Brexit was one of the biggest events of 2016, and has naturally triggered a fair bit of contemplation in the hedge fund industry, where money managers are now pondering the short and long term implications. Here is a selection of some of the Brexit points made in the second-quarter letters sent to investors by a batch of hedge funds. Most were sent out in July, but many of their thoughts remain very current.
HSBC is out with a note this morning warning about the consequences of the UK voting to leave the European Union. It’s a 50-page, hefty bit of research spanning FX, economics, banks, real estate, gilts and equities. The headline figures:
British real economic output is only about 3 per cent higher than at the beginning of 2008. Yet labour input (hours worked adjusted for schooling and experience) is up around 11 per cent and the real value of the UK’s net capital stock has grown about 6 per cent. The implication, as it can’t be measured directly, is underlying productivity has plunged in the last seven years. One of the most important concepts in macroeconomics, the decline matters for living standards and anyone hoping to improve them, yet explaining the UK experience remains a puzzle without a solution.
Always something of a subjective question, Simon Wren-Lewis, economics professor at Oxford, has had a go at putting the recent performance for the UK in context. It is, after all, a mere 98 days to the UK election, and economic managment may feature in the pre-poll debates. Here is a very simple fact.  GDP per head (a much better guide to average prosperity than GDP itself) grew at an average rate of less than 1% in the four years from 2010 to 2014.  In the previous 13 years (1997 to 2010), growth averaged over 1.5%. So growth in GDP per head was more than 50% higher under Labour than under the Conservatives, even though the biggest recession since the 1930s is included in the Labour period! Which, given that anti-austerity politicking is all the rage now that Syriza has taken power in Greece, is in large part an attempt to reopen questions about the broad effect of reductions in government spending at a time of weak aggregate demand. (Or, so far as Simon is concerned, persuade journalists to challenge Conservative claims about a successful track-record of economic management).
The UK’s current account deficit is at its widest level in decades, and over the previous four posts we’ve managed to narrow down the cause to falling earnings from UK direct investments abroad since 2011. In our final post, we will do our best to figure out which specific investments are to blame, as well as what all of this means for people who actually live and work in the UK. Our main limitation is that the most detailed data end in 2012, although we can use that information to make some reasonable inferences about what has happened since then. About half of the decline in the UK’s earnings from foreign direct investment from 2011 to 2012 came from the “information and communication” sector, which includes publishing, media, software, data processing, and telecoms. Almost all of that decline can be attributed to the European Union. So what happened?
The UK is more dependent on foreign capital than at any point since the end of WWII. Unusually, the trade deficit isn’t to blame: (Source: Office for National Statistics, 4-quarter rolling average)
After reading John McDermott (formerly of these pixels) on the latest independence vote poll numbers and why he reserves the right to panic… Take a moment to reflect on this late (potential) addition to the No-vote campaign, via Citi’s Jonathan Stubbs: The history of the union has been kind to UK equity investors. Since the Acts of Union were passed by the Parliament of England (1706) and Parliament of Scotland (1707), UK equities have returned c12,700,000,000% (Figure 1) with a slightly less impressive annualised return of 6.3%. Our back-test concludes that equity investors have been well served by the Union, to date.
Can just one product deliver a 1 per cent boost to Chinese export growth? If that product is Apple’s iPhone 6, then potentially yes. So says BoAML’s China Economist Ting Lu, who presents the iPhone 6 case for Chinese exports as follows (our emphasis): Though iPhone is an American product, it’s assembled in Mainland China (henceforth China) and all iPhones, except those sold in China, and are counted as China’s exports. The iPhone 6 is also important for Taiwan because the economy provides a significant amount of iPhone components including producing processors.
We had feared that one of most famous of Chinese statistical quirks might have abandoned us forever. The reported combined GDP of China’s provinces came in only slightly above its national GDP in the first quarter, amid reports that more than 70 smaller Chinese cities were dropping GDP as a performance metric. Perhaps as China stopped evaluating its local government officials on a narrow GDP basis, the officials would stop doing the obvious and fiddling their GDP numbers. That would in turn stop the sum of China’s regional GDPs always coming in ahead of the national figure… as well as helping with things like unequal income distribution, problems with the social welfare system and environmental costs.
Credit Suisse’s global demographics research team came out with a new note on Friday featuring some enlightening charts about the US economy. It provides a handy way of evaluating the country’s lackluster performance since 2000, as well as a few longer-term trends. As the CS team notes, GDP growth can be decomposed into three distinct forces: growth in the population of working-age people, growth in the number of hours worked by each working-aged person, and productivity growth.
Alternative currencies are being issued left, right and centre these days. So what’s stopping Scotland issuing its own currency? (Did you not know that Spain already has SpainCoin?) Well, what most people don’t realise is that Scottish institutions already issue their own currency because the Scottish pound is already a private currency. Nobody notices, however, because it’s so sophisticatedly pegged to the Bank of England pound thanks to Scottish banks being part of the BoE central bank system and collateralising every note they issue with a sterling asset of some sort. For as long as the Scottish banks have the sterling collateral needed to maintain the 1:1 valuation, there is no reason for the value of the Scottish pound to disconnect from that of the UK pound.
