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PracTICal Remainders and Reminders

As usual, a couple of additional odds and ends leftover from TIC that are worth a few brief mentions. And then a reminder of the caveats which come along…

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This article was originally published by Alhambra Investment Market Research

As usual, a couple of additional odds and ends leftover from TIC that are worth a few brief mentions. And then a reminder of the caveats which come along with them (and all the interpretations).

1. First up, China.

According to the latest TIC data, mainland China added a few billion to its UST holdings during July 2020, while those belonging to someone (China) posting through Belgium declined by a few billion more. Netting the two, a small decline otherwise more consistent with a weaker CNY (rising dollar) and yet that was the month when the Chinese currency really traded in its suspiciously narrow range.

There isn’t a one-to-one with what’s in TIC; meaning that CNY can and does move independently of what might be indicated in China’s holdings of Treasuries, at the same time the latter can be noisy in the short run being affected by who knows what (see: below at the end) with data constraints, Communist priorities, and a whole range of stealth capabilities beyond our capabilities to uncover.

But July’s TIC does continue the weaker CNY trend, or more in line with dollar shortage indications all over the place whatever is up – after August 20 that’s been yuan, slightly – with the Chinese.

2. Next, this might turn out to be a much bigger deal down the road, maybe even soon, but for now it is just a single monthly negative. Private net activity in reported US$ corporates:

For the first time since last December, TIC shows a sharp drop meaning, on net, more corporate securities were sold than bought.

As you can see above, this was one of the first indications from late 2018 that Euro$ #4 was turning pretty nasty heading through its landmine on into 2019. It also related to collateral, as junk corporates were the primary infection of the global US$ collateral pool meaning the growing rejection of them was almost certainly expressed in repo and derivatives (securities lending) by bigger haircuts, risk aversion, a falling collateral multiplier herding participants more and more into only the best quality collateral (eventual bottleneck).

For the first three months of this year, foreigners were all over corporate bonds and while TIC doesn’t break it down by type (how much was junk, we don’t know) we can reasonably surmise there was probably quite a bit of risk-taking given especially January and February inflation hysteria (predicated on a far more optimistic view of the global economy therefore reduced risks generally).

The favorability faded by June and now this net selling in July. If it remains just the one month, maybe nothing more than technical reasons or seasonal quirks (or UFO’s). Should it continue over subsequent months, then like overall net selling this would be a key warning to take under advisement.

3. Finally, in response to what’s suggested by two out of the last three months being net negative headline TIC, growing systemic dollar shortage, the official side has remained relatively muted. For July, just barely a net minus.

There was the one big month of net official buying – the one when UST’s were falling to their lowest recent price, the opposite of how it’s “supposed” to work by conventional views – and that big month just so happened to be also the peak in reflation.

This actually makes sense: more offshore dollars (reflation), prices for safe and liquid instruments fall (bond rout), overseas officials are able to add more US$ assets to their reserves even as they lose value.

Then comes the (inevitable?) opposite: UST’s begin to rise in price yet foreign reserve managers sell them as a means to offset the reason for the falling yields that come with rising bonds – dollar shortage as higher deflationary potential, therefore lower growth/inflation expectations which, since 2012, has forced officials (not just Chinese) to deal with the monetary shortage by mobilizing reserves.

They don’t just “sell Treasuries”, though, many appealing to the purposefully hidden use of “contingent liabilities.” Thus, when TIC shows foreign official net selling of UST’s, the main reserve asset, it indicates dollar shortage though to a degree which isn’t likely described only by that selling.

We know by this visible behavior central banks are acting in response to a eurodollar shortfall because we can see it here, but what else are they doing at the same time? Almost always there’s more to it.

In our current case, the July 2021 TIC estimates, the pendulum has swung back in the other direction from reflationary monetary relaxation back toward shortage. Basically, consistent with everything else we find in this data as well as market prices, etc., even if we don’t know the full extent of what’s being done about it.

Deflationary potential up.

