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The case for reading old economists and the elephant in the room in EM equities

I hope you’re enjoying the 2023 Chat-GPT advent calendar even if it is quite a deviation from the content normally posted here. Fret not, I will pepper the flow of advent stories with some economics, and a lookahead to markets next year.

I really enjoyed @EconTalker's conversation with @tylercowen, the founder of the most widely read economics blog out there, reminding us that there is still value in reading the grand old masters of economics. I enjoyed re-reading most of Keynes’ the General Theory for my essay on fiscal policy, and it was also fun to remind myself about Milton Friedman’s permanent-income-hypothesis for the essay on the life cycle hypothesis. But in reality, I fall foul of Tyler’s accusation of an economist who is probably not as well acquainted with the classics as I should be. I have read very little of Smith for example, I find Hayek very difficult to read, and as an economist interested in demographics, I also regret to say that I have only read few parts of Malthus in the primary versions. Fortunately for me and others, Tyler has made his new his new book—"GOAT" of economics—freely available, and I am looking forward to dig in over Christmas.

Goldilocks

Someone has to say it, and it might as well be me. Markets have a distinct goldilocks feel about them at the moment, or in the words of the FT’s editors; markets are beginning to eye the “immaculate disinflation”, which is a prerequisite for a soft landing. This is a story about two trends; easing inflation and economies which are, well… neither too hot nor too cold. Soft US and UK inflation reports for the month of June have been key catalysts for the change in mood. Headline CPI inflation in the US fell to a two-year low of 3.0%, with core inflation dropping by 0.5pp, to 4.8%, a 20-month low. In the UK, meanwhile, headline inflation slipped to 7.9%, from 8.7% in May, while core inflation dipped by 0.2pp, to 6.9%. These numbers don’t exactly scream goldilocks, but markets trade at the margin of the economic data; it is the direction of travel that matters.

Finding the Cracks

I have a lot of sympathy for pen-wielding strategists at the moment. Every day the empty white sheet of digital paper is staring at them, the little cursor tauntingly flickering in the top-left corner. The most obvious course of action, to copy-paste their previous note, is just about the only thing they can’t do. We economists at least have a steady flow of new data, however mundane and useless, to write about. In other words, the main questions remain the same, and they remain largely unanswered. Economic activity has collapsed, and is now staging what appears to be a painfully slow rebound. Even in the best of worlds, however, it’s difficult to escape the notion that significant damage has been wrought in on both the demand and supply-side. This puts equities on the spot. A reflexive rebound from the nadir in March was always coming, but could it be sustained, and would we re-test the lows? In a normal recession the answer to those questions would be “no” and “yes”, but there is nothing normal about this recession. U.S. equities have roared higher, and the ubiquitous growth stocks, which outperformed before, are leading the charge again. The S&P 500 growth index is up a cool 32% from its March lows, and is now flat year-to-date. By contrast, the S&P value index is up “just” 21% from the lows, and are still carrying a 20% loss year-to-date.

China, Asia, Markets and Tradingclaus vistesenMay 25, 2020China, USDCNY, equities, Trade Wars, U.S. elections

The Balance of Payments

The flow of goods and capital across borders and between nations has featured in human storytelling and economic relations since the beginning of time. The biblical protagonists traveled and traded with each other, and often fought over the dominion of resources. The protagonists in modern historical tales of trade and war since the turn of the millennium continue the habit in similar ways. You would be hard-pressed to find a better historical account of that than in Ronald Findlay and Kevin H. O’Rourke’s Power and Plenty. The book is as much about the wars that divided empires and nations as it is about the exchange of goods and capital that bound them together, though it is reasonable to say that these two perspectives are joined at the hip. Economics plays a specific role in the study of global trade and empire-building. The exchange of goods, capital, and services across borders gives rise to transactions as the ownership of resources shifts. Over time, these processes lead to the accumulation of wealth and debt on the part of nations and economic actors—assets and liabilities, in the jargon of modern finance. It is the economist’s job to trace, identify, and record the nature and value of these transactions.

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