FT Alphaville

RSS

For those who still remember it, a little perspective on Piketty’s (r-g) from BernsteinResearch:

Net interest margins (a decent proxy for r) are positively correlated to growth rates and negatively correlated to the stock of wealth. Concerns about slowing growth leading to rising concentration of wealth (r-g getting bigger) may be overdone. 

(Matt)

Chart from Credit Suisse showing the movement in six polls on the Scottish referendum. 
(Cardiff)

Chart from Credit Suisse showing the movement in six polls on the Scottish referendum.

(Cardiff)

What bond bubble?

From Deutsche’s latest long-term asset return study showing where current nominal and real yields are relative to each country’s long- term history (last 100ys) in percentile terms: 

On both measures, nominal yields have rarely been lower than current levels for the majority of countries, particularly in Europe. This is a fundamental starting point for the case that government bonds are in bubble territory. However real yields are not at such extreme levels. Using the full history, most DM countries are in the 60-80% range and have therefore been lower 20-40% of the time. So they are low but not extremely low unlike nominal yields. Japan sees one of the lowest real yield readings relative to its own history in this sample partly due to the rise of 'Abenomics’, but with some of this due to the recent inflation spike after the April 2014 sales tax rise. If we go back around 18 months, this number drops from 79% to 59%. On the other side many countries in Europe actually have real yields that are closer to their median relative to history. Italy (63%) and Spain (61%), certainly stand-out, especially as both are at 100% in terms of nominal yield lows. Indeed if we only look at data over the last 100 years Spain (40%) sees real yields slightly higher than the long-term median and Italy (53%) is close to median. France (62%) is also much closer to its median over this period. 

And going back a little further in some cases:

(David)

Goldman Sachs economists round up the many estimates of cyclical vs structural labour market slack in the US.
(Cardiff)

Goldman Sachs economists round up the many estimates of cyclical vs structural labour market slack in the US.

(Cardiff)

Sep 8

The impact of the crisis on US construction spending in one chart:

Via CreditSights.

(Matt)

Sep 5

People have rightly been focusing on the comeback in US auto spending, but we were interested in this chart from CreditSights on the impressive recovery in the UK:

Their take:

Total new passenger cars in the UK market grew by 9.4% YoY to 72,163 unit sales this month — a 30th consecutive month of growth that highlights the strength in the UK autos market relative to the choppiness seen in other major European automotive markets. Private registrations were up 10.3% and fleet sales were up 10.0%, while corporate sales (2.3% of the market) fell by 14.0%. Attractive financing deals for consumers including Personal Contract Purchase (PCP) offers are helping to support growth against a backdrop of a relatively stable economic outlook. On a LTM basis, the UK market is now 0.1% above levels reached prior to the crisis in December 2007.

(Matt)

Sep 4

The robotics megatrend

The size of this coming wave of robotics is staggering: spending on robots worldwide is expected to jump from just over $15 billion in 2010 to about $67 billion by 2025. (See Exhibit 1.) Driving this growth is a convergence of falling prices and performance improvements. The cost of high-quality robots and components is dropping rapidly, while CPUs are getting faster, and application programming is getting easier. As robots become cheaper, smaller, and more energy efficient, they gain flexibility and finesse, increasing the breadth of potential applications. 

Initially, robots were used mainly for dirty, dull, repetitive, or dangerous tasks that did not require high precision, such as painting car doors or spot welding. Today’s robots, by contrast, are moving into a new range of precision applications far beyond the manufacturing realm. For instance, they’re enabling food processors to make products untouched by human hands. At Sweden-based Charkman Group, robots slice and pack high volumes of salami, ham, turkey, rolled pork, and other cooked meats. At the heart of the line is an intelligent portion-loading robot that can handle 150 picks per minute across multiple sizes and types of meat.

Via BCG Perspectives.

(Cardiff)

Sep 3
Contributions to euro zone inflation, chart via Capital Economics. 

Contributions to euro zone inflation, chart via Capital Economics. 

Sep 2

The incredible flattening German yield curve, via CreditSights:

At the same time, investment-grade credit spreads across the euro area have tightened, with the biggest improvements at longer maturities:

It’s enough to make one wonder whether the ECB needs to actually buy any assets in order to loosen financial conditions.

(Matt)

If you want to make a bet on the expected devastation of the US by hurricanes, CreditSights has you covered:

From the report:

Allstate, Chubb, Liberty Mutual and Travelers are the most exposed to hurricane losses…On the other end of the spectrum, Progressive, CNA, AIG, ACE, and Hartford are more insulated from hurricane events.

