Monday , March 27 2017
Home / Matthew C Klein
Matthew C Klein

Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist. I have worked at the world’s largest hedge fund and read every FOMC transcript since May, 1987

Articles by Matthew C. Klein

What if breakeven inflation and the “term premium” are measuring the same thing?

4 days ago

There are two simple ways to think about long-term bonds yields:Traders’ best guesses about future short-term interest rates plus something extra — the “term premium” — to compensate for the risk that those guesses are wrongA long-term real interest rate plus something to compensate you for inflationSo here’s a surprising chart:The change in the Federal Reserve Bank of New York’s estimate of the “term premium” is, apparently, closely related to the change in the spread between US Treasury bonds and their inflation-indexed equivalents. For a given move in the five-year forward “term premium”, there is a corresponding move about half as big in the five-year forward breakeven inflation rate.The only serious exceptions are a few months in the second half of 2008 during the financial crisis and

Read More »

In defence of Jim Cramer’s call to sell stocks in October 2008

12 days ago

[embedded content]In retrospect, this seems like terrible advice. Someone who had bought the Wilshire 5000 index of publicly-traded US stocks on October 6, 2008 would today be up about 180 per cent after reinvesting dividends.One man who seems to have listened to Cramer, to his apparent detriment, is Marty Bannon, father of Steve Bannon. From a recent Wall Street Journal profile, with our emphasis:With his children’s security a priority, Marty Bannon began accumulating phone-company stock, which AT&T occasionally made available to employees…he viewed the shares as an inheritance for his children, a lesson in the value of hard work and stability…Then came the 2008 market chaos…Marty Bannon says he lost more than $100,000 because he sold the shares for less than he paid for them.It was a

Read More »

Trouble ahead for PE investors?

14 days ago

Buried in the latest issue of Bain & Company’s Global Private Equity Report are a few concerning nuggets for investors.First, buyout firms are paying extraordinarily high prices for their targets, even higher than during the last boom in 2007:Historically, the single best predictor of returns in private equity investing is the entry multiple. That shouldn’t be surprising since, in general, higher initial discount rates tend to produce higher returns across assets. Limited partners should therefore avoid using the performance of the recent past to justify their PE allocations, since future returns will likely be lower.As if that weren’t bad enough, Bain points out that the relatively strong performance of the past few years was itself caused by the same forces likely to depress future

Read More »

More evidence in the case against Luxembourg

18 days ago

Luxembourg sometimes resembles a criminal enterprise with a country attached.The Grand Duchy’s appetite for other nations’ tax revenues ranges from its unusually low petrol taxes, which siphon commuters from neighbouring Belgium, France, and Germany, to its unusually generous treatment of multinational corporations.These predations are distasteful, but they are more or less legal, at least for now. Less justifiable is Luxembourg’s role as a centre for money-laundering and outright tax fraud.As Gabriel Zucman of the University of California-Berkeley has documented, there is a gap worth roughly $8 trillion (5 per cent) between the world’s financial assets and its financial liabilities. If that gap were randomly distributed across countries, it could be attributed to errors at national

Read More »

Borio to central bankers: the “secular stagnation” is coming from inside the house

20 days ago

One of the most significant changes in the world economy in the past couple of decades has been the decline in real interest rates and the commensurate rise in indebtedness:The chart above comes from a recent speech by Claudio Borio of the Bank for International Settlements. The question is why it happened.According to Larry Summers and other exponents of the “secular stagnation” hypothesis, the downward slope of the red line reflects deep changes in the balance between the supply and demand for credit. If market interest rates — and central banks — hadn’t responded to these underlying fundamental changes, the rich world would have been plagued with decades of underemployment and slow growth in the decades before the crisis.The corollary is that rich countries must either depend on

Read More »

Will Nevada ever recover from the housing bust?

