A economic market review of the last 3 weeks

The last three weeks have seen central banks do what one would probably simply describe as “amazing” stuff as follows; 

§  the Sweden Cut Rates to minus 0.5% from minus 0.35% – in its battle to revive inflation and keep the krona from appreciating. How this works is that lowering the rate to larger negatives is intended to impose a charge on banks when they make their deposits with the central bank. This charge will encourage them to lend thus stimulating the economy and then pushing inflation higher. This doesn’t worry the central bankers because Swedish banks are well leveraged and highly profitable for the charge to be too much of a disincentive in their business.

In terms of the currency, krona, the Swedish central bank, the Riksbank is seeking to control the exchange rate in lowering interest rates as well. How this happens is that negative rates will discourage foreign investors from holding krona and pushing the krona value down which in turn pushes import prices up which gives inflation a further kick.

§  the People’s Bank of China (PBOC) did a series of eye-popping liquidity injections in that same period;

o   starting with a $1.5 billion injection,

o   then another Yuan Devaluation and a $54 billion injection,

o   then another $49 billion injection,

China’s PBOC is releasing extra cash to ensure China’s cash machines are continually oiled. This is a way to ease monetary policy without using the traditional toolkits like interest-rate cuts. By continuing to devalue, China is hoping to encourage investment as they seek acceptance into the international monetary system. A lower yuan means more foreign demand for yuan, boosted export demand due to the devalued prices. Hopefully then a devalued currency will gain the favour of outsiders and economists as China seeks to push on to join the basket of Special Drawing Rights currencies.

§  the ECB cut rates and added more Quantitative Easing (money-printing). The ECB has also sent rates further into the negative territory (-0.4% now from -0.3%) with the hope that it would stimulate bank lending and QE raised to 80 billion Euros from 60 billion a month to provide a boost in liquidity and prevent deflation. Things are not looking so great for the ECB as inflation is moving nowhere as desired and the uncertainties in the world economy are still with us.

§  Norway cut rates to 0.5%. Norway being a big oil producer continues to hurt from the low oil prices.

§  the Reserve Bank of New Zealand cut rates in a shock move that economists didn’t seem to expect. The NZ dollar fell 1% from the announcement but the main reasons to cite for the reserve bank wanting to maintain the lowest interest rate at 2.25% is weak China demand and global growth uncertainties.

§  the US FED cut the number of interest rate hikes for 2016. The sentiment from Janet Yellen the Fed Chis is that the pace at which the FED will hike rates will slow down in 2016. Expectations for growth and inflation have been cut and eyes are on the rate at which the US economy will travel for the remaining year.

Key themes in the world economy continue to be oil, inflation fears and the Fed. The Fed’s decision to weaken the dollar has put great pressure on Europe and Japan (we may even see more devaluations). European banks are in a tight squeeze with the ECB lowering rates and adding more QE as this means they will not be profitable in 2016. These pressures could be negative in a global sense if things worsen. With a weakening USD, commodities (as they strongly correlate to the USD) have gained strength and this has put relief on US banks and lenders that provided capital to the commodities complex. Oil at $40 though may not be sustainable so it will be very interesting to watch what happens in the coming months. 

Reference: Stig and Preston updates for pointers.

Some visuals from the Australian Federal Budget 2015-16

A 5-page visual of interesting picks arising from the 2015-16 Australian Federal Budget! 

The 'dull' budget can be summed up as an attempt to bring Australia to surplus (Government Revenues > Expenditure) in about 5 years mostly through spending cuts to buckets such as education, welfare and health sectors.

A few Nobel Prize facts and reflections on economics

Perhaps the most stunning of the Nobel Prize statistics is the fact that for every 1 woman that has won, 18 men would have already won the prize. The common explanation to this 'boy's club' question over the years has been that there have been far fewer women in science than have men, a field in which the Prize is heavily skewed. Assuming that the whole world provided similar opportunities for all and social expectations shifted to accommodate a world where women are treated the same as men, perhaps we shall see more women on the forefront of science, literature and peace in the years to come.

