Markets were mulling familiar themes last week. Will a wider U.S. twin deficit change the rules for the dollar and treasuries and is elevated volatility here to stay in equities? Judging by last week, the answer would be: probably and yes. The contemplation over these stories, though, were interrupted by politics. Mr. Trump announced his intention to apply tariffs on steel and aluminium—25% and 10% respectively—and Mrs. May attempted to give clarity on the U.K. government’s Brexit position.* I was unimpressed with both. Before I have a dig at Mr. Trump, I ought to provide an example of someone who supports it. I have great respect for Stephen Jen, but his argument here is like endorsing the idea of a diet by advising someone to eat nothing but kale and carrots for a decade. The analysis of Mr. Trump’s tariffs requires a distinction between the principle and the concrete measures. I concede that China is bending the rules of global trade, but Mr. Trump is stretching the fabrics of macroeconomic policy if he starts imposing tariffs on industrial goods. He is presiding over an economy close to full employment, a low domestic savings rate, and a medium-sized twin deficit. To boot, he is about to let fly with unprecedented fiscal stimulus.
Read MoreI have trampled around in the same weeds recently, so I will keep it short this week. Equities are doing what they’re supposed to, trying to complete a V-shaped recovery from the swoon earlier this month. Last week was a corker, even for the portfolio, which benefitted from solid earnings reports. Bloomberg’s Joe Weisenthal had me one-on-one on Monday, where I duly warned that the S&P 500 remained overvalued relative to other asset classes. Even Gartman couldn’t have done it better. On this occasion, though, I am happy to double down. A V-shaped rebound to a new bull run looks like wishful thinking to me. Equities are the least of macro investors’ problems, though. The puzzle of the day remains the link between rising U.S. yields, a firming cyclical outlook and a falling dollar. In my last post, I asked the question of whether foreign savings would come to aid of a U.S. economy at full employment—with a record low savings rate—about to be jolted by fiscal stimulus. Open macroeconomics suggest that such an economy should open up a large external deficit, and Japan and Europe have the savings to make it happen. Alternatively I suggested that perhaps the rest of the world doesn’t fancy financing excess spending and investment in the U.S.
Read MoreSeven years ago I did a thesis on demographics and capital flows, which informs my thinking on economics and finance to this day. That’s a long time ago, though, so I thought that I would provide an update on one of the key pillars of that work. It starts with ageing. The breadth and speed of population ageing currently sweeping the global economy is unprecedented in human history. It is partly driven by rising life expectancy, which we can crudely hold to be a linear function of economic development. But it is also a result of a complex fertility transition. Two stylised facts should be highlighted at the outset. Firstly, the demographic transition does not end with a homeostatic “equilibrium” of replacement level fertility. Secondly, the decline in fertility seems to be driven by two forces; the quantum effect which operates on a quantity/quality trade-off and the tempo effect, which is the phenomenon of “missing births” as women postpone having their first child. The two are connected in complex ways, that we probably don’t quite understand. My goal here is to understand what is happening to global fertility rates. My sample is the World Bank’s data and their estimates of total fertility rates across countries.
Read MoreIn this show I argue that paying less attention to Mr. Trump and the White House probably won't do you any harm. It might even do you good. I also respond to the idea that no credible alternatives are currently being offered to the surge in new populism and its policy suggestions. I offer three concrete proposals. Finally, I try to make an impossible transition to a brief discussion about financial markets. I will put up some charts in the next few days, but I am not sure that much has changed. The queue of bears at the abattoir is long as ever.
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