Welcome to boom time in the UK. There, we said it. Or rather we’ve spotted that the optimistic Jonathan Stubbs at Citi has said it. There is a buzz, and it is all about the Bs. Bull Market — Boom, Bids, Base Rates, Builders & Big-Caps Global recovery, UK boom — Our economists expect progressive recovery of global economy in 2014-15 with GDP growth of 3.1% this year rising to 3.5% in 2015, from 2.5%in 2013. Recovery led by US and Europe/UK. EM headwinds not strong enough to derail growth. UK survey data very strong, eg new orders, hiring and investing intention. Boom time.
This post is just to flesh out a point in this great piece by John McDermott — so read that first. But we think it’s an important point. An alternative title for this post: What’s under your gilt? After all, it is the debt that has enabled Her Majesty’s government to turn so breezily confident that currency union with an independent Scotland “is not going to happen”, fully seven months before an independence referendum.
The Resolution Foundation has published its annual look at UK standards of living, and what a brightly coloured chartfest of post-recession misery it is indeed. It’s an attempt to provide an accurate picture of income distribution, addressing some flaws in the official statistics. But the central message is that not just the middle, but everyone outside the top 1o per cent has seen their share of economic gains squeezed.
Who thinks UK base rates will go higher this year? We ask because Economics Editor Chris Giles made precisely that bold prediction in the FT’s collection of holiday prophesy. Will the Bank of England raise interest rates in 2014? Yes. It is fashionable to think this is an absurd question to which the answer is obviously no. But not for the first time, fashion sucks. The British economy is growing at an annualised rate of more than 3 per cent, unemployment is rapidly falling towards the Bank of England’s 7 per cent threshold when it considers rate rises and inflation has been above the central bank’s 2 per cent target for all of the past four years. The reason the BoE would keep rates on hold at 0.5 per cent amid a fast expansion is a rapid improvement in productivity, allowing recovery to coexist with an absence of inflationary pressure.
Among the factoids we came across while reading Books as Capital Assets, by Rachel Soloveichik of the BEA: 1) Book sales have tracked nominal GDP pretty closely for about sixty years:
This is what $560bn or so of newly-discovered US economic output looks like. Yes it’s the latest BEA estimates/revisions of US GDP. They’re out – and with 1.7 per cent growth in 2013′s second quarter, and 2012 growth revised up to 2.8 per cent from 2.2 per cent at the last estimate, they’re fairly good.
The BEA’s comprehensive benchmark revisions to the national income and product accounts will be released later today, and they’ll include the major conceptual changes announced earlier this year. If you want a straightforward summary of the changes and how they matter, we recommend Robin Harding’s piece from Monday. (And remember that the annual benchmark revisions, also to be released today, will affect numbers going back to 2010. Look for GDP and GDI, which had diverged markedly in the year through the end of Q1, to be revised towards each other.)
A few thoughts on China’s second-quarter GDP, which came in at 7.5 per cent, in line with expectations: - The seasonally-adjusted rate is 1.7 per cent. If annualised — ie the way that most countries present their quarterly GDP data — is it just under 7 per cent.
A couple of years ago, we did a long Q&A with Fed staff economist Jeremy Nalewaik about his work on the differences between Gross Domestic Product and Gross Domestic Income. The two indicators, as you would expect given their theoretical sameness, tend to be nearly identical over a long enough stretch of time. GDI is interesting mainly because Nalewaik had found that its early estimates tend to be revised less over time than are initial estimates of GDP.
Compare: …the UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower.
Our headline is the same question you could have asked of Moody’s back in February… The UK lost its second AAA rating on Friday night after Fitch cut its rating to AA+. The outlook’s stable. S&P is now the only one of the big three giving Britain a top rating. The rationale from Fitch:
Following on from our post on Monday comparing China’s relatively low GDP growth and its relatively high levels of new credit… Here are some updated charts from Michael Werner of Bernstein Research, which show that the total stock of non-government and non-financial debt to nominal GDP continued to climb to new levels in Q1 (it was 193 per cent at the end of 2012):
A great pick-up from Climateer Investing on the extremely important subject of whether we are collectively, as a planet, mismeasuring GDP by failing to account for the transformation of the economy into a service-oriented, information-based, digital entity. It comes from Irving Wladawsky-Berger, the former IBM executive. As he notes: Gross domestic product (GDP) is the basic measure of a country’s overall economic output based on the market value of all the goods and services the country produces. Most measures of economic performance used by government officials to inform their policies and decisions are based on GDP figures. But, many concerns have been raised about the adequacy of GDP-based measurements given the major structural changes that economies around the world have been going through over the past few decades. GDP is essentially a measure of production. While suitable when economies were dominated by the production of physical goods, GDP does not adequately capture the growing share of services and the production of increasingly complex solutions that characterize advanced economies. Nor does it reflect important economic activity beyond production, such as income, consumption and living standards.
(Header credit to UBS’ Paul Donovan) Flash estimates for euro area GDP below. Warning: they’re not pretty. From Eurostat: GDP fell by 0.6% in the euro area1 (EA17) and by 0.5% in the EU27 during the fourth quarter of 2012, compared with the previous quarter, according to flash estimates2 published by Eurostat, the statistical office of the European Union. In the third quarter of 2012, growth rates were -0.1% and +0.1% respectively.