 

Caveats: the TIC data, broadly speaking, is incredibly helpful and informative as one of the few sources for cross border flows even if it was never intended to be used in this fashion. However, what’s missing from it is a third piece which remains completely absent.

What I mean is, TIC captures bank data and asset flows from the US to outside, as well as from outside into the US. The banking data is broken down specifically into those two categories from the perspective of US banks (and this technical term also includes domestic subsidiaries of foreign parents).

The first is what I call and color the blue: US banks who lend to (claims on) overseas counterparties. And then the red: US banks who borrow from (payable to) overseas counterparties. This lending/borrowing data in both directions also includes a small window into securities lending; the lending/borrowing of securities either explicitly held in repo or for use in other ways that eventually lead back to collateral in repo/derivatives (transformation).

What TIC does not capture or even go after – because it cannot – is the vast likely larger piece of offshore to offshore. It does get some US to overseas, and then some overseas to US, but there is nothing, absolutely nothing (even the best BIS data is wildly incomplete) about overseas to overseas.

You get a bank in the US doing something with a bank or non-bank in the Caymans, some of it (not all) shows up on TIC. That bank in the Caymans doing something, in dollars, with a bank in Singapore? Ghost.

This can account for most of why TIC can seem “noisy” at times and even contradictory at others. In the short run, just too many unknowns and too much left out of the data collection. In other words, why, even though this is all really good stuff, better than most, we still have to be careful about drawing too many individual conclusions.

You can start with TIC and what might be indicated within it, but that just means there is more work to do. The chief benefit is, unlike most who don’t know or can’t read the data, which is pretty much everyone, you at least know in which direction to start looking. 






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Economics

“Beyond What We Anticipated” – Kimberly-Clark Slashes Forecast Amid Inflation, Supply Chain Debacle

"Beyond What We Anticipated" – Kimberly-Clark Slashes Forecast Amid Inflation, Supply Chain Debacle

Now that companies are reporting their…

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“Beyond What We Anticipated” – Kimberly-Clark Slashes Forecast Amid Inflation, Supply Chain Debacle

Now that companies are reporting their latest quarterly financial results. Investors are becoming increasingly concerned about inflation impacting the performance of companies. The latest example is from Kimberly-Clark Corporation, which missed analysts’ forecasts as inflation and supply chain disruptions dented sales. 

Kimberly-Clark shares slumped the most in six months after the maker of toilet paper, Huggies diapers, Kleenex tissues, and tampons, among other household items, slashed its annual forecast amid inflationary pressures and supply-chain woes. 

Kimberly-Clark reported a Q3 net income of about $469 million, or $1.39 per share, compared with $472 million, or $1.38 per share, last year. Adjusted EPS of $1.62 missed consensus of $1.65. Sales of $5.01 billion were up from $4.68 billion last year and higher than the consensus of $4.99 billion.

“Our earnings were negatively impacted by significant inflation and supply-chain disruptions that increased our costs beyond what we anticipated,” CEO Mike Hsu said in the statement.

The company is raising prices to offset soaring commodity prices sparked by supply chain issues that are not likely abating anytime soon. 

“We are taking further action, including additional pricing and enhanced cost management, to mitigate these headwinds as it is becoming clear they are not likely to be resolved quickly,” Hsu said. 

He continued:

“We will continue to invest in our brands and capabilities as we navigate through this volatile and difficult macro environment. Our strategy is working, and we remain confident in our future and our ability to create long-term shareholder value.”

One of the most notable takeaways from the earnings reports, not just with Kimberly-Clark but also with other companies, is that higher inflation and labor shortages exert margin compression. At the same time, broad US major equity indexes tread around all-time highs. 

As inflation becomes more persistent and the “transitory” narrative fades into the darkness, even White House economic adviser Jared Bernstein recently had to admit that inflation is likely to stay elevated longer than previously expected. The question remaining is if the monetary wonks at the Federal Reserve will embark on a tapering program of their balance sheet, which could eventually end the stock market party. 