21 days ago

At this rate, probably not.Start with the state-level GDP figures, which show the real output of Nevada’s private sector is still more than 8 per cent below its previous peak:As hard as it is to believe, this understates the scale of the damage.Despite an undiversified economy stuck in the middle of the desert, Nevada continues to be one of the most popular places for Americans to move. It also has a relatively high birth rate.Adjusting for changes in population, Nevada’s real output is a staggering 21 per cent below its 2006 peak, and more than 10 per cent below its level from two decades ago — a performance only comparable to Greece:No wonder recent data from the Federal Reserve bank of New York shows that, unlike the rest of America, Nevadans are still cutting their debts ten years

Read More »

Fed vs Fed on strategic mortgage default during the financial crisis

24 days ago

Suppose you borrowed a lot of money to buy a house but now find it’s worth a lot less than you currently owe. If your lenders only have recourse to the house itself, you might have good reason to stop paying your debts and walk away — even if you’re perfectly capable of making continued payments.After all, your credit rating will take a hit but your net worth will improve significantly as you move from negative home equity to zero home equity. You might also save money by moving somewhere else with lower monthly payments. Since you never lost the ability to pay your debts, only the willingness to do so, your default would be “strategic”.A few years ago, economists from the Federal Reserve banks of Atlanta and Boston wrote an influential paper trying to quantify the importance of these

Read More »

America’s household debt binge *was* about income inequality

26 days ago

Since 2006, a yawning gap has opened up between the average level of real household spending and the remarkably stable long-term trend:The standard explanation is that the trend’s stability was misleading.For one thing, aggregate consumption spending grew much faster than disposable incomes thanks to the steady decline in the average savings rate since the early 1980s. Not surprisingly, America’s household savings rate hit bottom just before consumption spending began falling away from its long-term trend.Even more important than this aggregate story, however, was the changing distribution of income. While the soaring fortunes of those at the top is well-known, the less-appreciated corrollary is that those in the bottom half experienced barely any growth in their real market incomes:Adding

Read More »

Decomposing the euro area’s current account surplus

February 24, 2017

One of the most significant changes in the global economy since the start of the financial crisis has been the massive swing in the euro area’s current account balance of roughly 0.6 percentage points of world output relative to its pre-crisis average:From one perspective, this is simply the consequence of the collapse in domestic spending in countries such as Spain, Italy, Greece, Ireland, Portugal, and the Netherlands — a collapse that wasn’t offset elsewhere in the currency bloc. By definition, if you earn a given amount from foreigners through exports and asset income, sharply reducing your spending will give you more money that you can then use to accumulate financial assets abroad.There is another way to understand the same dynamic, however, which is to focus on the flip side of the

Read More »

Snap AV: Guess which European country just got in trouble for lying about its debt?

February 22, 2017

According to the European Commission…It’s Austria!On 3 May 2016, the Commission announced the launch of a formal investigation into the possible misrepresentation of statistics in Austria…The investigation showed that severe irregularities took place in the compilation, control and reporting of financial, as well as non-financial, transactions in Land Salzburg for several years.By serious negligence, public accounting rules were not followed, control was lacking, financial and non-financial transactions were not appropriately reported, and recommendations from the Austrian Federal Court of Audit (Rechnungshof) were ignored.The report concluded therefore that the Excessive Deficit Procedure (EDP) data transmitted to Eurostat in 2012 and 2013 did not include part of the debt incurred by Land

Read More »

Snap AV: Is India’s demonetisation supporting the rupee?

February 21, 2017

Future historians may eventually conclude the most significant event of 8 November 2016 was the Indian government’s decision to scrap most of its physical currency (by value).The policy has been justified as an attack against corruption and other illegal activities facilitated by paper money, even though legitimate transactions seem to have borne the brunt of the costs.One unexpected consequence could be stronger support for the value of the rupee against other currencies. The following chart comes from Srinivas Thiruvadanthai of the Jerome Levy Forecasting Center and compares the share of currency in India’s measure of narrow money against the nominal exchange rate:For about ten years, the growing use of physical currency — something unique to India and supportive of the argument that

Read More »

The long rise in profits is mostly just the flip side of falling interest rates

February 17, 2017

Here’s a deeply misleading chart:It would appear that the returns to owning capital have grown far in excess of national income. More than a seventh of all the money earned in America has gone to equity owners in the past few years, nearly double the proportion in the 1980s.Nostalgists for the 1960s and 1970s might see this as evidence that structural changes since the 1980s mainly benefited the wealthy at the expense of regular people. Some have argued, for example, that the growth of the lobbyist-regulatory state has dampened competition and boosted aggregate profitability.While those sorts of arguments probably explain the performance of particular companies or even entire sectors, the logic doesn’t hold up when expanded to consider the profitability of private enterprise as a whole.In

Read More »

If you’re going to border-adjust a carbon tax, why stop there?

