Vogonomics

  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...

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...

"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...

21 is lucky; it is the number of dots on a dice; it is the winning hand in Pontoon; the final act in a famous university drinking game and the traditional age of majority. 2021 is going to be lucky; the return to normality and remembered as the end of the coronavirus pandemic, at least as an economic event for the major industrialised economies.  The health crisis will not be over; restrictions will continue, but the major industrialised economies will move on encouraged by the hope of immunity and faith in their exceptionalism. The rebound after the first lockdown demonstrated that the bigger the fall, the bigger the bounce. The free world will once again ignore mortality and focus on the base levels of Maslow's Hierarchy. The demands of publishing schedules ensured that most 2021 outlooks were written and published in late October and early November before the outcomes of three crucial known unknowns were revealed. These were the Presidential elections and the special Senate elec...

QE by the Bank Of England in Q2 was enormous ! They bought a staggering £235m / bp. The graph below shows qtr by qtr DV01 bought by the BoE over the last 10 years. (forward curve risk buckets are shown by colour, data BoE, analysis CRZ ). That means that for every 0.01% move in yields the value of Gilts bought from the market in Q2 changes by £235m. Notwithstanding, that something needed to be done to restore a functioning market mid-March,  we should maybe question (as Paul Tucker does here ) if this scale was truly justified by the economics. Is it a surprise that the curve is locked at rock bottom [flat] and not [yet?] responding to the deteriorating fiscal position? However, as the OBR points out, “... higher public debt also increases the sensitivity of the public finances to higher interest rates, increasing the risks from pursuing a fiscal strategy that assumes that financing conditions will remain favourable over the longer term”. The graph below shows the historical re...

High yield indexes yield more than the Treasury + equity put hedge. The above chart is a toy spreadsheet model of the concept outlined in the papers below using put strike levels that gave the same daily volatility and range over the data period.  The Empirical Merton Model and Option-Based Credit Spreads  by Christopher L. Culp are worth a read. There is definitely a conceptual elegance to viewing credit in aggregate as Treasurys­ (risk-free rates) plus puts (at various strikes) on broad equity indexes. and it encapsulates perfectly the notion that by owning a corporate bond, you are long the risk-free rate and short tail risk. .

Real GDP forecast using labor force participation as an indicator variable  This is a follow up from the St. Louis Fed blog post last year, suggesting that GDP / labour force participant had continued on trend post-crisis, this was their chart: Data from  FRED and forecast from Indicio , suggesting 2.2 to 2.4% growth is a reasonable estimate for trend growth over the next couple of years. This is before adjusting for known demographics (i.e., assuming the recent trends in labor force participation. No atrophy post-crisis to be seen here.

With knowledge or expertise on the x-axis and skill on the vertical axis; we're going to postulate that "conviction" seems to be an S-shaped curve, rising slowly at first and then zooming to unrealistic levels. Realised skill, on the other hand, is far more likely to grow at a decreasing return to effort in a much smoother way, topping out at the limit. Background reading on the weak correlation between self-assessment and performance in this article .