A lot of models of the economy use the stock market as a leading indicator. That is why it can be very silly to turn around and use these models in order to figure out where the market is going*. Perhaps more subtle forms of this type of mistake are why economists are generally not known for being good traders. However, there are interesting micro-relationships within the market that correspond to economic activity in interesting ways. One of these is the relationship between consumer discretionary stocks and consumer staples stocks vs. nominal US personal consumption expenditures.
Right now, the market seems to be pricing in a slightly lower nominal growth rate than it did pre-crisis.
*These models can be useful insofar as it helps tell a trader that the market has an incorrect macro view, but that is another story.
China is changing its RMB exchange rate policy. Here are the key quotes:
In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.
In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.
I can think of a few reasons why they are choosing to do this now.1. By promising action right before the G20, it allows them to avoid this contentious issue and instead make the developed countries focus on their debt problems. 2. They have been trying to moderately tighten their policy in other ways, so this move is a natural extension of their policy that as an added benefit placates members of the international community.3. They figured that because everyone is now worried about the Euro, they could change to a basket and have a smaller effect on the markets than if they implemented this policy while everyone was already selling the dollar. 4. Due to recent currency movements, they are worried about export competition from manufacturing in the Euro-zone more than they are about US competition. This move could be a medium term move to strengthen the Euro. Of the above reasons, #1 and #2 are pretty obvious and are generally well known. #3 seems like it could be true, while for #4 to be correct the reference basket of currencies would have to be changed pretty drastically. It is worth noting that while the language does not imply revaluation, but as long as the forward rates are pricing in some type of revaluation (and the only time they don't seems to be when there is a liquidity shock and people are forced to exit their positions) the last time the PBOC used similar language the RMB appreciated pretty steadily for a few years. However, this steady appreciation encouraged speculation in RMB based assets, driving up the real estate bubble that China is presumably worried about now. If they let (encourage) the RMB be priced to steadily appreciate at a similar rate again that would imply that either they haven't learned their lesson or that the party has decided that they cannot let the real estate bubble collapse anytime soon and are desperate to keep it going.
The group paraded through Toronto's financial core with an outsized papier-mache head of Canadian Prime Minister Stephen Harper, handing out fake C$1 billion bills that spoofed the price tag just for security at the summits.
I thought that it would be worth looking into the demographics of China. It would be nice to actually quantify its effect a bit more closely. Luckily, I found a paper that did just the type of analysis that I was looking. David Bloom and Jeffrey G. Williamson wrote “Demographic Transitions and Economic Miracles in Emerging Asia”, published in April 1998. They used demographic and economic data from 1965 through 1990 to generate estimates on the impact of a demographic dividend. They measured the impact of the growth of the population, the growth of the working age population (15 through 65) and other common variables on per capita GDP growth. I took the average of the coefficients in table 4 to do a country specific analysis of China and India. On average, the growth of a working age population helps per capita GDP growth by about 1.7% for every additional percent growth in working population, while every percent growth in the total population hurts per capita growth by 1.4%.
Without a demographic Dividend, China’s GDP growth would be marginally lower:
The demographic dividend’s effect (blue line) is disappearing, and will go negative after 2015. The orange line measures the total impact of population on GDP, combining the dividend’s effect on per capita income with the overall population change.
For India, their demographic dividend is mainly in the future.
India’s overall GDP growth will slow down with their general population growth, but their per capita GDP growth will be benefiting from a demographic dividend for quite some time.
This analysis relies on coefficients from 1965 through 1990, so the impact of the elderly is not going to be properly quantified. There were no countries facing an abnormally large elderly population that expected benefits from the government. When the Bloom & Williamson paper separated out the youth dependency and elderly dependency ratios, they found that an elderly population actually added marginally to growth (Which makes some sense since unlike with youth the elderly population is marginally productive). However, after economies have had to deal with the potential fiscal crisis due to their aging population the effect might be found to be quite a bit more negative.
I suspect that some measure of this nature might be helpful in separating out convergence growth from demographic driven growth. Unfortunately, the nature of the demographic dividend is that the dividend occurs during convergence, so a simplistic analysis can only explain so much.
One thing that China's markets lack is human capital. One part of that deficit is a lack of trust in the markets. When companies use fake protein in their foods and others put lead into children's toys, there are understandable reasons as to why they may be suspicious of domestic Chinese companies. Some companies figured out that they could gain a certain amount of legitimacy by hiring... inexperienced white workers.
No experience necessary—which was good, because I had none. I’d be paid $1,000 for a week, put up in a fancy hotel, and wined and dined in Dongying, an industrial city in Shandong province I’d also never heard of. The only requirements were a fair complexion and a suit.
Institutions matter, or why you shouldn't be bullish on Russia without being very bullish on oil and natural gas:
In Russia, the 'Ask the Audience' lifeline isn't one that the contestant would often use because the audience often gives wrong answers intentionally to trick the contestants.