Tyler Durden
Mon, 10/25/2021 – 14:00




Author: Tyler Durden

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Rabo: “We Have Just Seen One Key Step Forward… And More Back”

Rabo: "We Have Just Seen One Key Step Forward… And More Back"

By Michael Every of Rabobank
A step forward – and more backwards
In the real,…

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Rabo: “We Have Just Seen One Key Step Forward… And More Back”

By Michael Every of Rabobank

A step forward – and more backwards

In the real, not the financial economy, we have just seen one key step forward – and more back.

In particular, the crisis at the port of LA/Long Beach, on the verge of truly metastasizing, has finally seen shipping containers allowed to be stacked higher than usual to provide more storage in the limited areas available. Will this help? Yes! Is it enough? No! LA/LB still has a record backlog, with more containers arriving every day; every US logistics node from there on is also logjammed; alternative smaller ports are constrained by a lack of workers and trucks; and global carriers are opting to skip larger ports, such as Boston (perhaps for good reasons, but it certainly ensures shipping rates stay sky high).

China also reports Covid is spreading again in 11 provinces, despite being largely closed off to the outside world, and is imposing limits to intra-province travel. This will not only hit an already-slowing economy, but global supply chains too. Yes, that might ease congestion in US ports again temporarily, as did recent Chinese power-cuts. However, it will only do so because goods aren’t flowing, not because they are. It’s not just a US issue either. Recall the warning here about China’s cessation of exports of magnesium, and the likely knock-on effects on European industry? Politico is now flagging EU leaders signal alarm over Chinese magnesium crunch. Add other goods, and industries, to that list, perhaps.

On the virus front, despite official pre-Budget denials, there are also health-expert warnings and cynical chatter about the UK needing another Covid lockdown – although naturally not until 30,000 people have mingled at the COP26 in Glasgow next month. Parts of the EU are also seeing soaring Covid case numbers.

Europe can also worry about the La Nina pattern emerging in the Pacific, presaging what could be a colder than normal winter for the Northern Hemisphere, which already-tight energy markets did not want to see. As Politico also notes: ‘The EU’s impotent rage at Putin’s gas games: Access to Russian gas is splitting the European Union.’ But it’s not just gas doing so. The UK still rejects the European Court of Justice (ECJ) having a role in Northern Ireland, and the Polish government is also brawling over the ECJ vs. sovereignty: the Polish PM says the EU is making demands “with a gun to our head,” and risks starting a “third world war” if EU funds are withheld. In support, Hungary’s Justice Minister has tweeted: “We remember the Hungarian freedom fighters who faced Soviet tanks on the streets of Budapest. We said no to the Soviet Empire & we say no to the #imperial ambitions of #Brussels.” Recall EU countries are talking about a joint foreign policy and army: if things get worse, intra-EU enmity will start to look as bitter as that between California and Texas!

Is it a surprise Treasury Secretary Yellen now says inflation will stay high until H2 2022? But why is she talking about inflation again? The person who should be doing that, for now, Fed Chair Powell, just stated despite all of the inflation risks, it would still be “premature” to raise rates. As an aside, following the Fed’s recent decision to ban market trading by senior officials, it turns out the ECB’s own disclosures for last year show 13 of the 25 members of the Governing Council picked their own funds, stocks and bonds – in some cases including government bonds the ECB is buying under its stimulus programmes, or shares in companies whose debt it buys. Again, how very American of Europe.

So the inflation outlook is now clear: high, for around a year – and then we will see, depending on supply chains. Yet the growth outlook is far from positive. Bloomberg had a long read called ‘Chinese Economy Risks Deeper Slowdown Than Markets Realise.’ (Well, some of us did.) Beijing has also announced, contrary to the Wall Street Journal, that it *will* proceed with pilot property tax schemes over the next five years. The Global Times explains: “…there is no turning back…It will not begin with tigerish energy and peter out towards the end, or leave the matter unsettled…it is best to treat the prospect of property tax with a calm mind [because] people with more houses have enjoyed more public services provided by the country and society, so they should contribute more tax…there is no need to wait until house prices fall off a cliff due to the levying of property tax. I can say with certainty that such a scenario will never happen. Our country will not allow such a situation to occur, and will not introduce radical tax reforms that could lead to the “collapse” of the housing market.”

