Unproductive debt

January 4, 2020

Credit and related interest income have historically been viewed as service and related payment for lending productively. However, in a highly collateralized and risk-averse financial system credit may be granted mainly on the basis of collateral value and aim at wealth extraction rather than wealth creation. On the macroeconomic level, this creates unproductive debt, i.e. debt that is not backed by productive investment. This type of debt carries greater systemic default risk. The rapid increase of debt and leverage after the great financial crisis may be an indication of an unproductive debt problem. For the purpose of macro trading, relevant systemic risk indicators should feature intelligent debt-to-GDP ratios and trackers of collateral values.

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Modern financial system leverage

March 24, 2018

Leverage in modern financial systems arises from bank balance sheets and off-balance sheet transactions that involve banks and other financial institution. Non-bank funding of banks and credit is large, rising, and not fully captured in official statistics. Collateralized transactions and wealth management products are important underappreciated parts of system leverage. The classic narrow focus on bank credit-to-GDP ratios does not only underestimate leverage in size, but also overestimates the stability of sources of funding.

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How to use financial conditions indices

October 14, 2017

There are two ways to use financial conditions indicators for macro trading. First, the tightening of aggregate financial conditions helps forecasting macroeconomic dynamics and policy responses. Second, financial vulnerability indicators, such as leverage and credit aggregates, help predicting the impact of an initial adverse shock to growth or financial markets on the subsequent macroeconomic and market dynamics. The latest IMF Global Financial Report has provided some clues as to how to combine these effects with existing economic-financial data.

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China’s internal debt overload: a refresher

August 26, 2017

According to the latest IMF China report credit to non-financial institutions has soared to over 230% of GDP, an increase of 60%-points and a doubling in nominal terms from 2011 to 2016. Credit efficiency, i.e. the benefit of new lending in terms of economic output, has deteriorated markedly. Corporate lending has soared with an outsized allocation to state-owned enterprises, particularly to “zombie” and overcapacity firms. The credit boom has been supported by an abnormally high national savings rate of over 45% of GDP, which is likely to decline going forward. Historically, almost all credit booms that were similar to China’s in size and speed ended in a major downturn or credit crisis.

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Why money markets remain vulnerable

February 20, 2016

New theoretical work shows that money markets remain fragile as long as there is a connection between asset prices, secured funding and unsecured funding. The degree of fragility depends on leverage in the financial system. Central banks can alleviate acute liquidity stress but cannot easily reduce financial system leverage. Hence fragility remains even with ultra-easy monetary conditions.

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Non-conventional monetary policy and global finance

January 23, 2016

Empirical evidence shows that non-conventional monetary policy in large advanced economies has shaped financial conditions in the rest of the world. In particular, non-conventional easing has boosted EM bank balance sheets and securities issuance. This goes some way in explaining why the emerging world has become so vulnerable to even just tapering of these policies.

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Leverage in asset management

October 24, 2015

Asset managers can use leverage to enhance returns. Outside hedge funds, such leverage is modest as share of assets under management. However, considering the huge volume of assets, changes in buy-side leverage still have a significant impact on financial conditions, particularly in emerging markets. Also, both theory and empirical evidence suggest that leverage is pro-cyclical.

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The toxic combination of leverage and bubbles

September 26, 2015

A 145-year empirical analysis suggests that asset price surges are most dangerous when they are associated with rising financial leverage. The combination of housing price bubbles and credit booms has been the most detrimental of all. This bodes ill for modern leveraged housing price booms, such as in China.

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When is public debt a problem for growth?

August 22, 2015

A new empirical analysis quantifies the (historic) link between public debt and economic growth. Critical thresholds depend on country features, such as access to financing. Average thresholds might be 60% and 80% of GDP for emerging and developed countries respectively. Importantly, debt dynamics matter more than levels. High debt is less of a drag when it is on a declining trajectory.

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The rise and risks of euro area shadow banking

June 6, 2015

The non-bank financial sector in the euro area has doubled in size over the last 10 years. It has become a concern for three reasons. First, its tight links with regulated banks imply contagion risk. Second, investment funds’ supply of liquidity has become critical for many markets, but is pro-cyclical. And third, rising synthetic leverage aggravates pro-cyclicality of both market prices and liquidity conditions.

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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 over eighteen years. 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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