’s new trade czar is telling us the pivot will be violent.

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Black Swan Investing and the breakup of Europe

This isn’t going to be a thematic post on how to profit from Europe’s breakup, despite the sinister title. Instead, it’s a potpourri post – a mashup of different ideas I have right now and want to run by you to organize my thinking about them. I used to do this a lot more in the past – and I found it useful; I hope you did too. So for lack of a coherent theme, I chose the title above. Here goes.

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Policy divergence, the strong dollar and trade war with China

Policy divergence, the strong dollar and trade war with China

I have heard some commentators say that the concern over a strong dollar is overblown. I don’t think it is. In the context of heightened tensions with China, the strength of the US dollar will be a key issue affecting Asia in particular. I want to flesh out a few thoughts here, especially regarding the pivot by the US toward Russia and away from China.

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