Summary: Macro information efficiency and investment strategies

November 20, 2014

Markets are not efficient in respect to macroeconomic information, because both research and strategy development are expensive. As a result, there is ample scope for value generation based on researching fundamental valuation gaps, detecting implicit subsidies, and tracking the setback risk to popular strategies. Increased macro information efficiency benefits both investors and economies at large.
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Updated summary: Shadow banking and asset management

October 26, 2014

Easy monetary conditions and tighter regulation for banks naturally encourage risk transformation and liquidity creation outside the banking system. Institutional asset managers are key agents of that development. As such shadow banking relies on collateral value rather than external backstops it can make the financial system more pro-cyclical and vulnerable. The size and herding incentives of large asset managers could reinforce excesses.

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The global leverage problem

October 18, 2014

On aggregate, global financial leverage has further increased since the great financial crisis. Most worrisome is the declining debt service capacity of public and private borrowers due to falling potential GDP growth and inflation. This precarious development virtually enforces very low real interest rates. EM leverage has increased fastest in recent years. China in particular poses maybe the greatest global debt problem.

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A refresher of European banking union and AQR

October 11, 2014

Nicolas Veron explains European banking union and its acronyms. The two main pillars are the SSM (Single Supervisory Mechanism), run by the ECB, and the SRM (Single Resolution Mechanism), run by the SRB (Single Resolution Board). Before taking up its new role next month, the ECB will publish a stress test and an AQR (Asset Quality Review). The new framework is expected to ease the home bias of banking regulation and the sovereign-bank “doom loops”. Deficiencies include a lack of area-wide deposit insurance and insufficient resolution funds.

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When does shadow banking become a problem?

September 14, 2014

A new ECB paper explains key risk factors of shadow banking. First, if unregulated finance outgrows market size, tightening liquidity can escalate into runs and fire sales. Second, if shadow banks are operated by regulated banks they become a source of contagion. Third, and most importantly, if shadow banking focuses on regulatory arbitrage it erodes classical financial system safety nets.

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Regulatory tightening: the basics and the basic risks

September 13, 2014

Financial regulatory tightening implies to some extent mutation of systemic risk. Thus, elevated bank capital requirements raise incentives for regulatory arbitrage and shadow banking. Liquidity regulation and OTC derivatives reform inflate holdings of government securities and help accommodating high public debt. And the emergence of central banks financial stability mandates and macroprudential policies may create misplaced confidence in crude and untested macro management tools. 

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When currency strength and credit booms feed on each other

September 6, 2014

A  paper by Bruno and Shin illustrates how global banks drive lending booms in local currency markets. Most importantly, they explain how currency strength fuels rather than curbs financial expansion in small and emerging economies, leading to escalating dynamics. Conversely, dollar strength can trigger a tightening spiral. Empirical evidence seems to support the point.

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The impact of non-conventional monetary policy on banks

August 24, 2014

Non-conventional monetary policy seems to benefit banks’ balance sheets. After all, it offers cheap refinancing and credit market support. However, an empirical analysis by Lambert and Ueda casts doubt on that belief. Market measures of bank credit risk have mostly deteriorated in episodes of policy stimulus. Easy monetary policy has been encouraging risk-weighted asset accumulation and discouraging balance sheet repair.

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The basic mechanics of shadow banking

August 17, 2014

Shadow banking creates liquidity outside the regulated banking system. Unlike traditional money, shadow money is constrained by the value of assets that serve as collateral. Therefore, shadow banking is vulnerable to market price declines. As shown in a new paper by Moreira and Savov, pro-cyclicality is compounded by collateral values falling more than asset prices when uncertainty is rising. This makes modern financial systems prone to collateral runs and liquidity crises.

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A brief review of China’s vulnerabilities

August 8, 2014

The IMF’s latest staff report on China serves as a reminder of key vulnerabilities. With repressed real interest rates corporate leverage remains high and particularly so in state-owned enterprises. Shadow banking has exceeded 50% of GDP and is still growing. Economic growth and credit quality are exposed to an unbalanced real estate sector. And the augmented fiscal deficit is already close to 7.5% of GDP, due mainly to local governments’ net borrowing through financing vehicles.

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Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

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