Recap 8-12-13


Another interesting bit on Chinese Monetary Policy:

There was also this interesting bit from JPM:

  • The saving motive appears to have been mostly responsible for the large bond fund inflows seen over the past five years.Of the $2.5tr that was invested in bond funds over the past five years, $1.6tr or 2/3rds is explained by money market fund outflows. This saving motive is unlikely to go away as long as policy rates stay at zero.
  • But even if retail investors are forward looking and start positioning for an early end of ZIRP, this is more likely to create a flow away from bond funds into money funds rather than equity funds.
  • Our guess is that less than a third of the $2.5tr retail investors put into bond funds will rotate into equity funds over the coming years as the Fed normalizes policy.

Separately, I just wanted to add some thoughts on BoE guidance. Several brokers have noted that BoE’s forecasts have historically been quite poor, and Carney himself has hiked rates in Canada in May 2010 despite promising to not hike until mid 2010. These were all cited as reasons for the weak performance in sterling rates products last week. I’d posit one more reason as well. To the best of my knowledge, it is actually quite hard to reliably forecast UK unemployment, at least relative to other G10 countries. Of course, this could well be because I’m just not smart or educated enough to do it, but the BoE’s own poor track record suggests that I am not alone in this. As a result, to get the same level of credibility, BoE guidance needs to be strong than guidance elsewhere to achieve the same effect, irrespective of the other issues.

Finally: a couple of interesting links. First, a very interesting and funny story on MI5:

And along those lines, are we spending too much on these anti-terror initiatives?

And third: why are people not getting upset about the fact that residency slots are basically unchanged in 16 years?

For years the United States has been training too few doctors to meet its own needs, in part because of industry-set limits on the number of medical school slots available.

The biggest challenge is that an immigrant physician must win one of the coveted slots in America’s medical residency system, the step that seems to be the tightest bottleneck. That residency, which typically involves grueling 80-hour workweeks, is required even if a doctor previously did a residency in a country with an advanced medical system, like Britain or Japan. The only exception is for doctors who did their residencies in Canada. The whole process can consume upward of a decade — for those lucky few who make it through.

The residency match rate for immigrants is likely to fall even lower in coming years. That is because the number of accredited American medical schools, and therefore United States-trained medical students, has increased substantially in the last decade, while the number of residency slots (most of which are subsizided by Medicare) has barely budged since Congress effectively froze residency funding in 1997.


According to govtrack, a bill to relieve this has a 0% chance of being enacted, even though there are 63 co-sponsors:


  • Japan Apr-Jun real GDP growth was weaker than expected at +2.6% QoQ SAAR (+0.6% QoQ, vs. Cons. +3.6% QoQ SAAR). The difference mainly came from the volatile inventory component (that reduced annualized real GDP growth by 1.1% pt), weaker capex, public investment, and residential investment.
  • FT: Eurozone banks need to shed €3.2tn in assets by 2018 to meet Basel III. Versus nominal GDP of 9.5trn, that’s 33.7% of GDP, or 6.7% annualized. Assuming nominal GDP growth of 2%, that’s still almost 5% annualized. The deadline will probably get pushed back again, but this still gives us an idea of how much deleveraging remains, especially since banks usually front load these regulator mandated deleveraging moves!
  • USDA WASDE report was fairly bullish for ag products. End stock estimates for all major grain products printed below expectations.

Upcoming Data:

  • Mon: UK RICS house price balance, Japan Machine Orders, Australia NAB Business Confidence
  • Tue: UK Inflation, German Zew, US Retail Sales, Australia Consumer Confidence
  • Wed: France GDP, Employment, BoE Minutes, UK Unemployment,
  • Thu: UK Retail Sales, US Jobless Claims, CPI, NAHB Survey, Philly Fed
  • Fri: US Labor Costs, Housing Starts

4 thoughts on “Recap 8-12-13

  1. Great stuff as always, keep it up!

    On BoE, not sure if you’ve come across this but, Bridgewater (daily observation for Aug 13) had an interesting read on the situation. They appear to be big believers in the recovery, with stronger expectations of growth and a sharper expectations of the decline in UER vs BoE.