So the tax rate will be very, very low: in which case, it won’t provide much revenue for cash-strapped government. And in the background, Evergrande is putting out pictures of the projects it is still finishing, just as another developer looks like it is to default on a 12.85% US dollar note due today. Consider the profit margins the firm must have been expecting to have borrowed at that rate; imagine the margins Beijing would prefer under ‘common prosperity’ to allow for more affordable housing.

Staying with tax, and after having almost all other avenues closed off by intra-party fighting, the US Build Back Better Act –the White House fiscal plan to stave off a growth slump, even if it also pushes inflation higher– will apparently be funded by “not a wealth tax, but a tax on unrealized capital gains of exceptionally wealthy individuals,” according to Yellen. Which means their assets, i.e., their wealth. So, in the US it is time for curbs on ‘excessive’ income and for the wealthy to give back more to society. Oh, sorry: that’s common prosperity in China. More policy mirroring, as both sides of a growing geoeconomic divide try to deal with the inequality and polarisation that Chimerica globalisation built.

In geopolitics we see mirroring too. On Friday, US President Biden stated on live TV the US would defend Taiwan if it were attacked, a major step away from the US policy of “strategic ambiguity” over this hyper-sensitive topic. The admission, not actually Biden’s first on the topic, was immediately walked back by the White House press office, but it remains to be seen if this was the president ‘mis-speaking’, or if it was deliberate messaging. Either way, Beijing’s response has been furious, with the Global Times calling the present US administration the “most incapable and degenerate in the country’s history.” With the US also pressing ahead with plans to try to allow for Taiwan’s “meaningful” involvement at the UN, tensions over this issue look set to escalate further. Indeed, with all the EU drama over “WW3” and Poland, it’s the Indo-Pacific that is still the epicentre of geopolitical fat tail risks.

So that’s the real economy. The financial economy will just do its own sweet thing today, as usual.

Tyler Durden
Mon, 10/25/2021 – 13:00





Author: Tyler Durden

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Reading The Classics: Mathematics Vs. Economics

There’s been a fun (but silly) long-running debate on Twitter whether economists need to read canonical texts: Smith, Marx, Ricardo, Keynes, etc. What caught my eye is that a mainstream economist compared economics to mathematics — why don’t we learn c…

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There’s been a fun (but silly) long-running debate on Twitter whether economists need to read canonical texts: Smith, Marx, Ricardo, Keynes, etc. What caught my eye is that a mainstream economist compared economics to mathematics — why don’t we learn calculus by studying the history of calculus? Why this is interesting is that is showed a lack of understanding of the situation in both mathematics and economics.

Please note that this article is a discussion of the philosophy of teaching at the university level, so do not expect any conclusions that will help make analysing bond markets easier. That said, there is an outline of a critique of the core methodological principles of neoclassical macro.

I will first start with mathematics.

The Eras of Mathematics

My academic background was as an (honours) electrical engineering undergraduate, with a minor in mathematics. I then ended up with a doctorate in control theory — an area of applied mathematics that is normally attached to engineering faculties. As such, I missed most of the undergraduate mathematics curriculum, but I did cover relevant courses, and hung out with mathematicians (my supervisor had a background in pure mathematics until he went to the dark applied side).

I took a course in the history of mathematics at McGill. My comments here reflect my hazy memory of that course — as well as an editorial bias that might horrify some historians, but probably reflects how many mathematical students would approach the topic. 

(I grabbed the cover of the book History of Mathematics (Amazon affiliate link) to give a pretty picture to distract from my text. The text looks interesting, and overlaps the topics in the course I took, although my course terminated at an earlier historical period. I have not read that book, but I would give 100% odds that it is a more reliable source about the history of mathematics than myself.)

