Other Alpha Sources

1. Variant Perception's blog is up and running and while I realise there has been little or no macroeconomic analysis here for a while, there is plenty of top notch analysis over at VP's blog. The three latest entries take a look at inflation in the UK, the divergence between Spain and Italy in sticking to the path of austerity and how money keeps trickling out of the eurozone periphery. If you think I have been running lean on analysis and commentary here, the VP blog is a good way to get a take on what me and my colleagues are looking at. 

2. The debate on macroeconomics and microfoundations keeps in chugging along and there has been a lot of interesting contributions lately beyond the ones I pointed to in my latest discussion of the subject. Simon Wren-Lewis has posted two additional pieces after the first one. PhD student Jérémie Cohen-Setton has a very nice summary of the flurry up on the Bruegel Blog and I would also emphasize Noah Smith's comment. I realise that all this is terribly wonkish, but it is at the heart of developing modern macroeconomics into something that can tackle the important problems and issues ahead. As such, it won't be work wasted to take a dive into the deep end here and have a look. 

3. Morgan Stanley's global central bank team takes a look at the outlook for QE3 in the US. 

We see a three-out-of-four chance that the Fed acts as the data on growth soften and the rally in the equity market fades.  If the Fed is in a hurry or feels no need to push up inflation expectations, the action likely takes the form of sterilized asset purchases, i.e., the one-in-four chance of Operation Twist 2.  Recent public comments by Fed officials, along with press comments, make it more likely we are underestimating, not overestimating, their willingness to execute OT2.  If the Fed needs to see some slowing in the economic expansion either to get internal agreement or external insurance, the policy initiative waits until the April or May meeting and more likely entails asset purchases that are funded with reserve creation.  This policy, Quantitative Easing 3, which we peg at a one-in-two chance, would also be favored if the Fed desired more significant currency depreciation.

The view above squares well in my view of a slight change in the consensus expectation of the Fed's next move. As the US data has improved and as it has continued to come in with upside surprises in key areas such as the labour market and auto sales the expectations of outright QE3 have been paired. Instead, the consensus has moved towards the expectation of an extension of Operation Twist. Such a move would however has its limits. It OT II were to happen in an environment of an improving economy yield curve flattening could move into inversion if short term yields became unhinged. This would obviously be unacceptable and therefore an outright expansion of the balance sheet specifically aimed at MBS would probably be the least risky alternative for the Fed. 

4. Elsewhere in CB land it was absolutely amazing to hear the ECB actually worry about inflation just days after having completed the largest balance sheet expansion in the ECB's history. 

European Central Bank President Mario Draghi signaled he’s done enough to battle the sovereign debt crisis, laying the groundwork for an eventual exit from record-low interest rates and emergency lending measures.Declaring that the environment “has improved enormously” and there are “many signs of returning confidence in the euro,” Draghi yesterday turned the spotlight on “upside risks” to inflation, which is now forecast to remain above the ECB’s 2 percent limit this year. That suggests policy makers don’t plan to cut rates further or add to their 1 trillion euros ($1.32 trillion) of long-term loans to banks, economists said.

So, let me get this straight. The ECB has just effectively backstopped the entire European banking system for 3 years effectively becoming a clearing house for the reshuffling of lending risk onto the ECB's balance sheet in exchange of 3y loans over to now worrying about the inflationary effects of its policies? 

What planet are they on? 

Obviously, the single interest rate policy does not work and perhaps such statements are exactly a reflection of this, but if the market was looking for transparency and foresight from the ECB they are going to look a bit harder it seems. The sovereign debt crisis is merely a few 100 basis points short of reflaring and Portugal and Spain are about to re-enter the limelight. Not a time it seems to me to assure markets that everything is about to move back to normal. 

5. Portugal seems to be the next in line as yields stay in double digit territory, but who can really claim to be surprised? Edward certainly isn't.  

So why would people think that Portugal might be the next to need a second bailout? Well, what the Greek historian Thucydides would have called the efficient cause would be the fact that it has a 9.3 billion euro bond redemption due in September next year and the despite initial Troika hopes, the markets remain closed tighter than the lips of Angela Merkel were to the supposedly amorous advances of Silvio Berlusconi. But the final (or underlying) cause which will send Portugal into a second bailout is the fact that the country has a high level of debt (both public and private) and a chronic growth problem which won’t simply be turned around by a bit of good will and a few “magic wand” structural reforms. So essentially the numbers just don’t add up.

6. It was a beautiful weekend in London this week and on Sunday I picked up the Independent and while I was not surprised, I thought their piece on cheating at UK universities disturbing. 

Over the past three years, more than 45,000 students at 80 institutions have been hauled before college authorities and found guilty of "academic misconduct" ranging from bringing crib-sheets or mobile phones into exams to paying private firms to write essays for them.Some 16,000 cases were recorded in the past year alone, as university chiefs spent millions on software to identify work reproduced from published material, or simply cut and pasted from the internet. But officials last night warned they were fighting a losing battle against hi-tech advances – which means it is becoming increasingly difficult to detect the cheats.

Cheating in academia is as old as academic itself and even tenured professors have been known to fudge their results or even plagiarise their colleagues' work. But what does it tell us when the problem is particularly severe among entry level students? Surely, the article's rationale based on university leaders' comments that higher tuition fees and pressure to do well mean that more students are pushed into wrongdoing is sound. However, there is an underlying problem, or an elephant in the room if you will, that is not being mentioned in particular detail. Specifically, I am talking about the chasm between the level of academic standards applied by UK (and European universities) and the academic standards brought into universities by the foreign students largely financing the UK education industry. 

I have seen this with own eyes and I have been amazed. Yet, the way Western universities produce (and set standards for) knowledge is simply so foreign for many who come from abroad that they are compelled to cross corners. When these students are then exposed they often do not realise why they are being summoned to a disciplinary body. 

Another and more disturbing trend however is the implied argument that some students cheat because they can. Take for example the industry which has emerged to furnish students in a tight spot with a tailor made essay on any topic they might wish for a fee. This seems to be absolutely mad to me and any student resorting to this must either be desperate or stupid (or both) since anyone would be able to tell you that the quality of such essays is likely to be poor, at best.