Research

Our research seeks to exploit the most recent advances in financial economics, and connects factor returns to macroeconomic conditions. Our goal is to produce and implement differential portfolio advice.

Dollar Tantrums

Since March, the US dollar lost about 8% of its value relative to major currencies. According to our models, the decline in the dollar is consistent with markets’ pricing of lower long-term US real economic growth with higher uncertainty - and not higher inflation - relative to the rest of the world. Further relative deterioration in trend growth could well lead to investors losing confidence in the sustainability of US government debt, fuelling increased inflation expectations and further USD depreciation. In the current context of resurgence(s) in Covid-19 infections, investors are well advised to monitor changes to long-term US and global growth, and their impact on US fiscal balances, the privileged position of the US dollar, portfolio returns and allocation strategies.

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Why Is US Inflation So Low?

Despite the dramatic surge in government debt in the US - relative to GDP - our prior for long run inflation remains a rather benign rate of about 2.2%. Our prior is consistent with bond markets’ pricing of our baseline scenario of continued sluggish real economic growth and of the role of US dollar denominated government debt securities as the dominant reserve assets in the world. In this context, today’s low levels of US inflation rely on long-term stability of government finances, markets’ perceptions of macro uncertainty, and the continued ability of the US to mine the exorbitant advantages accorded the US dollar as the leading reserve currency.

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Macro Uncertainty and Corporate Dividend Payouts

As major countries have started to ease restrictions on social and business activities, investors remain rightly concerned about the speed of economic recovery and its impact on corporate dividend payouts. A delayed recovery could elevate payout risks for a prolonged period of time. This potential for large shocks to growth and dividend payouts to persist matters for long-term investors, as these shocks are at the source of long-term portfolio risk and returns. In this context, long-term investors would be well-advised to re-examine their asset allocation and savings decisions.

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China Long-Term Macro and Market Prospects

The Covid-19 pandemic has renewed investors’ concerns about macroeconomic and financial markets prospects in China, and their potential impact on portfolio decisions. Our models reveal that long-term real economic growth in China has been decreasing and trending at much lower rates compared to reported official statistics. These trends predate the pandemic, driven by deeper, secular factors: decreasing growth in total factor productivity, and low growth in the labor force. Going forward, investors are well advised to monitor potential changes to these long-term macro trends and trace their impact on asset returns and allocation strategies in a consistent fashion.

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Covid-19 and Global Macro Uncertainty

Even as Covid-19 cases and fatalities seem to recede in most countries, investors still face uncertainties about the choice and effectiveness of policies that prepare for a tapering of restrictions on social and economic activity. Scenario analyses coupled with macro-based models that consistently trace the impact of policy choices on macro and market conditions can help investors grapple with these long-term uncertainties. According to our models, the primary consequence of the rise in uncertainties is a rise in long-term equity risk premia.

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Covid-19 and Risk Management

Covid-19 naturally raises key issues for how investors can incorporate the importance of such significant and unprecedented uncertainties into their risk management processes. In our view, the use of modern macro asset pricing models together with more timely publicly available data and crowdsourced information provides a step forward in addressing the uncertainties posed by Covid-19. By doing so, risk managers can provide richer analysis for investors and decision makers.

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Covid-19 Long-Term Macro and Market Scenarios

How to make sense of macro and market trends amidst the virulent spread of Covid-19? In our view, the biggest concern is the long-term impact of health, fiscal, and monetary policy uncertainties. Our models can help investors navigate through the fog by tracing the effects of alternative policy-driven scenarios on long-term macro trends, returns, and portfolio decisions.

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Covid-19 Macro and Markets Infections

According to our models, the recent dramatic fall in stock and bond markets largely reflects a trending rise in uncertainty - over the past year - about low long-term real economic growth. The real worry for investors is the added impact of the covid-19 pandemic on long-term macro trends and uncertainty. Our models can help investors think through the potential effects of alternative scenarios on returns and portfolio decisions.

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Brexit or No Brexit

Whatever the form of Brexit (including no Brexit), our models suggest that markets are pricing in the prospect of a prolonged period of near-zero growth, higher macro uncertainty, and relatively high inflation. Investors should think about Brexit scenarios in the context of their potential effects on long-term growth and inflation. Our models can help investors think through the potential consequences of alternative scenarios on returns and portfolio decisions.

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Whither Real Growth in Europe?

Bond yields in major European countries have fallen to historical lows. According to our models, bond markets in Europe are pricing in higher recession risk in the short term, and a continuation of near zero growth with high uncertainty in the long term. These long-term macro trends imply a continuation of low bond yields and high equity premium in Europe.

