Macroeconomics

Snippets on the big picture.

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.
Macroeconomics

Taiwan

  • An investigation by Reuters suggests China is using “gray-zone” warfare to subdue Taiwan via military exhaustion.
  • “The risk of conflict is now at its highest level in decades. PLA aircraft are flying menacingly towards airspace around Taiwan almost daily, sometimes launching multiple sorties on the same day. Since mid-September, Chinese warplanes have flown more than 100 of these missions, according to a Reuters compilation of flight data drawn from official statements by Taiwan’s Ministry of National Defense.” 
  • Something to watch carefully.
Macroeconomics

JPM Outlook 2021

  • Good outlook piece by JPM Asset Management.
  • Some amazing stats on the state of US federal finance – debt levels are about to hit World War II peaks (as % of GDP), and the projected 2020 deficit (at 16% of GDP) is the largest since 1945.
  • This interesting chart shows the fall in the corporate effective tax rate for large cap stocks over the years.
  • Under Biden’s plan – which will raise $2.2trn by raising and broadening corporate taxes (vs. $700bn Trump corporate tax cuts) – this trend could reverse (costing 10% of S&P EPS).
  • Lots of other interesting observations inside.
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