I would divide mathematics into three eras.

  1. Modern. Mathematics pursued in a fashion that is consistent with what is done in the present research literature.
  2. Early Modern. Mathematics that is structured in a fashion similar to the present (although perhaps more “wordy”), but often uses proof techniques not used in the modern literature.
  3. Pre-Modern. Any mathematics that a present-day math undergraduate would need a historian to explain the context.

Modern Mathematics

If we look at the output of modern mathematicians, we see two main classes of texts: articles, and long-form texts. Long form texts include textbooks, monographs, and theses (which is a monograph published at a University instead of publisher). Meanwhile, a “textbook” is just a monograph that has been optimised for teaching purposes.

When we look at monographs, a significant portion of the text is devoted to a survey of the field, as well as setting up notation (which is typically tied to the survey). The reason is straightforward: attempting to review a monograph that consists of purely new results would be a daunting task. It might happen in a brand new area of mathematics, but that is unusual (almost by definition).

We can then see why mathematical teaching does not consist of “reading canonical texts”: the underlying texts are a huge volume of journal articles, along with monographs that survey the journal literature. For reasons of time, teachers use the surveys — but students are expected to be able to go into the primary literature as needed.

(Jumping ahead, this is how many neoclassicals like to view economics.)

With respect to textbooks, within an area of specialisation, the textbooks generally evolve to meet teaching needs. However, the core contents are often relatively uniform. For example, both Rudin and Kolmogorov were popular textbooks for real analysis when I was student. Once you worked through one, you could cover the other without picking up much new content.

Early Modern Mathematics

For a philosopher of science, early modern mathematics (as I define it) is probably way more interesting. There were a lot of debates on how to prove results.

Unfortunately for the pre-moderns, the typical reason why a debate existed was that both sides were wrong. Over time, more robust proof techniques were developed, and the debates were ended.

A modern student of mathematics would be expected to be able to go through that literature, and very easily demonstrate the weaknesses (if not outright errors) of the old proof techniques.

This is not usually covered, although it can appear in surveys. For example, Rudin covers both the Riemann and Lebesgue definition of the integral, and explains the advantage of the Lebesgue formulation.

These debates are otherwise not covered for the basic reason that it is impossible to find properly-trained mathematicians who take the old proof techniques seriously. To what extent a debate exists, it would continue within “modern” mathematics.

Calculus

Calculus has its roots in the “early modern” period (as I define it). There were debates on how to do proofs. But, those debates were settled, and the modern proof techniques that settled the debate are the ones taught in courses.

Although those were important debates, they are not a major feature of university level teaching for an important reason: calculus is barely considered to be a university level subject. For example, in Quebec, local students have a 3 year university program, and for students in the mathematics/science streams, Calculus I (differentiation) and II (integration) are taught in CEGEP — a pre-university level of education. (Students from outside the province have an extra year, where they learn calculus.)

Calculus is a settled area of mathematics, far from the research frontier. The only pedagogical interest in teaching it is to find the way that best fits the backgrounds of the enrolled students. For students of Calculus I/II, teaching them invalid proof techniques is distracting and not helpful.

Pre-Modern Mathematics

What about the canonical texts of pre-modern mathematics? Well, here is my list of such canonical texts.

  • Euclid’s Elements.

Until relatively recently, Euclid was taught. The catch was that it was taught to school children (such as generations of English schoolboys). Although not assigned, I read the Elements in either junior high or high school.

What about everything else? Well, we need to look at what pre-modern mathematics consisted of. Firstly, people lumped a lot of things in with “mathematics” that mathematicians have dumped on other faculties, such as applied sciences and mysticism about numbers. What about the rest? We see the following areas of interest.

  1. Plane geometry. Any culture that had access to the Elements took it seriously, and you could use the plane geometry either in it or as taught in modern high schools to solve the problems that the ancients faced.
  2. Arithmetic. This is taught in modern primary schools. The best way to teach arithmetic depends upon your numbering system, and even modern schools keep experimenting.
  3. Word problems. These can be solved by using high school algebra. The rise of modern notation is probably where you can draw a line between “pre-modern mathematics” and the rest.