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Bond Markets Don’t Point To a US Recession

The inversion of the US treasury yield curve (long interest rates falling below short rates) has raised concerns of imminent large scale recession in the US and globally. According to our models, bond markets are not pricing in a recession, but the continuation of low long-term trend growth, driven by low growth in total factor productivity (TFP) and the labor force. For investors holding bonds in their portfolio, stagnant low growth also implies a prolonged period of low bond yields relative to history.

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Investors - Stop Obsessing About a Recession

Concerns of imminent large scale recession in the US are misguided. According to our models, a recession in the next 12 months is unlikely. Rather, our models point to a continuation of low long-term trend growth, driven by low growth in total factor productivity (TFP) and the labor force. Stagnant low growth also implies a prolonged period of low equity returns and real bond yields, relative to history. In this context, investors should focus on their long-term portfolio decisions.

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Managing Private Equity Risk

The findings in this paper suggest that the private equity premium varies over time, driven by changes in long-term real economic growth and uncertainty. Moreover, the effects of these fluctuations could potentially be managed by systematically changing the private equity portfolio structure, in a macro-consistent fashion, via tailored publicly traded overlay strategies conditioned on our macro uncertainty index, and/or replicating private deals.

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Private Equity Is Growth Sensitive

This paper applies our models to a proxy private equity portfolio to evaluate its expected long-term return relative to the public equity market. Today’s premium has decreased by as much as 50% in the last two decades, driven by a reduction in long-term trend economic growth and, more recently, a decrease in macroeconomic uncertainty. Private equity investors should review the structure of their private equity and total portfolios in the laws and related context of changes in macro uncertainty.

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Real Growth Matters For Asset Markets

This note looks at recent developments in US equity and bond markets in the context of the decade following the global financial crisis of 2008.

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Less Macroeconomic Uncertainty

This note takes a long run, macro view of the recent developments in US equity and bond markets, from the perspective of our models. It argues that investors have priced in a reduction in uncertainty about long run growth and a reduction in trend growth, driven by stagnant growth in TFP and the labor force. For investors who care about long horizon returns and risk, our models point to lower long run equity returns and a continuation of low real bond yields.

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Markets Discount High Inflation

This note discusses the implications of the recent increases in interest rates by the U.S. Federal Reserve for long run inflation. According to bond market pricing and our baseline scenario of continued macro uncertainty, higher inflation is unlikely. Investors worried about inflation should look beyond Fed watching, and focus on macro uncertainty and the basics of government finances. In this context, they should monitor the role of US government debt as the dominant reserve asset.

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Differential Portfolio Advice:

This paper provides a comprehensive framework for offering portfolio advice. This framework takes into account the impact of income risk and investment horizon. Finally, it places factor investing in the context of lifecycle investing.

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More Low Inflation or Stagflation?

This paper uses the government budget constraint to address the potential for future inflation. The paper shows that under our baseline of low real growth, current inflation levels are also consistent with current levels of government debt and monetary balances. However, application of the government budget constraint also suggests that increased deficits combined with decreased money growth could lead to stagflation.

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Slow Growth is bad news for U.S. Pension Investors

This paper builds on our earlier work linking macroeconomic conditions to asset returns. In this paper we show that a prolonged period of below-trend real economic growth can lead to deterioration in pension funding ratios.

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Sluggish Long-Term Prospects for U.S. Economic Growth

This note puts recent positive developments in US real GDP growth in the context of factors affecting long-term real growth. It argues that long-term trend growth has declined in the US, driven by declines in Total Factor Productivity and Labor Force growth. Consequently, growth forecasts should be dampened until there are signals that TFP growth and Labor Force growth have improved.

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The End of Asset Price Reflation?

This paper is relevant because it explicitly ties long term returns to real growth. The paper achieves this end through the linkage between real economic growth and cash flow growth. Finally, the paper suggests that extended periods of below-trend real growth should correspond to lower expected asset returns.

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Factor Investing and Portfolio Strategy

This paper lays a foundation for differential portfolio advice. It shows that when investor attitudes towards risk differ, their factor allocations should also vary. As on a result, this paper provides a framework for developing the investment strategies that are investor-segment specific.

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Disruptive Forces in Asset Management

This paper argues that the combination of market bifurcation and new technology are disrupting the asset management business.

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Factor Investing

This paper shows there are differences in how factor returns are measured. Consequently, factor measurement and portfolio construction are critical to factor-based investing. Thus, to implement a factor-based approach, investors will still need to rely on skilled investment managers.

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