Macroeconomics

Snippets on the big picture.

Macroeconomics

Future of Cities

  • A really brilliant interview with Enrico Moretti, a researcher in labour and urban economics.
  • He makes two points on the future of post-pandemic cities, which, due to agglomeration effects he sees as bright.
  • There will be two forces – the first as employers accept some working from home, workers will accept a longer commute if it is less frequent, thereby growing the size of cities and hence the amenities they support.
  • This process will also lighten the load on the urban core – thereby making it more attractive.
  • Which force will win out is yet to be seen.
Macroeconomics

UK Retail

  • Nearly 11,000 stores (defined as retail, restaurant and leisure premises) permanently disappeared from UK retail landscape last year.
  • This is largely coming from chain stores (-9,877) with the independent market shrinking only (-1,442).
  • The article does say that many more remain temporarily closed so the full impact is not clear.
Macroeconomics

Mortgage Payments

  • Alternative way of looking at the US housing market – suggesting it isn’t as frothy as it seems.
  • Adjusted for inflation and interest rates, using median house prices and a 20% downpayment the monthly mortgage payment in the US has actually come down over time.
  • This is especially so if you adjust for the “quality” of the median house.
Macroeconomics

Inflation Extrapolation

  • Nice chart from KKR showing how investors in the 2000s have over-extrapolated the persistence of early cycle inflation.
  • The reason this happens is early cycle pops in commodity prices and disposable incomes don’t flow through to core consumer prices.
  • Consumer goods themselves are also only a quarter of core CPI.
  • See page 17 of the report for details.
Macroeconomics

Inflation pt 2

  • Most indicators suggest inflation is heading higher in 2021, though there is some disagreement (here).
  • Here is one more from Nordea to add to the list.
  • The bank argues overshooting inflation will be harder to defend in an average inflation targeting regime than when it is below target.
  • The Fed and the market, as we wrote before, need to discern whether this is transitory or persistent.
Macroeconomics

Inflation

  • Inflation has been a big topic in markets recently.
  • This post is worth reading to understand the key distinctions between transitory and persistent inflation.
  • Interesting stat – sectors that are vulnerable to post pandemic consumption shifts are less than a quarter of PCE inflation component weights.
  • The bottom line is it is important, for markets and the Fed, to watch labour markets alongside inflation.
Macroeconomics

Market Inflation Expectations

  • “The five year constant maturity Treasury yield has risen; but after accounting for the estimated term premium, the increase is much more modest, if not negative. Moreover, expected 5 year inflation has not on net moved much over 2021.“
  • Correction: One needs to also adjust for the liquidity premium.
  • Source.
Macroeconomics

Long term currency movements

  • This chart presents exchange rates against the US Dollar over a long period of time.
  • The values are indexed to 1.0 in 1900.
  • Over 121 years most currencies depreciated against the dollar.
  • The number of Italian lira (then Euros) that could be bought with one US dollar is 280 times more now than in 1900 – a huge depreciation.
  • Only the Swiss Franc has meaningfully appreciated against the dollar in this period.
Macroeconomics

Savings

  • There has been a colossal build up of savings at households.
  • By Q2 Goldman’s expects this to be 11% of GDP.
  • Many think this could be unleashed leading to a huge recovery.
  • It is important not to view savings in one sector outside of the savings/dis-savings of other sectors (especially the government sector).
  • This is an idea popularised by Richard Koo as a way to understand the great financial crisis.
Macroeconomics

Commodity Supercycle

  • There is a lot of talk about a new commodity supercycle.
  • This chart suggest it might be ending before it starts – remember China is the largest consumer of most commodities.
  • After the boom decade a lot of this consumption is driven by the mini leverage and de-leverage cycles in China – summarised by a credit impulse.
  • The latest measure of this credit impulse is turning down, which leads commodity prices by 12 months.
  • h/t The Market Ear.
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