It’s been a while since I ran through my favourite charts for the global economy. I am happy to report that nothing much seems to have changed since my last overview. Markets are still enjoying a soft landing, defined as a world in which inflation is drifting lower, even if still-sticky in key areas, the global economy and labour markets remain unencumbered, and monetary policy is on track to ease modestly. More immediately, a run of softish inflation data in the US, rising jobless claims—despite still solid non-farm payrolls—and the return of political uncertainty in Europe have driven a bond rally in the past few weeks, and raised questions about the strength of the US economy. As a result, markets are now pricing in slightly more aggressive near-term policy easing from the major central banks. In the US, SOFR futures imply 75bp worth of easing from the Fed this year, and similarly for the ECB, which includes the 25bp cut that the Bank delivered last month. Yields also have softened in the UK. The consensus expects a second rate cut from the ECB in September, at which point markets believe Frankfurt will be joined by the BOE—with many speculating on an August cut from Bailey et al—and the Fed. The first chart below plots the implied policy path for the Fed and ECB using SOFR and Euribor, respectively. This is a pleasant picture overall. Rates will remain higher than immediately before the twin-shock of Covid and an inflationary shift geopolitics, but they’re still on track to come down some 150bp from their highs.
Read MoreThe Economist’s Free Exchange column drops in on the question of an economic motherhood penalty from childbirth. It is nice to see that the Economist correctly distinguishes between two distinct economic motherhood penalties, both of which can be traced to the interplay between evolutionary forces and modernity, where the latter in this case is defined as an environment with rapidly increasing returns to investment in human capital and education. The first, between fathers and mothers, emerge because the cost of child-rearing especially in the early part of a child’s life overwhelmingly falls on the mother, a conclusion which follows from Trivers (1972). This is true in terms of the cost during pregnancy and immediately after too. It is also true before we consider the possibility that the resource allocation trade-off for many women shifts in the wake of motherhood. The second motherhood penalty occurs between women. Put simply, in an economic structure where childless women have the ability to devote all their resources to somatic investment and take advantage of the above-mentioned increasing returns to human capital investment, the wage and wealth divergence between women who have many children and those who have none will widen significantly, at least in theory. For more on this, I cover the theory in more detail in my essay on fertility and sexual selection; see here.
Read MoreI am still in a quant-mood at the moment, so today I will go through some work I’ve done on portfolio optimization with US large cap equity sectors. I am doing this to augment my current MinVar framwork, which I use for my own investments. A quick re-cap on the basics of portfolio optimization, with advance apologies to PMs reading this and lamenting that I’ve missed something. Finance has two workhorse models; the tangent portfolio, which places the investor on the efficient frontier, where risk-adjusted return—or the Sharpe ratio—is maximised. Or the minimum variance portfolio, which offers exposure to the combination of assets with the lowest variance, or standard deviation, regardless of return. These portfolios often are estimated given a set of constraints, as I explain below. Assuming most portfolio allocation decisions start with one of these ideal models in mind—you either want to achieve the best risk adjusted return or the lowest volatility—the difference between the textbook models and real-time allocations is governed by the following layers of complexity.
Read MoreLast week, the leasehold and reform bill became law in the UK. This is not the end of leasehold reform. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. This passage of the bill happened against the odds. It was crawling through parliament and when Rishi Sunak, somewhat unexpectedly, announced the general election on July the 4th, campaigners for leasehold reform—a group which yours truly have been loosely working with for a while—thought the bill would be lost. If you want to understand what happens to outstanding bills in the brief final sessions of parliament before prorogation, you need to read to up on something called wash-up. Put simply, it’s the period where outstanding bills are either rammed through as is, or kicked into the abyss never to be seen again. It is a borderline insane policy process, which breaks all the rules of legislation, simply to get the order book emptied as quickly as possible. The leasehold and reform bill made it, just, though without key additions such as a cap on ground rent or a ban on forfeiture. This is bitterly disappointing, especially in case of the former given that an agreement to cap ground rents to £250 pa was virtually agreed by the department and HMT, or so we’re told. But I guess we live to fight another day rather than having to start over.
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