I recently said that markets were cruising for a bruising. For now, they’re just cruising, mirroring the path set by Corporal Ferro as she guides her drop ship to a perfect landing on LV-426 in James Cameron’s Aliens. There is still little stopping risk assets, short vol is paying steady premiums for those picking up dimes in front of the proverbial steamroller, and risk-free instruments still offer 4-to-5% for anyone who feels like temporarily getting off the train. In other words, it’s very pleasant indeed for investors. From the perspective of the macro data, that’s easy to explain. Market ..read more

I had the opportunity earlier this week to sit down with the IIEA and Dan O’Brien to discuss the decline in global birth rates, population ageing and what it all means. Thanks to the IIEA for hosting me ..read more

I have a few things on my mind this week. We have to talk about Japan and the BOJ. Last week’s decision by the BOJ to raise its deposit rate above zero for the first time in 17 years cements Japan and its central bank as a counter cyclical indicator, of sorts. While major central banks have spent the majority of the past 18 months raising interest rates, the BOJ has stubbornly resisted calls to exit NIRP, despite rising inflation. Now that the ECB, BOE and Fed are on the cusp of lowering interest rates, the BOJ is pulling the trigger on a hike. The BOJ’s decision raises a number of fundamental ..read more

This is the final chapter in the first part of my long-running demographics project. In the previous chapter I described the quantum effect of fertility, which hypothesises a negative relationship between fertility and rising incomes as parents substitute quantity for quality in their reproductive decisions and child-rearing. But can the quantum effect explain why birth rates in one country after the other appears to be stuck below the replacement level, and why global fertility will soon drop below that same level? The answer is no. To understand current and more recent post WWII global ferti ..read more

I am almost done with the fifth chapter for my book on demographics, but given that I’ve spent the best part of 18 months writing and researching it, I think I will let it marinate a bit further before giving it a final look and read, and present it to the world. In the meantime, however, there is plenty to chew on in markets and the wider economy. — Financial market pundits are a bit like dogs chasing cars; they wouldn’t know what to do if they caught one. And so it is that after trying to figure out whether the economy and markets would achieve a soft landing in the wake of the post-Covid ti ..read more

The BIS has a Bulletin out on the usefulness of AI and large language models. They’re not terribly impressed. When posed with a logical puzzle that demands reasoning about the knowledge of others and about counterfactuals, large language models (LLMs) display a distinctive and revealing pattern of failure.  The LLM performs flawlessly when presented with the original wording of the puzzle available on the internet but performs poorly when incidental details are changed, suggestive of a lack of true understanding of the underlying logic.  Our findings do not detract from the considerable pro ..read more

This is my third use case for how to do quantitative analysis with Chat GPT 4. The two others, on Eurozone inflation and times series regression with macro data, can be found here and here. I started in the industry as Head of Research for Variant Perception, a research shop that specialises, among other things, in quantitative trading models, asset allocation tools, and trade signalling analysis. One tool that came up again and again in my analyses was binary signals to identify turning points in asset classes, stocks or economic data series. The idea is simple. First, you create a binary ind ..read more

The following chart is one of hundreds that I use in my day-job as Chief Eurozone Economist at Pantheon Macroeconomics. It plots a normalised Z-score index of surveyed new manufacturing orders in Germany alongside year-over-year growth in factory orders, ex-major orders. It’s worthwhile spelling out the meaning of this chart in the world of economic research and forecasting. The factory orders numbers are so-called hard data, which in this case means that they’re official numbers of real activity reported by the statistical office. The PM new orders index, by contrast, is my home-cooked index ..read more

I am coming into 2024 in a decent position. My MinVar equity portfolio, designed to extract the best from both worlds in the perennial battle between growth and value, has done largely what it is supposed to do. It has offered positive, but below-beta, returns with below-beta volatility, the latter which means that your humble blogging investment analyst has been able to sleep calmly at night. In bonds, I moved my exposure onto the front early in 2023 in line with the yield curve inversion. At this point I see no reason to change that strategy. Why buy negative carry in duration when you don’t ..read more

This year’s advent calendar project was primarily done on ChatGPT 3.5 and DALL E2. I only recently acquired access to GPT 4.0, which is infinitely more powerful, especially in its ability to respond to real-time events—it is trained on current data—to create more detailed and realistic pictures and, as I will show here, to analyse data. So, I thought that I would pivot on this entry and show an example of some empirical and statistical economic analysis I’ve done with GPT 4.0. The first step was to create my own GPT optimised for time series analysis done on data uploaded in excel or CSV forma ..read more