    In particular, they have a couple of interesting charts. 1/ The forecast of a sharper expected downturn in UER based on an aggregate of 3 Eurostat surveys on employment expectations (not sure where they got the consumer one), which seems to work well and 2/ they see core inflation adjusted for tax distortions printing just above 1% – which they use to conclude that forward guidance is well justified.

    Interestingly, their forward view of inflation is weaker than BoE. Seems to me that this likely implies – despite no explicit mention of this – that they’re believers in a productivity rebound. They also view (or did at least) that rates being too rich. I think GBP is a bit of a tougher call given how many will have mixed views on credibility, while long in eur short rates is probably easier to justify. That said, sitting on it for a bit seems reasonable as it looks to me like things aren’t quite ready to decouple yet…

    Curious if you have any thought on this – happy to forward you the piece if you’ve not seen it (has a good bit on France as well).

    On a bit of a tangent from the INET / Pettis seminar link, I always find it interesting how Pettis is actually much less bearish in person (attended one of his seminars while in Beijing) than what one might think given his publicized comments (probably mostly due to media headline sensationalization). This, and of course how he seems to be much more passionate about his record label / nurturing the Beijing indy music scene than economics!


    1. Hi SS,
      I haven’t see the Bridgewater piece but I would find it interesting! I won’t forward it, of course.

      Since I haven’t read the piece, I can’t comment on it directly, but I will say that I’ve found UER in the UK to be fairly hard to forecast, at least relative to the US and EU. People seem to blame the BoE for poor forecasts in general, but I think part of the problem is that the UK economy is just hard to forecast! So I’ve been somewhat circumspect about the BoE’s forecast that UER won’t drop below 7% for 3 years, when in the US it can drop 80bps in just one year. And as you noted, the economic momentum is clearly positive, so the risk is probably biased toward to lower UER than the BoE expects.

      I’m not quite sure how much weight to put on inflation. My take is that most central banks focus on the measure of slack in their economy, since inflation is itself a lagging indicator. Barring substantial volatility or an unmooring of inflation expectations, I actually think most central banks don’t spend a lot of time looking at realized inflation. BoE policy the last few years seems to support this hypothesis, given the additional QE despite the high CPI prints. Having said that, a low tax-adjusted core cpi in the 1 handle certainly makes sense in the UK, especially given that it is where core CPI prints are in the US and EU.

      With respect to UK rates, I don’t have a strong view, but am more willing to wager that the market pricing is more accurate than the BoE guidance. GBP has quickly become a strong consensus buy of late, and I agree with you that it’s a tougher call.

      EUR rates seem to be dragged higher by external factors. Quantitatively speaking, based on my modeling work, EU swap rates across the curve are way too high given the underlying dynamics. However, economic momentum is positive for now (and likely to continue through Q4) so drivers for a reversal of recent price action is likely to hinge on US rates and/or stronger ECB rhetoric. They’ve said yields were too high on 7/4, and they are even higher now, so it will be interesting to see what they say in a few weeks. I agree with your view and like receiving rates there, but I think the key is to do it in a risk contained way, (until the momentum turns) so you can hold on in case things get choppy – via small size, options, or against some rates shorts.

      Thanks for the bit on Pettis. You’re right, he seems much more balanced in his essays than his reputation suggests. What I am wondering is how the social dynamics there will work with 3% growth given that the government think unemployment will rise if growth is less than 7%. And on that note, not sure if you’ve been following 10y CNY government bonds… yields are up 60bps, back near 2011 highs.

      Thanks for reading and thanks for your thoughtful comment!

      1. I just read the comments (yes I’m 11 days late) but for the last bit on Chinese unemployment – I would figure its higher than one thinks, but the bigger structural problem is under-employment. Having lived in China for some time and visiting for work, the one thing that strikes me is the high number of college graduates that cannot find work with decent wages (we won’t get into the argument of employability) – but there is lots of lost hope that one can see when speaking to them, or simply by observing the often very full internet cafe in a number of China’s cities.

        1. Hi Jamoldo – well noted! The lack of published Chinese unemployment data is a pretty big negative. Having said that, the large number of college graduates who are under or un-employed seems to be a global phenomenon. In the US, there are lots of stories of recently college graduates with a crushing debt load and a food service industry job. But it’s not all bad. So I guess what I’m saying is, I’m sure you’re right that there are a lot of underemployed Chinese college graduates – what I’m less sure about is how bad that situation is.

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