February 14, 2017

The massive growth in China’s share of global exports coincided not only with a big decline in rich-world manufacturing employment and ensuing political turmoil, but also with a significant redistribution in world carbon dioxide emissions:So it’s interesting to read a proposal from Republican eminences arguing the government should tax carbon dioxide emissions, including from imported goods, and rebate the revenues to the public:Border adjustments for the carbon content of both imports and exports would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt carbon pricing of their own. Exports to countries without comparable carbon pricing systems would receive rebates for carbon taxes paid, while imports from such countries would face fees on

Read More »

Thought for the weekend

February 10, 2017

Research shows that while older colleagues often view diversity as an issue of representation and fairness, millennials tend to view cognitive diversity as essential for a diverse and inclusive organisation…The spirit of the millennial is better suited to the complex challenges that central bankers face in a risky and uncertain world.–Mark Carney, February 9, 2017

Thought for the weekend
Thought for the weekend

Read More »

Tarullo exits Federal Reserve

February 10, 2017

Well this was a surprise:Daniel K. Tarullo submitted his resignation Friday as a member of the Board of Governors of the Federal Reserve System, effective on or around April 5, 2017. He has been a member of the Board since January 28, 2009…Tarullo, 64, was appointed to the Board by President Obama for an unexpired term ending January 31, 2022. During his time on the Board, he served as Chairman of the Board’s Committee on Supervision and Regulation. He was also Chairman of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation.Tarullo was the Fed’s point man on financial regulatory issues, although he was never confirmed to the role of Vice Chairman for Supervision and was often undermined by the Fed’s far more powerful General Counsel, who, as it

Read More »

Greece has done much worse with the euro than EM basket cases did with their own currencies

February 8, 2017

Some people didn’t appreciate Alphaville’s recent comparison of Greece’s economic performance since 2007 with that of the United States during the Great Depression, which implied the Greek government missed a trick by committing to remain a member of the euro area no matter the costs.Their argument went something like this (our paraphrase):America in the 1930s was a large diversified economy with strong institutions. It was also in the midst of the one of the greatest periods of technological innovation in human history. Of course reflation would work well there.Greece, by contrast, is a small economy that depends on a handful of industries (mostly tourism, shipping, and oil refining) to earn hard currency. The country is notorious for the corruption of its officials and the weakness of

Read More »

The IMF implies Greece should have the left the euro long ago

February 7, 2017

The International Monetary Fund has published its latest Article IV report on Greece, the introduction of which features this remarkable chart:(Thanks to FT colleauge Mehreen Khan for pointing it out.)Aside from putting the scale of Greece’s depression into the proper context — something Alphaville has covered here and here, for example — it suggests Greece missed a trick by remaining a member of the euro area.The comparison to America in the Great Depression is particularly relevent because, like the euro crisis, it was preceded by an epic lending boom within a system of fixed exchange rates. The mix between public and private borrowing differed across countries according to circumstance, but the growth of credit in the 1920s was broadly analogous to what happened in the 2000s, much of

Read More »

“Sexy” companies like Snap tend to be bad investments

February 7, 2017

The S-1 filing of Snap Inc has generated a lot of attention, and not just because it promises to be a large initial public offering at a time when such things are rarer than during the financial crisis.Snap is an experiment in corporate governance in sync with the world’s authoritarian turn. It’s a company reaching out to the public markets even as it loses money hand over fist. (Costs were about 2.3 times revenues in 2016.) The products don’t seem to be used by anyone over the age of 25.Yet Snap and its bankers think investors will judge the business to be worth tens of billions of dollars. Their confidence is probably based on their assessment that there is strong investor demand for any company with claims to be a “unicorn”, and no one else is offering any shares to the public

Read More »