Another interesting conjecture to note is the role economics has played over the years, since 1901. One of the cornerstones of economics is a theory referred to as the rational-expectations theory, the idea that people make choices based on their rational thinking, available information and past experiences. Economists then go ahead and extend this theory to come up with the efficient-market hypothesis, the absurd idea that financial markets reflect all available information and therefore inherently tended towards efficiency and stable risk dispersion. These two theories have been central to mainstream economics for more than 40 years. Most followers of economics can see that these models blind economists to reality and certain that the universe was unfolding as 'in equilibrium', they failed both to anticipate the financial crisis of 2008 and to chart an effective path to recovery. The economic crisis has produced a crisis in the study of economics – a growing realization that if the field is going to offer meaningful solutions, greater attention must be paid to what is happening in university lecture halls and seminar rooms.

Perhaps a great starting point in this reformation exercise should be a denouncement of rational expectations and efficient-market modelling and considering what behavioural economics has to offer; which embodies the mindset that people could actually sometimes be have irrationally and contrary to predictions of economic models. Notable individuals that have won Nobel Prizes in behavioural economics are laureates Gary Becker (motives, consumer mistakes; 1992), Herbert Simon (bounded rationality; 1978), Daniel Kahneman (illusion of validity, anchoring bias; 2002) and George Akerlof (procrastination; 2001).

References: FT website, The Nobel Prize official website.

[DK 15/03/15]

Don't blame the whole 'dismal science'!

In response to this interesting article from Business Daily Africa, Why development economics is biggest challenge to growth, I'd say:

It's the massive generalisations within the 'dismal science' that are of concern and that's what should really come under fire, not the whole science. I still think there's some hope if economics is done a little differently. For instance, I'd go straight for the famed General Equilibrium as an example of one massively broken theory that's taught to new economics students so religiously. If you choose to do the unorthodox qual and quant economics (which is what Behavioral Economics mostly stands for and that I'm quite a fan of), I believe the results will be much more palatable to current affairs. For instance - as mentioned by a previous commenter adopting a different risk management methodology, or viewing public and private debt in the truer way that that debt should be looked at in stead of masking it frivolously in the way current  governments are doing (or should have learned not do having been burnt by the recent crisis).Then I believe you will still have some pretty strong cases to lobby the body politic with i.e. call them to action issues like the massive rising income inequalities of the present times, debt escalations (because as clearly experienced in the US with the largely sub-prime loan-backed crisis, when debts rise above a certain threshold, debt deflation kicks in [poor Eurozone is experiencing deflation at the moment], and then asset prices go to the floor).

The "Good" Politicians of Canberra

Canberra has taught me a few things over the years and one of them has to be the ability to spot a "good" politician. I say this after being entertained by one Julie Bishop at the Africa Day celebration event on the 27th of May. The celebration is organised by the African diplomatic core and held to commemorate the formation of the Organisation of African Unity in 1963, the organisation which now stands as the renamed African Union. 

To be precise, the statement that has left me as convinced as to think of Julie as a "good" politician boils down to her choice of words when it came to her reference of Australia's aide to Africa. The facts of the recently released budget stand as being that foreign assistance will be frozen and capped to a ceiling with the Department of Foreign Affairs expected to shed some $400m weight through efficiency gains from merging with the Australian Agency for International Development. 

The Government will achieve savings of $7.6 billion over five years by maintaining official development assistance (ODA) at its nominal 2013‑14 level of $5.0 billion in each of 2014‑15 and 2015‑16. From 2016‑17 ODA will grow in line with the Consumer Price Index. The savings include $2.0 billion in 2017‑18 by removing the provision previously set aside for ODA spending.
As part of these savings, the Government has decided to reverse previous decisions to join the African Development Bank Group and the International Fund for Agricultural Development, and has introduced a cap on departmental costs for the Department of Foreign Affairs and Trade (DFAT) to administer ODA equivalent to 5 per cent of DFAT's total ODA budget. (2014-2015 Budget - Paper No. 2 - Expense Measures - Foreign Affairs & Trade)

Julie Bishop referenced the aide that Australia provides to Africa but didn't say at which side, in the north-south map that the monies will be moving to. With some economic insight, one can clearly see the equivalence between "savings", "efficiency gains" and cuts, but with no economic insight and with some eloquently rehearsed off-the-top-of-your-head political language oratory, one can surely fail to see the stark difference as it's nicely disguised within the prose.

With that said, I still thank Canberra for opening up my eyes and driven within me the hunger for in-depth critical analysis. It becomes quite hard to take things as they come once one discovers the facts behind the talk or in this case, the rust beneath the coating. But will the average Australian have the same drive to scrutinise political speech for what it is?

But maybe the story might be different if I'd