And here is a more detailed breakdown by region:

By the way:

According to researchers at Colorado State University, the Atlantic basin will experience below average hurricane activity in 2014 due to the combination of a cooler than normal Atlantic ocean and a still-developing El Nino. As of July 31, 2014, the CSU forecast called for approximately one major (category 3,4,5) hurricane (median is two), four category 1 or 2 hurricanes (median is 6.5), ten named storms (median is 12.0), three major hurricane days (median is 21.3), and 40 named storm days (median is 60.1).

(Matt)

BMO makes the case for ECB asset purchases:

The declining inflation rate in the Eurozone is problematic for the ECB. One tool they have yet to employ to battle disinflation is asset purchases. But due to institutional constraints – both owing to politics and capital market structure – a QE program like the FOMC’s is unlikely in the near term.

But as the chart shows, the falling balance sheet size corresponds directly with the falling inflation rate, so even if the transmission mechanism is unclear and complicated, the ECB is under increasing pressure to put the balance sheet to work.

(Matt)

Another interesting chart from Kuroda’s presentation:

Note in particular the big decline in the household savings rate, as well as the cash-hoarding tendencies of Japanese corporates. Something to watch.

(Matt)

Best evidence that Abenomics is working comes from a chart that BOJ boss Kuroda presented at Jackson Hole last weekend:

(Matt)

From Nomura’s Richard Koo:

Private-sector savings in the UK have fallen sharply, dropping to just 1.68% of GDP in 2014 Q1, according to the latest flow-of-funds data (see Figure). At the end of 2009, when the UK balance sheet recession was at its worst, private-sector savings amounted to 10.47% of GDP. The drop in this figure to 1.68% is a major change that signifies a large contraction in the economy’s deflationary gap. The 1.68% financial surplus is small not only in comparison to the US, where private-sector savings totaled 3.92% of GDP in 2014 Q1, but also in comparison to the UK fiscal deficit, which stood at 5.8% of GDP in 2013.

The fact that the UK’s private sector is still saving 1.68% of GDP in spite of near-zero interest rates indicates the economy remains in a balance sheet recession. However, the UK is one of the few countries where the private savings surplus is smaller than the fiscal deficit. That suggests the UK’s economy is being supported in no small part by the decline in private savings and by the government’s fiscal stimulus, coupled with support for the real estate market from overseas capital inflows.

Despite being an epicenter of the global financial crisis, the UK is one of the few countries where house prices have recovered to pre-crisis levels, something I suspect has helped to reassure people. On the other hand, the average UK household has not seen a significant increase in income, and—as BOE Governor Mark Carney has noted—the private sector still faces balance sheet problems. After taking on huge amounts of debt during the bubble, UK households are now net savers despite the lowest interest rates ever, as the household financial surplus in the accompanying Figure demonstrates.

That indicates the possibility that today’s UK economy is not as strong as it appears. I suspect that is behind the BOE Monetary Policy Committee’s decision to keep interest rates low for the time being in spite of the substantial decline in the unemployment rate. The fact that inflation in both the UK and the US is running below the target rates of 2% offers some justification for current policy, but it also implies the risk of a sudden change in the monetary environment were inflation to accelerate.

(Matt)

Chart via BCA Research. And here is commentary from Credit Suisse: 

Draghi has clearly linked a decline in medium-term inflation expectations to ECB QE in previous speeches and the last press conference, so this is something that the ECB must be taking note of, and which the market will, rightly, expect some discussion on if it is sustained. The first opportunity for clarification will be Draghi’s speech at Jackson Hole on Friday (20.30 CET). It is unclear whether he will comment on this given that the conference is focused on the labour market. After this, the market may have to wait for the September ECB meeting (4th Sep).

(Cardiff)

Chart via BCA Research. And here is commentary from Credit Suisse: 

Draghi has clearly linked a decline in medium-term inflation expectations to ECB QE in previous speeches and the last press conference, so this is something that the ECB must be taking note of, and which the market will, rightly, expect some discussion on if it is sustained. The first opportunity for clarification will be Draghi’s speech at Jackson Hole on Friday (20.30 CET). It is unclear whether he will comment on this given that the conference is focused on the labour market. After this, the market may have to wait for the September ECB meeting (4th Sep).

(Cardiff)