The US shouldn’t blame Mexico for “losing” at trade — it should blame Germany

February 1, 2017

Since the mid-1990s US manufacturers lost market share to foreign competitors and hemmorhaged jobs. This produced a political backlash the consequences of which are only beginning to be felt.One consequence that seems increasingly likely, however, is that the rules of the global trading system will change.As with most policy questions in America today, it’s more or less impossible to predict how things will change, but trade is an area where the executive branch has relatively more leeway to change policy without Congressional consent than, for example, the tax code, financial regulation, health care, or infrastructure. (Alex has much more detail.) And there have been plenty of hints about how the new administration thinks about trade:The overall trade deficit can be narrowed by focusing

Read More »

America’s growth has a slowed a lot in the past two years. Why?

January 27, 2017

The latest estimates from the Bureau of Economic Analysis show the US economy grew by 1.9 per cent in the past four quarters* — the same pace as in 2015 and significantly slower than 2013 (2.7 per cent) or 2014 (2.5 per cent).Delineating things by calendar years is arbitrary, however. What’s more relevant is America’s four-quarter growth rate had been steadily accelerating since the low point in mid-2013, peaked at 3.3 per cent in the beginning of 2015, slowed by a little more than 2 percentage points by the middle of last year, and began turning around in the second half of 2016:So what explains the 1.4 percentage point deceleration in growth? At a mechanical level you can say GDP is just hours worked multiplied by productivity. Since the growth rate in jobs has slowed by about a

Read More »

Americans are making more money from renting out homes than ever before, sort of

January 27, 2017

Here’s an arresting chart:As recently as 1990, Americans earned only 0.5 per cent of their personal income from rents. Now they earn 4.5 per cent of their income from this source.Since February 2007, more than 12 per cent of the total growth of personal income can be attributed to rising rental income, even though rents were only responsible for 1.5 per cent of personal income ten years ago. Put another way, rental income has more than tripled in the past decade during a period when employee compensation only grew by 31 per cent.On the surface, these data seem to corroborate the increasingly common view that the increase in American wealth inequality can be blamed almost exclusively on rising house prices.However, an analysis of what the Bureau of Economic Analysis is actually measuring

Read More »

The New York Fed thinks it’s time to make cashout refis great again

January 24, 2017

A return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to aggregate growth… If households and lenders again become comfortable with financing consumption with debt in addition to income, this will provide additional support to household spending and to the current economic expansion.–Bill Dudley, January 17 2017America has yet to fully recover from the last downturn — and for those who don’t remember, one of the defining features of the 2000s bubble was the extent to which American households borrowed against rising home values to pay for consumption.The following chart from Bill McBride at Calculated Risk, using methodology developed by Alan Greenspan and James Kennedy, gives a flavour of the magnitudes

Read More »

Japanese investors are handing out free money but not enough people want it

January 23, 2017

Regular readers of Alphaville should be well aware that currency markets are implying a different set of short-term interest rates in some countries than the local money markets.In theory, the dollar/yen exchange rate you can lock in three months from now by doing a currency swap should just be the dollar/yen exchange rate today adjusted by the difference between 3-month interest rates in America and Japan.In practice, however, this hasn’t been true since around 2014. The gap between the US-Japan interest rate differential implied by the currency markets and the actual interest rate differential is almost a full percentage point. For example, buying short-term Japanese government debt and swapping an equivalent amount of yen back into dollars can currently earn you about 80 basis points

Read More »

The folks who think “passive investing is worse than Marxism” think Trump will #MakeActiveGreatAgain

January 20, 2017

Most would agree the outlook for America (and, by extension, the world) changed significantly a few months ago. Just how things will turn out, however, is still extremely unclear.One consequence has been a collapse in correlations among stocks, both in America and Europe. Via Bernstein:Put another way, the dispersion between stocks has spiked. The latest figures from S&P show an upward spike in the gap between the returns of the typical stock and the broader market immediately following the election, although this has since reverted:As of the end of November, the level of dispersion was at its highest since the financial crisis — a telling milestone considering economists have found dispersion to a reasonable predictor of downturns. (Going further back, dispersion was even higher during

Read More »

