I’ve recently come back from a week on Ibiza—the smaller and cooler of the main Spanish Mediterranean isles—enjoying what has to be one of the most fantastic climates on earth. I come back to the realisation that I could have been more spendthrift in the pool bar despite its grotesquely overpriced drinks and snacks. Stocks are flying, credit spreads are narrow and volatility has plunged to a new low for the year. My relatively defensive portfolio is currently tracking a punchy 3.8% monthly gain for May, just shy of the 4.4% rise in the S&P 500. Long may it continue. I will have more to say about this in due course, but in the first instance, my recent work suggests that this rally has one strong tailwind on its side; the cyclical picture in the global economy has improved. My measures of global cyclical activity hit a new high at the end of Q1, and into Q2, from a trough last year, and cyclical equity returns are now re-accelerating, after softening a touch at the start of the year.
Read MoreThe idea of government intervention and demand-side fiscal stimulus was born by Keynes, eradicated by neoclassical economics, lazily reintroduced by the new Keynesians, and is now enjoying a renaissance. It’s fiendishly difficult to judge history in real time, but I would bet that the current shift has momentum, a position that has been strengthened by the response to the Covid-19 crisis. It is perhaps unfair to insist on a marriage between this story and MMT, but it serves as an introduction to the issues at hand. The idea that governments with sovereign Chartalist currencies can’t run out of money, and that this power should be used to achieve full employment, is enticing. It is also, however, naive. MMT easily dodges the main theoretical critique, at least in the current environment. The Phillips Curve probably still exists, but it has also flattened significantly, making it difficult to attack MMT armed with the traditional trade-off between unemployment and inflation. If MMT passes this first test, however, it fails the subsequent trials. The implementation of MMT in today’s economy requires significant shifts in the relationship between fiscal and monetary policymakers and an end to the free flow of capital. My sense is that about half the proponents of the theory don’t have a clue about any of this. The other half understands that MMT requires an end to central bank independence, and a significant reduction in capital mobility. The problem is that this latter group aren’t being honest, and for that reason, I am skeptical about their true motivation. If you want to dial back globalization, the least you can do is to be honest about what this means for households and firms. If you think that an independent central bank is a suboptimal institution, how will the alternative look, and how will it be held accountable?
Read MoreI want to wish all my readers a Merry Christmas and a Happy New year. I am averaging one market related post a week since I moved to this new site, and I hope to keep that up in 2017.
The original entry contained a little Christmas story, but I reckon that I should keep my fiction and market commentary a little more separate than just putting it all up here above the fold. To make amends, I have created a new blog here where I will put up my non-market related content in the future. If you only come here for the occasional musing on the market, rest assured that this is what you'll get, and only that. I might still nudge you across from here once in a while, but I won't inundate you RSS readers with long tales of fiction. the original story which was posted here has been moved to the new blog. Josh is in a spot of bother. He is hungover, he has a lot of work to do, and someone just handed him an encrypted message.
Read MoreThese exercises inevitably turn into a "look how smart I am" post, but I love when others do them. My friend Jonathan Tepper usually does one every year, and I always find something interesting on it. Tyler Cowen's 2016 non-fiction list is here, and is full of gems. The FT editors’ recently gave their suggestions too, Shane Parris has chimed in, and Toby has listed the favourites of FinTwitter where my suggestions, inexplicably, have been left out. No matter, however, because I have listed them all below.
Some of the titles invariably are from 2015, but I thought I that I would include them anyway. In addition, I should note that over half of them have been consumed via Audible. If you don't already have a subscription, go get one. I have separated fiction and non-fiction. I dare you not to find one or two that would be worth your time.
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