What caught my eye

1. Global bond sales at post-2009 high (from the FT):

Banks and businesses seeking to capitalise on record low borrowing costs in the west have seen worldwide bond volumes increase by 6 per cent to $2.74tn so far this year compared with the same period in 2013. The figure is the highest since 2009, a record year for deals according to Dealogic.
[...]

The US accounts for the largest number of global bond deals, equivalent to 30 per cent of the global total, but its share has slipped by 5 percentage points from 2013 in the face of resurgent issuance elsewhere, especially in Europe.

Overall European issuance increased by 11 per cent to $1.41tn driven by a 69 per cent year-on-year rise in financial institutions’ bonds, while corporate bond issues enjoyed a single-digit rise. Sovereign bond deals decreased slightly.

Eurozone banks, especially those in the periphery countries, have been eager to cash in on investors’ hunt for higher yielding bonds while they have been under regulatory pressure to build their capital buffers.

2. A new book (free!) on the secular stagnation hypothesis. VoxEU summarizes the book. Stephen Williamson writes a critique. David Beckworth says long-term interest rates are not in secular decline.

3. Timothy Taylor (Conversable Economist) relays the conclusions of a new paper on fair trade:

a) Fair Trade and other certification programs affect a relatively small number of workers.

b) Fair Trade does seem to provide higher prices and greater financial stability, at least when farmers can sell at the minimum price.

c) Fair Trade does seem to promote improved environmental practices.

d) While Fair Trade helps producers, the effects on workers and work organizations is more mixed. 

4. Dovish Draghi. Comments by Simon Wren-Lewis and Greg Ip.

5. Home ownership for everyone, Swedish edition, from Bloomberg News:

Sweden’s Social Democratic Party, which polls show will oust Prime MinisterFredrik Reinfeldt’s ruling coalition in elections next month, is ready to relax a regulatory limit on mortgage financing.

The party says a rule that prevents Swedes getting loans worth more than 85 percent of property values hurts first-time buyers. According to Magdalena Andersson, the party’s economic spokeswoman, the Social Democrats may seek to ease the loan-to-value cap if the regulator introduces rules that force households to amortize their mortgages. Less well-off households would be exempt from any amortization requirements, she said.

[...]

The proposal, which would reverse a 2010 limit put in place during Reinfeldt’s tenure to contain record household debt, risks colliding with central bank pleas to slow credit growth. Riksbank Governor Stefan Ingves said last week failure to address consumer indebtedness could force the central bank to tighten monetary policy to protect financial health.
[...]

The government and regulator are exploring more options to address Sweden’s debt burden, which the central bank estimates is about 175 percent of disposable incomes, the highest on record. Swedes’ addiction to borrowing has intensified over the past half decade. Consumers in the AAA-rated country used record-low interest rates during Europe’s debt crisis to take on credit in a cycle that contributed to record housing prices.

6. Tyler Cowen on the interaction between macroeconomic trend and cycle:

Let’s say, as seems to be the case, that wages stagnated, labor market mobility slowed down, and non-outsourcing productivity was slow during 2000-2007 (or maybe longer).  Those are all long-term economic trends and they are all bad news.

During 2000-2007 most Americans acted as if were are on a good trend line when in fact they were on a less favorable trend line.  This influenced spending decisions, borrowing decisions, real estate decisions, and so on.  People overextended themselves and they also created unsustainable bubbles.  Sooner or later the debt cannot be rolled over, the bubbles pop, the crash ensues, AD falls, and so on.  This often takes the form of a discrete cyclical event, as indeed it did in 2008.

One point — still neglected in much of today’s macroeconomic discourse — is that the mis-estimated trend was a major factor behind the cyclical event.  But there is yet more to say about this interrelationship between cycle and trend.

The arrival of the cyclical event, in due time, makes the negative underlying trend more visible.  At first people blame everything on the cycle/crash, but a look at the slow recovery, combined with a study of pre-crash economic problems, shows more has been going on.

The cyclical event itself places greater stress on labor markets, on firm liquidity and thus on R&D, on perceived stocks of wealth, and so on.  As individuals observe the reaction of the economy to this added stress, they start seeing just how wide-ranging and deep the previously existing structural problems have been.

Those observations, and the accompanying economic responses, make the problems worse.  Forecasts become more pessimistic, investment declines, firms will be less keen to commit to workers who are less than the “sure thing,” and so on.  Sometimes this is moving along curves, other times there are shifts in multiple equilibria (“is Greece a European country or a Balkans country?”), toss in some herd behavior too.  In any case these changes are ill-served by the terminology of cyclical vs. structural.  They are cyclical and structural in an intertwined fashion.  And of course this all leads aggregate demand to fall all the more.

U.S. equities in 2013: Highest Sharpe ratio since 1995

This is by Gavyn Davies at the Financial Times. In his article, Davies ponders whether the bull market can last another year.

I am a little alarmed by this:

"...there is an unusually strong consensus in analysts’ forecasts for next year, with almost everyone expecting stronger global GDP growth, dovish central banks and further rises in equity markets. As John says, this “cozy consensus” borders on complacency."

Such a widespread bullish sentiment has often be a preamble to short-term corrections. Although,

"Past returns do not help us very much to predict the out-turn for 2014."

Besides, Davies states:

"Nor are valuation signals are very helpful in picking the top of a bull market, except when they are at extremes.That is not the case at present."

Even more,

"Research on identifying bubbles by new econometric techniques (which I will write more about in the near future) is also re-assuring. It suggests that the probability that the US equity market is currently in a bubble is less than 20 per cent."

In the rest of the article Davies turns to estimations of the output gap, and to the monetary policy outlook.

Well worth reading

1. Forward interest rates and monetary tightening, by Jim Hamilton at Econbrowser. This is a nice refresher of forward interest rates, and an application of the Gurkaynak-Sack-Wright data set (xls).

2. A summary and critique of Summers' "great stagnation" hypothesis, by Stephen King at the FT. King makes an important distinction between "supply side" and "demand side" theories of the stagnation. Tyler Cowen already pointed the discussion in that direction a few days ago.

3. NBER working paper by David Dollar and Benjamin Jones, on the link between China's institutions and its "unusual" macroeconomic performance.

China presents several macroeconomic patterns that appear inconsistent with standard stylized facts about economic development and hence inconsistent with the standard neoclassical growth model. We show that Chinese macroeconomic patterns instead appear consistent with an environment where state control of factor markets can promote aggressive output goals. We consider the micro-institutional features that can sustain this behavior, emphasizing the hukou system and state control over capital allocation, and present a simple model built on these features. The model can explain several puzzling facts about the Chinese economy, including its unusually low labor share and unusually high saving and investment rates. Interestingly, the model also shows that free-market reforms can initially take the economy further from global macroeconomic norms.

4. John Hussman on his usual crusade to show that we should expect meager returns from U.S. equities. I find his charts persuasive--until he starts trying to show that the Philips curve is incorrectly specified, or that there is a tiny correlation between unemployment and the stock market. (I don't disagree with the theses, but with the methods.)