Debunking the NAIRU myth

January 19, 2017

It’s important to try to estimate the unemployment rate that is equivalent to maximum employment because persistently operating below it pushes inflation higher, which brings me to our price stability mandate.–Janet Yellen, January 18, 2017A little more than half the income generated in America is paid to workers and most of the money spent in America goes to personal consumption. So it’s reasonable to think there is some relationship between the health of the job market and other important macro variables.And, in fact, there is a robust connection between the change in the unemployment rate and the change in the real value of money spent on employee compensation per working-age American since the mid-1980s:That chart shows the link between two real variables that have a logical connection

Read More »

Chinese capital flight is back

January 19, 2017

Ever since the People’s Bank of China began reducing its enormous pile of foreign exchange reserves and letting the yuan depreciate against the dollar a few years ago, people have been arguing about why.The three most popular explanations:It’s portfolio diversification. After all, Chinese households have a lot of money but almost all of it is locked up in bank accounts and domestic real estate. Even modest shifts towards a globally balanced asset mix would show up as capital outflows worth trillions of dollars.It’s just the end of an arbitrage. Interest rates on dollar-denominated debt are lower than on yuan-denominated debt, so lots of Chinese companies with international exposure borrowed in dollars, invested the money domestically, often by lending to companies without access to

Read More »

The value of the land in Vancouver has doubled since 2014

January 17, 2017

Jens von Bergmann of Mountain Math has just updated his maps and figures for the assessed value of the land and physical buildings in the city of Vancouver. There is incredible neighbourhood-level detail in his post, but perhaps the most striking takeaway is this chart showing the aggregate values of land and improvements over time:In the 2014 tax year, the assessed value of the underlying land in the city of Vancouver (excluding parks etc) was worth about $167 billion Canadian dollars. The latest data imply the value of this land is now worth about $318 billion!There are some legitimate reasons for this.A strong legal system, easily obtained residency, clean air, and a large expatriate community make Vancouver a prime destination for Chinese flight capital — something there’s been quite a

Read More »

A massive timeline of all the nutty things that happened in 2011, to aid your reading of the FOMC transcripts

January 13, 2017

Populist anti-elitist Congressman Henry Gonzalez (D-TX) successfully pushed the notoriously secretive Federal Reserve to release transcripts of its monetary policy meetings and staff presentation materials in the early 1990s.The latest batch, just released in time for the long weekend, are from 2011. Alphaville will be going through the materials slowly to digest the thousands of pages of text and charts. In the meantime, sit back and enjoy this timeline of noteworthy events from that tumultuous year:Estonia joins the euro area on January 1The spread between the price of Brent crude oil and West Texas Intermediate crude oil starts the year around $4 per barrelThe Bank of Korea raises its policy interest rate by 25 basis points on January 13Greek sovereign debt gets downgraded to junk

Read More »

Do lenders of last resort actually make the financial system safer?

January 12, 2017

Banks buy risky things by borrowing from people who want safe things.But lending money to people who buy risky things is inherently risky, so banks depend on a combination of deception and explicit government support to make sure cautious savers keep funding them.One way governments support their banks is by letting them borrow from a central bank in unlimited size at relatively low cost. This “lender of last resort” lets banks raise money during a panic to repay nervous creditors without having to worry about selling their risky and tough-to-value assets at a loss.In theory, the mere knowledge of the central bank’s existence should make depositors less prone to panic, which in turn will make it unlikely the emergency lender is ever used. The net result should be a safer financial system

Read More »

The politics of America’s transfer union looks *a lot* different at the county level

December 21, 2016

Last week we looked at how America’s federal government moves resources from richer areas to poorer ones by studying state-level personal income data. We also compared our results against how the states voted in the most recent election.We noted at the time this wasn’t a perfect analysis, since there is lots of inequality within states, not just between them. Combine that with the fact most states didn’t vote overwhelmingly one way or the other, and it made some commenters (and us) wonder what the results would have looked like if we could zoom into smaller areas.Fortunately, the Bureau of Economic Analysis publishes most of the same figures we looked at for states at the county level.There are currently 3113 counties in the United States. The biggest is Los Angeles County, with about 10.2

Read More »