The Political Economist

My new paper  (open access; meaning free to read) is out in the new edition of Public Choice (published online first in February this year). This was my second PhD paper at Oxford, and one I am particularly fond of given the importance of the topic and one of the cornerstone arguments of my upcoming book Elite Networks: The Political Economy of Inequality (more on that below).  What's the main finding?  In short, I looked at the effect of political connections on the allocation of TARP funds to US banks, and found that TARP recipients that lobbied the government, donated to campaigns, or whose top execs had direct connections to politics received better bailout deals. Let’s unpack this. In 2008, as the crisis unfolded in the US, the banking industry elevated its lobbying and campaign spending activities.  You might remember the panic days in Sep & Oct ’08 where it seemed like the financial world is collapsing. Getting bailed out was a priority for many banks, es...

This article was first published on Seeking Alpha on July 15th 2021 . This article contains updated graphs for the subsequent month and a half (a new version will look at the situation again in October).  A lot of investors and analysts like to look at various stock market indicators for signs of widespread market hubris, overconfidence, greed (&  fear ), or an upcoming contraction. Many like to point out that stock valuations are at their extremes, particularly in the tech sector, or that, for example, the Shiller PE ratio is running at a 39 multiple (the only time it was higher was prior to the 2000 dot-com bust). Many such indicators certainly have merit for uncovering sentiment, and while they can be good indicators of whether a bubble is reaching its climax (e.g. the Shiller PE ratio), whether a market is overheating, or that a correction is due, a much better indicator of an upcoming contraction is the bond market.  This is not only true historically (e.g....

This week we saw a huge play come to its climax. For a while the retail investor community at r/wallstreetbets (WSB) on Reddit has been pumping several stocks that have been targeted by short sellers (mostly in the form of big hedge funds). GameStop ( GME ) was among the most prominent ones (others include AMC , BB , BBBY , NOK , etc.). The pump was done on the aforementioned subreddit, spilling over onto other social media platforms like Twitter where many retail investors, bystanders, billionaire businessmen, and even celebrities have joined in to push the stocks up in the massive short squeeze against the short sellers.  Why has this caught so much attention? The motivation of the WSB community was driven by the fact that many short positions in these companies were overleveraged. GME  for example had a short interest at 140% of its float . This means that there was more demand for borrowing stocks to be sold short than the number of stocks in circulation ( this artic...

In addition to monetary and fiscal bubbles , another potential issue that could be exacerbated by a prolonged period of low interest rates are rising corporate debt levels of publicly listed nonfinancial companies. Total corporate debt of such companies has already reached historical highs by surpassing $10 trillion in Q1 2020 , and is likely to keep growing in the months to come. Adding to this another 5.5 trillion of corporate debt from SMEs and other non-listed companies the total corporate debt size in the US is now at 73% of GDP . This is still lower than household debt in 2009 which reached almost 100% of GDP, and with lower rates of growth. However, corporate debt will keep on rising – as it did during the 2009 crisis – as a necessary consequence of the pandemic and increasing risk exposure of many companies. Leveraged loan market and CLOs About $1.4 trillion of that market (also at historical highs) is comprised of leveraged loans , which include all loans securitized in someth...

The ECB performed another stress test on Europe's biggest banks. Here is the full report and here is the brief presentation . This stress test represents a yearlong audit of Europe's largest lenders to evaluate their hidden pressures and potential problems that could arise if another recession hits them. The conclusion was that 24 EU banks (out of the 130 tested) are about 25bn euros short of the money they would need to survive another potential financial crisis (this is what a stress test does - it assumes negative economic scenarios such as sharp declines in GDP and in equity markets, or spikes in interest rates, unemployment and oil prices, and then uses a series of simulations to calculate the losses of banks in the next several years to evaluate whether or not they have enough capital to 'weather the storm'). However the ECB has stated that half of these banks which failed the test (12) have already raised enough capital to make up for the shortfall. Wha...

