Big Data: Insights or Illusions?

What is Big Data? Infused with human understanding it can lead to powerful new insights. Or it can be used to cement and intensify pre-existing toxic assumptions. I talk to Christian Madsbjerg of ReD Associates, who gives examples of data’s use and abuse.

The Countries Most (& Least) Satisfied With ‘Democracy’

Across the globe, the spread of right- and left-wing populism and authoritarian politics have shaken the very foundations of democracy.

As Statista's Niall McCarthy notes, a new survey from Pew Research has found that people across the globe are generally unhappy with the functionality of their political systems, though levels of satisfaction with democracy vary hugely between countries.

As can be seen from the following infographic which shows a selection of countries from the survey, people in India have tremendous faith in democracy. 79 percent of those polled said they are satisfied with the way democracy is working in India compared to 11 percent who are dissatisfied. Germany also recorded a high level (73 percent) of satisfaction with democracy.

Infographic: The Countries Most & Least Satisfied With Democracy  | Statista

You will find more statistics at Statista

In many other developed countries, however, faith is waning.

In the United Kingdom and Japan, 47 percent of people are not satisfied with how democracy is working in their countries while in the U.S., that rises to 51 percent. France, South Korea and Brazil all recorded dissatisfaction levels of 65 percent or higher… but Greece tops the charts with only 21% of its citizenry 'satisfied' with the weay democracy is working.

Carney Reveals Europe’s Potential Achilles Heel in Brexit Talks

This morning, BoE Governor Mark Carney discussed the risks of a hard Brexit during his testimony to the UK Parliamentary Treasury Committee. There was renewed weakness in Sterling during his testimony.

Ironically, given the fall in Sterling, Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. We wonder whether Juncker and Barnier appreciate the threat that a “no-deal” Brexit poses for the EU’s already fragile financial system?

When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

Calling into question the continuity of tens of thousands of derivative contracts, he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe. Moving on to the possibility that there might not be a transition period, Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

Maybe it’s Europe, not the UK, that needs the transition period most.

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.”

Returning to the theme of financial stability, he stated “As a general thing, in an uncooperative outcome, at least initially, the UK will be long financial services. We will have more capacity, capital, individuals, collateral in the UK. The EU will be short of financial services because not all of that capacity will be able to go across. The entire economic impacts are greater for the UK but, from a financial stability perspective, they are greater for the EU.”

On further questioning, Carney outlined the other two major issues, along with derivatives and wholesale banking, which would be affected, i.e. cross-border provision of insurance (UK domiciled entities would be unable to pay out) and data protection and transfer (there is more data in the UK which is relevant to the EU than vice versa).

Summing up, Carney stated “These issues are bigger for Europe than they are for us, but they’re material for us.” That comment prompted the following question “In which case we have much more leverage in order to get a deal?” The diplomatic reply was “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.” Didn’t he just describe Juncker’s modus operandi.

Could the Next Fed Appointment Crush the Housing Market?

As the end of Federal Reserve Chairwoman Janet Yellen’s first term approaches, financial markets are beginning to digest the increased likelihood that US President Donald Trump will opt to appoint a more hawkish individual to the position.  Even though the Federal Reserve is largely expected to continue tightening monetary policy over the coming months as it pares down the balance sheet and contemplates a dovish hike, Trump’s appointment could send shockwaves through the housing market. 

One of the nastier side effects of operating at or near the zero-bound for interest rates has been the rapid expansion of asset valuations.  Lower interest rates encourage individuals and companies to finance their purchases and then reinvest for more aggressive returns. However, this rapid valuation expansion has not been limited strictly to financialized assets, but also physical assets like real estate.  When seen in the context of the more hawkish leanings of Trump’s recent Fed Chair interviewees, the Administration’s next Fed appointment could pose the risk of a serious correction across asset classes.

Fed Frontrunners Exhibit More Hawkish Bent

Financial news outlets have been rife with reports covering the potential picks for Fed Chairman, with two of the leading candidates including Economist John Taylor and former Federal Reserve Governor Kevin Warsh.  Taylor, who currently serves as an economics professor at Stanford University, received high marks from Trump according to a Bloomberg report on the matter.  Trump was purportedly very impressed with his credentials, though unlike other candidates, Taylor is among the fiercest advocates of having policy measures closely reflect economic conditions.  

The “Taylor Rule”, titled after the economist, stipulates rates should rise when inflation is running at an elevated pace or unemployment is below the “full employment” threshold and should fall in the opposite scenario.  Applying this set of rules to current economic conditions indicates that the key Fed Funds rate should be 3.74% to reflect high levels of employment and rising prices.  At nearly 3 times the present rate, a selection of John Taylor to chair the Fed could rapidly dampen overextended valuations in equities and the housing market.  Already his interview with Donald Trump caused a palpable dip in gold prices considering his overtly hawkish stance.

By comparison, Kevin Warsh has also advocated for a tighter monetary policy regime, greater deregulation, and a general makeover of the Central Bank.  His attitude towards reform has won him positive mentions as well.  However, his overall degree of hawkishness and stated desire to overhaul the inflation target could put him at the epicenter of a dramatic policy shift that departs from the more cautious approach of current Chair Janet Yellen.

Factors Outside the Fed’s Control

While easy to label the rebuilding efforts in Texas and Florida as positive for the overall housing market, this deals more with the supply angle than demand.  On the buy side, a Fed determined to raise interest rates will assuredly presage rising mortgage costs which could in turn subject buyer interest to some downside as financing costs climb.  Though it is tempting to cite the foreclosure rate at an 11-year low as a sign of strength, it does not necessarily imply that the housing market is on stable footing, especially as prices reach past the realm of affordability.

Considering income growth has kept nowhere near the same pace as price growth for homes according to the monthly Case-Shiller home price index, the lack of affordable solutions may be another factor that hurts demand and concurrently weighs on pricing.  For the year through July, average hourly earnings climbed by 2.50% while housing prices of 20 major US metropolitan areas increased by 5.80% over the same period. With price growth outpacing wages by such a significant margin, the surge in values should be a worrying sign for prospective buyers thinking about diving in while mortgage rates remain not far from record lows.

However, a more concerning indication apart from unaffordability is the degree to which flipping has reemerged.  The move is eerily reminiscent of the years leading up to the last financial crisis as lending standards are relaxed.  House flipping reached the highest point since 2007 during the second quarter of 2017 and nearly 35% of the transactions were accompanied by mortgages.  Even Goldman Sachs is getting into the flipping game with its recent acquisition of Genesis Capital LLC, a move designed to help the institution build a bigger presence in the lending sphere.  Should mortgage rates rise in tandem with interest rates, it could spell doom for this substantial portion of residential real estate activity.

The Fed as the Deciding Factor

With the shortlist for the next Federal Reserve Chair realistically narrowed down to 5 candidates, those under consideration for the job have significantly more hawkish leanings than current Chair Janet Yellen and her predecessor Ben Bernanke.  While ultimately housing prices are a function of the interaction of supply and demand, demand largely behaves inverse to interest rates.  As rates climb, mortgage costs will echo the gains, potentially reducing interest.  Should demand fall, housing prices are likely to experience a correction as well after a near 8-year unabated rise in values.  Considering the unaffordability aspect and the degree of house flipping, the approaching Fed appointment has a higher propensity to cause a downturn compared to another leg of the ongoing housing market rally.