Vogonomics

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COP26 and the Paradox of Thrift

November 15, 2021

The climate crisis is irrefutable, and action must be taken to stop the planet from hurtling towards disaster. But, at the same time, it is crucial for governments, central banks and financial markets to recognise the inevitable short term negative externalities arising from the fight against rising temperatures. De-carbonisation means under-consumption. With under-consumption comes the paradox of thrift. The rise of global savings and the paradox of thrift will be most acutely felt amongst the so-called mercantilists, but economic growth will also be constrained in the rest of the world, with consequent impact on domestic politics, geopolitics and income distribution. The COP26 Climate Conference is important because of the participating nation's commitments under the 2015 Paris Climate Agreement; they agreed to strengthen their climate commitments every five years. However, these promises are non-binding "National Determined Commitments". When you add up all of these na...

Evergrande Accelerates China’s Long March to Net-Zero Growth

October 20, 2021

The collapse and imminent bankruptcy of Chinese property company Evergrande is not and never was the country's Lehman's moment. This false depiction is a classic example of the financial markets' favourite trope and behavioural economic sin, referencing the straw man. The straw man provides displacement to distract from the real question: if Evergrande is not Lehman's, what is it? The answer is considerably longer than the thousand words afforded by this website, but in summary, I believe that the collapse adds momentum to China's inevitable long march towards net-zero growth. China's economic miracle will not end with a bang but with a whimper. There are superficial comparisons between Lehman and Evergrande; both were over-indebted companies involved in over-inflated property markets, both were companies brought low by authorities application of moral hazard. The best depiction of moral hazard "Dans ce pay-ci, il est bon de teur de temps un admiral pour en...

The Big Picture

March 31, 2021

“But this long-run is a misleading guide to current affairs. In the long-run, we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again” . John Maynard Keynes. And as we know, the long-run is made up of a series of short-runs, and there is always a danger that economists and macro strategists conflate the two. Two behavioural sins follow, which unsurprisingly are not mutually exclusive. The most common, particularly for hedge funds and traders, is the immediacy bias, where the focus is entirely on the short-term, and more significant trends go unnoticed. This behavioural sin is matched by the equally insidious “tunnel vision”, exclusive focus on the long term, or more generously, three or four moves into the future. Admittedly a sin that can ultimately be successful, providing the analysis is correct, but it can lead to wild swings in unrealised P&L and man...

In Bill's World Asset Price Inflation is Easy

March 19, 2021

The Federal Reserve has revised up its economic forecast for 2021 as far as it dares. But for all of this optimism, and at 6.5% real GDP growth, it is predicting the most vigorous growth since 1992, when the economy was throwing off the shackles of the Savings and Loans bust, its forecasts for this year are still materially below consensus forecasts. In the wake of the two fiscal packages, totalling nearly 14% of GDP and evidence that consumers have built up savings of more than $1.6tr during the pandemic, investment banks are competing to forecast the strongest growth rates for 2021. I still think that these market forecasts, which are rising north of 8%, are still too low. Economists are intimidated by large numbers, but the massive stimulus and pent-up demand suggest that annualised growth will be stronger still. The risk for the Fed is that this strength is immediate. Citibank's US economic surprise index has dropped to its lowest level since last June as recent data has disa...

Stuart's Breakfast Orange; Roaring Twenties or a Pig in a Poke

February 26, 2021

There is a great deal of talk about the Roaring Twenties. In the depth of winter lockdown, it's not surprising that economists have crowded around the zoom campfire telling tales of better times to come. Moreover, there has also been the retrospective justification of buoyant risk markets. The narrative is adjusted to fit the performance. The Roaring Twenties, the decade of strong growth that followed the last global pandemic, Spanish flu, was primarily an American affair. Most other counties were constrained by the inappropriate return to the pre-War Gold Standard exchange rates. However, the American-centric Roaring Twenties narrative is also supported by the President's decision, together with his Treasury Secretary and former Fed Reserve Chair, Janet Yellen, to go large and larger still on fiscal policy. Donald Trump continues to exert his malign influence on the Republican Party, further reducing the scope for bipartisan agreement over Biden's $1.9tr additional fis...

Stuart's Breakfast Orange; The “Lucky” Country in “Lucky” 2021 – A Pontoon Bridge to Normality

February 11, 2021

Now that specific certification is no longer necessary, we all want to be Australian, at least for 2021 and maybe 2022. Australia, and its better rugby playing neighbour New Zealand, have become models for this pandemic. Suppress the virus domestically, but prevent importation of new infections and more virulent strains by closing down borders; domestic services can then thrive, and more importantly, life can return to "normal" without the disabling "mortality" fear. Foreign travel, tourism and education services remain depressed, but with plentiful liquidity from the Reserve Bank of Australia and RBNZ, and record expansion of fiscal policy, consumers have had the means to increase spending on other sectors. The success of Australia's pandemic strategy has resulted in a smaller than expected decline in GDP during 2020, and the Reserve Bank of Australia expect that real activity will return to its end-2019 level by the middle of the year, 6-12 months earlier t...

Stuart's Breakfast Orange; News Flash for Fed; Seasonally Adjusted there are no Pandemics in April

February 03, 2021

"you cannot predict inflation or deflation until you understand the extent of the virus over the next six months" . John Mauldin's precise words show why the Fed's January meeting is a holding meeting. The central bank added progress on vaccines to its list of uncertainties but maintained confidence in the economy's outlook. However, as my friend and former colleague Meghan Greene wrote in the FT last week, Murphy's law suggests that the risks remain on the downside. Therefore it's not surprising that the Fed maintained, that they're not even thinking about thinking about raising rates or even tapering its bond purchase program. Treasury market bulls have come to view FOMC press conferences as a reliable source of profit and last week's meeting was no exception. Major western industrialised economies, don't have a good pandemic record and as a result, the Antipodes are increasingly being viewed as the role model for the initial post-pandemic p...