Macroeconomics

Snippets on the big picture.

Macroeconomics

Consumer Confidence

  • Pretty staggering chart.
  • “Buying conditions for cars, houses, and large durable goods fell to multi-decade lows in June, according to the University of Michigan survey, meaning the vast majority of respondents believe it’s a bad time to buy the above“.
  • Consumer sentiment about the economy is also at a 40-year low. Interestingly, Oaktree make the point that the magnitude of decline could be skewed by political bias.
  • “For context, in June 1980, the difference between sentiment figures for self-identified Democrats and Republicans was 4.1 points. The gap is currently 31.5 points. This is another reminder of how people can interpret the same fundamentals very differently.“
  • Source.
Macroeconomics

Hoisington Reading

  • Hoisington AM, as long duration bond fund managers, practice sound economic thinking.
  • Hence, especially in the current situation, it is always worth reading their quarterly letters.
  • Q1 letter covers why they think US monetary policy has been a disaster, causing a cost of living crisis. In terms of outlook, they rattle off a huge list of recessionary indicators flashing red but place the outturn firmly at the command of the Fed.
  • Q2 letter discusses the damaging effects of rapid monetary policy acceleration and deceleration. It also prints another list of already present recession indicators.
  • The key balance point remains – recession is in the works which pushes inflation/growth/yields down. However, if the Fed falters, returning to a pandemic type response next year – then we have another cost of living crisis to contend with.
Macroeconomics

What was the effect of Brexit

  • On the 23rd of June 2016 the UK decided to, by a slim majority (51.9%), to leave the EU.
  • Some six years later this comprehensive report looks back to analyse the impact.
  • The hit to business investment, as seen in this chart, is clear – “UK business investment fell by 0.1 per cent a quarter on average in the three years post-referendum, compared to growth of 1.7 per cent a quarter on average growth in the previous three years, and ongoing growth in other G7 countries.“
  • However, the universally held belief that trade with the EU would suffer, didn’t materialise. “The UK has now been trading under the terms of the TCA [Trade and Cooperation Agreement] for 18 months, and, although UK imports to the EU have fallen relative to the rest of the world, the share of goods exports to the EU remains at its pre-Brexit levels.“
  • Lots more analysis and data inside.
Macroeconomics

Rhine River Water Level

  • Worrying development as the water level in the River Rhine drops to critical levels.
  • The river is vital, in that 80% of German inland water way goods transport relies on it.
  • This is especially important for bulk commodities and disruption could cause a 1% hit to German industrial production (at the worst point).
  • h/t Daily Shot.
Macroeconomics

Infrastructure Building

  • Interesting article arguing that state capacity is the real constraint for delivering infrastructure projects, not interest rates.
  • “The new tunnels for New York’s East Side Access project cost about $4 billion per kilometer, while Paris built a similar project (infill development, went under the Seine, had problems with catacombs) for $230 million per kilometer. Copenhagen, Barcelona, Naples, and Milan were all cheaper still, while South Korea was generally the cheapest, with a tunneling cost around $100 million per kilometer, or perhaps less. That’s quite a difference in state capacity.“
  • It’s not just tunnelling – NYC spent $39m per station to add elevators, Boston $25m while in Berlin it cost just $2.6m.
Macroeconomics

UK Inheritance Tax

  • UK’s Inheritance Tax (IHT) system seems broken.
  • The effective rate looks very different to other countries and raises less than it should.
  • In addition, take this chart from HMRC’s (UK tax authority) analysis of 2016/17.
  • It shows estate values on the x-axis and the effective tax rate on the y-axis.
  • Notice the huge drop off for large estates (£9m+).
  • It turns out the IHT is only progressive for mid/upper-mid classes.
  • There are plenty of reasons why this is (listed in the article).
  • IHT is “a tax with a terrible combination of a high rate (which makes it unpopular and drives avoidance) and poorly targeted/overly-generous exemptions (which then enable avoidance).“
Macroeconomics

Inflation Inequality

  • UK latest (April) headline inflation came in at 9%.
  • Until April inflation was hitting all households the same.
  • April was different, as Ofgem raised the energy price cap by 54%, leading to a 70% YoY increase in gas/electricity costs.
  • As poorer households spend more of their budget on energy, inflation is starting to tilt towards hitting them harder.
  • Ofgem is communicating a further rise of £800 for the price tariff cap in October, so the situation could look a lot worse.
  • “Analysis suggests that the poorest households may face average inflation rates of as high as 14%, compared to 8% for the richest households.“
Macroeconomics

US Oil to Gas Ratio

  • Before shale took off oil to gas prices averaged 8 to 1 – close to their energy equivalence ratio.
  • Since 2013 this ratio has averaged 20 to 1.
  • Outside of North America the ratio is 3 to 1.
  • “In other words, US gas is priced at an energy-equivalent discount of 56% to world oil and a 77% discount to world gas. In our 35 years investing in global energy markets, we have never seen such a wide disparity.“
  • Source (including arguments on why it might revert).
Macroeconomics

Energy Misunderstood

  • “85% of energy usage comes from burning things” and “human civilisation is powered by combustion“
  • So starts this excellent post on the current state of affairs and how they are described by politicians and the media.
  • The first big point is electricity does not equal energy. Electricity is only roughly 20% of world energy use.
  • Therefore, renewables, a minor part of electricity generation, are only a slither of the much bigger energy pie.
  • This chart “hammers” the point home.
  • As does this – from individuals in the know – “a net-zero policy, actually implemented “would certainly be the most significant act of mass murder since the killings of one hundred million people by communist regimes in the twentieth century—and it would likely be far greater.”“
  • Tough reading.
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