This is reflected in how my history of mathematics course was taught. We got a small potted history in lectures, but for testing purposes, we were expected to solve problems using the mathematical techniques available to a given culture. Although a fun challenge, this is more a form of entertainment than serious mathematics. Solving a problem that you already know the answer to (courtesy of knowing modern techniques) is not that big a deal.

This ease would not hold for the earlier mathematicians. It took an effort to translate other cultures’ mathematics to their own conventions, and would be shocked by the coursework by a modern mathematics faculty.

Economics

The Twitter debate about reading the classics largely consisted of a fiesta of name-calling and strawman attacks. In other words, the kind of entertainment that I go onto Twitter for. If we wanted to be serious, we realise that there are three separate questions that are being mangled together.

  • What do we expect an undergraduate in a field to know?
  • What should academic researchers in a field know?
  • What is the best way to teach an undergraduate (possibly graduate) students?

That is, we need to differentiate between what is considered required knowledge for an undergraduate versus researchers. In engineering, a knowledge of project finance is a requirement. I am out of the loop, but I believe that any Canadian faculty without such a requirement would face accreditation issues. This is despite the fact that it is exceedingly unlikely that faculty at engineering departments will publish research in the area of project finance.

I do not claim to be trained as an economist, and I leave it to the reader to decide whether a person can leave a university with an undergraduate degree in economics without knowledge of the thought of Smith, Ricardo, Marx, and Keynes (etc.).

At the graduate level? The reality is that students can parachute into an economics graduate program without an economics undergraduate degree. Since post-grad degree programs are already far too long in most places, you cannot shoehorn in an undergraduate degree into the program. That said, one does not normally crow about ignorance of a subject that is taught to undergraduates in their field. (My supervisor had an obligation to tutor undergraduates, and so he often left meetings with me to return home to study the next lecture of thermodynamics so that he could answer question. This is how academics should work.)

Finally, what is the best teaching technique? Speaking as someone who barely read any authors before Keynes, I am in the camp that secondary sources are probably the most time efficient teaching technique. That said, there is a catch: the secondary sources need to take the primary sources seriously. It should be possible for the reader of the secondary source to read the primary and go to almost any passage and understand what the original author is going on about.

Dunking on the Mainstream

With that out of the way, let’s have some fun and dunk on the mainstream’s positions in this area. More accurately, I will relay some critiques that I am aware of, without claiming that they are true.

  • We cannot compare many areas of economics — such as my only area of interest, macroeconomics — to calculus, since the questions are not settled. The research frontier has not completely moved away from what Keynes was writing about.
  • To what extent a mainstream academic argues that undergraduates do not need to be aware of foundational topics in their field since they are not current topics of research is out of line with accepted practice in every other university department that I have had contact with.
  • Heterodox authors claim that neoclassical summaries of economic debates are botched because they do not take critiques of underlying assumptions seriously. Debates that neoclassicals consider “settled” are still disputed.
  • Related to the previous: the survey undertaken neoclassicals of the literature is obviously biased. The case in point is MMT: from the perspective of a mainstream academic, MMT did not exist until the articles dunking on it by neoclassicals appeared. We have the obviously dysfunctional situation of earlier neoclassical articles on MMT critiquing it without citing any journal articles, with later neoclassical articles begrudgingly citing them since MMT has refused to disappear off the radar screen. I have encountered barriers to citation in my old area of academia, but nothing even slightly close to this behaviour.

Most of the discussion in this article could be viewed as academic mud wrestling, which not everyone is interested in. However, the latter point does affect the output of the neoclassical research program, and thus is of interest to anyone with an interest in macroeconomic theory.

Email subscription: Go to https://bondeconomics.substack.com/ 

(c) Brian Romanchuk 2021

Author: Brian Romanchuk

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