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Archived postings from Joshua McCallum

July 2016

 Interdependence Day

Interdependence Day

5 July 2016, 18:30 | Posted by: Joshua McCallum | Tags: Joshua McCallum

It has been apparent in recent years that the market is more interested in central banks than economic data. Now it appears to be ignoring geopolitical events – even an event as significant as the UK's decision to quit the EU. Is this a sign that the market has become over-reliant on the world's central banks as a cure for all ills? And, central banks notwithstanding, is the market correct in its assessment of a Brexit impact on the complex web of interdependencies that is the global economy?

June 2016


29 June 2016, 18:13 | Posted by: Joshua McCallum | Tags: Joshua McCallum

As the UK finds itself staring into the unknown, how can we bring clarity to what is an otherwise deeply uncertain situation? One of the gravest uncertainties is the UK's new-found position as a potential partner in global trade negotiations. Here, the application of game theory gives some very clear insights, all of which point to one, inescapable conclusion.


22 June 2016, 23:45 | Posted by: Joshua McCallum | Tags: Joshua McCallum

Geopolitical events have always been a challenge for investors, but on occasion many events can overlap or occur close together. This Thursday there is the UK referendum on EU membership, on Sunday there are the Spanish elections, and, not to forget, the upcoming spectre of the US election.

Recent charts

Chart 1: Low still happens

Probability distribution of monthly change in nonfarm payrolls, first release data since 1997 (%)

Probability distribution of monthly change in nonfarm payrolls, first release data since 1997 (%)

Source: US Bureau of Labor Statistics, UBS Asset Management. Note: the start and end of recessions are defined by the National Bureau of Economic Research and exclude the 12 months prior and 12 months after

So if these low numbers are to be expected, how much should we read into a weak jobs report? Does it mean that a bounce back the next month is likely? As always, start with the outside view: how often is a low number followed by another low number (below 50k)? For the full sample it is 72%, but excluding recessions it is 41%. So experience tells us that a bounce back is marginally more likely, but by no means certain.

We can make things more sophisticated by bringing in more outside information to inform the outside view. For example, the number of people making initial claims for unemployment benefits is widely viewed by economists to lead the payrolls data and to be more reliable at identifying turning points. So instead of conditioning on whether we are in recession, we can ask ourselves how likely it is that the payroll data will bounce back if the initial claims data has remained strong, as it has recently (fluctuation down by no more than half a standard deviation). When bad payroll data is not matched by bad initial claims data the payrolls tends to bounce back 65% of the time.

Now we can start to examine the individual circumstances, and ask ourselves whether we can add any further information. We can't use excuses like the Verizon strike, because plenty of those past instances of low payrolls could have also been caused by strikes. One thing to consider is what is happening in the labor market overall. For example, it could be argued that slowing employment could even be a sign of a tighter labor market.

This may sound counterintuitive, but it is possible. The logic is that when there is significant slack in the labor market, all those unemployed people are happy to get work even if wages have not risen. So in chart 2, as demand for labor moves from the first to the second demand curve, employment grows a lot but wages only rise a little. So firms have all the bargaining power. However, as an economy approaches full employment the trade-off becomes less favourable for businesses. For the same increase in demand (the second to the third curve), businesses now need to pay higher wages to lure those now scarce additional workers to sign a contract with them. Businesses get fewer employees but have to pay more.