Two weeks ago Argentina has once again declared default on its debt (the last time being 13 years ago during the infamous  Corralito  in 2001). This makes it their 9th default since they got their independence almost 200 years ago ( Reinhart and Rogoff have the numbers : Argentina defaulted on its debt in 1827, 1890, 1951, 1956, 1982, 1989, 2001). In the slow summer months this is obviously the top story:  New York Times  organized a debate questioning the justice behind the default (since after all it was the New York federal court which ruled that Argentina must pay a small group of bondholders $1.5bn by the end of July),  Kenneth Rogoff  and Joseph Stiglitz propose solutions on Project Syndicate, coupled with the usual reports from  The Economist ,  Forbes ,  WSJ ,  The Economist (2) , Financial Times , etc.  What happened?  After last minute talks being held in New York with a small group of its bond holders, c...

Some texts that caught my attention over the past few weeks: 1. Argentina's default As you may or may not noticed in these summer weeks, Argentina has declared a bankruptcy for the second time in 13 years. They place the blame on a US ( vulture ) hedge fund and its owner Paul Singer . A "vulture fund" buys cheap debt (bonds) of countries in financial distress for a discounted price and then profits by suing the debtor country, usually striping it of its assets. The coverage:  The Economist ,  Forbes ,  WSJ ,  Washington Post ,  New York Times ,  Kenneth Rogoff , etc.  2. Inheritance flows in Sweden, 1810-2010, VoxEU An impressive database covering a very sensitive issue of inequality based on inheritence, one of the topics emerging through the works of Atkinson, Piketty and Saez . "Overall, our analysis of inheritance flows in Sweden since the early 19th century point out two major lessons with respect to the development of capita...

According to numerous reports, it seems that the biggest world companies are sitting on record levels of cash holdings. If this is true, the question is why aren't they spending it? According to Financial Times , in 2008 the biggest 1000 world companies held a total of $1.95tn in cash, however by the end of 2012 this level has jumped up to $3.2tn. This can be attributed solely to the credit slump and the consequential severe lack of confidence during the entire recovery period.  However in 2013 the cash reserves kept on rising despite a rebound in the stock market and rising business confidence with still very low interest rates. All this should have encouraged more spending and investing from the business side, but cash reserves just kept on rising.  Source: WSJ and US Federal Reserve  Source: The Telegraph However, it is obvious the distribution of these funds are uneven. The very fact that only the top companies are holding all this cash is bi...

Observe the following two graphs (HT: Business Insider ): Source: Business Insider The first one depicts the S&P 500 index over the past 17 years where it seems to show remarkable patterns of volatility. The pattern is basically a series of sharp increases followed by a an even steeper decline. The market went up during the dot-com bubble in the 90-ies, only to see a sharp decline when the bubble burst (the 9-11 attacks didn't help either). The Fed then lowered the rates in fear of another recession and was encouraged to help fuel the housing bubble to offset this temporary market decline. Which it did as the market again underwent several years of high returns (which was actually another bubble). Then came the crisis of 08 and the market plummeted, only to recover in the later years, primarily thanks to massive QE done by the Fed . So if the pattern continues, we could be in for another correction right about now? Right? Wrong. Even by looking at this graph alone...

There has been a series of posts on emerging market troubles in the past few weeks. Dani Rodrik , Nouriel Roubini , Kenneth Rogoff , Tyler Cowen and the FT's Beyondbrics have all pondered on the great issues facing the emerging markets in the past few years and months (Project Syndicate has an entire section devoted to the loss of momentum in the EMs dubbed  "Subemerging Markets?" ). Many of the concerns they express don't seem to be fading, in fact they are likely to become even more pronounced in the years to come.  Arguably the main issue over the past months have been declining currencies and capital flight, mostly due to various political disruptions ( Argentina , Brazil , Turkey , Ukraine , Thailand , India , etc.). In addition the tapering of Fed's quantitative easing (tighter monetary policy) is causing havoc to many countries whose currencies are tied to the dollar and whose foreign debt is dollar-denominated.  It seems that the economic crisis ...