Economics, financial markets and the occasional fiction
02
Alpha Sources Blog
Data for charts are sourced from FRED, OECD, Eurostat, IMF, BIS, Market Watch, Yahoo/Google Finance, Investing.com, COT, Bloomberg or Quandl unless otherwise stated.
A number of interesting stories are being groomed at the moment in financial markets. First off, investors looking for a “Reverse Twist” story at the BOJ were partly vindicated by the introduction of yield curve control, but the details were underwhelming. In the end, the BOJ opted to commit to the maintenance of status quo.
The most interesting aspect of this policy move, however, has been the interpretation of its significance and what indeed it is trying to achieve. The main story, as I see, is that the BOJ wants a steeper yield curve, and they’re trying to achieve that by playing chicken with the momentum chasers in duration. They are sending a signal to the market that they will continue to do QE, but that they won't buy as much duration as before. They are betting on herding and front-running here. That has worked before for central banks, but will it this time, and will investors start to discount a similar move in Europe? The initial evidence doesn’t really suggest that this theme will have legs.
Investors are beginning to get seriously interested in the idea that the BOJ and the ECB will change the composition of their bond purchases to steepen the yield curve. In effect, this would be the opposite of the Fed’s Operation Twist, which saw QE purchases concentrated on the long-end, chiefly to lower the yield on mortgage-backed securities. I think this story, at least partly, is to blame for the recent nudge higher in global bond yields. But we will know soon enough. This week's BOJ meeting should give us a hint of whether this narrative has any legs.
Do you remember what you were taught in introductory economics? Do you remember how much math you had to chew through in graduate school? Do you want to relive that? Alternatively, you might just have wondered why macroeconomists write and speak like they do, why they use complex math to explain seemingly simple concepts, and why they don't seem to agree on anything?
In this first part, I pick apart the traditional undergraduate story of macroeconomics, and try to explain why Keynes and Friedman maybe weren't as different as everyone would like you to believe. In doing so, I am setting up the big plunge into why on earth macroeconomics has come to rely on a fusion of math and representative agent models to make theories of the world, a story that I will grapple with in part 2 of this show.
As I came back from holiday I cast my support, if only temporarily, for the bearish side of the spectrum. I see few opportunities to add to existing investments, or to begin new ones, but plenty of upside in betting on the short side of global equities. So far the market has been undecided on whether my call will prevail. But I am confident that it will be slightly more difficult for the longs in the next few months. I also said, though, that I didn't see any indication that this would be the big kahuna sell-off forcing the S&P 500 to re-tag 666. A cop-out in the eyes of many I am sure. But I really don't think it is wise to spend your time trying to plot a path for the end of the financial world as we know it. Ask bears of the 2011 vintage how they're doing, if you are not sure what I am talking about.