Prieur’s readings (November 13, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Economist.com: Cross my palm with euros? November 11, 2009.
The dollar’s days as the world’s reserve currency are far from over.

• Randall Forsyth (Barron’s): Good and bad news in China’s currency shift, November 12, 2009.
Allowing the remnimbi to rise may cut global imbalances but also tighten tap of liquidity.

• John Plender (Financial Times): Decline but no fall, November 11, 2009.
As US president Barack Obama begins a tour of Asian capitals, the standard assumption in the west is that his meetings will be with leaders of nations that rank as America’s junior partners. Yet the reality is more complex. Amid the rubble of the financial crisis, the US position as singular superpower and global economic top dog looks increasingly under threat. In particular, when he reaches Beijing next week, nothing will be able to disguise the fact that Mr Obama is paying a visit to his country’s biggest creditor.

• Eamon Javers (Politico): Is China headed toward collapse? November 10, 2009.
The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It’s China’s turn, the theory goes, as American consumers – who propelled the last global boom with their borrowing and spending ways – have begun to tighten their belts and increase savings rates. But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.

• Edward Harrison (Credit Writedowns): Parallels between US and Japanese economies, November 12, 2009.

• Joseph Haubrich (Federal Reserve Bank of Cleveland): A new approach to gauging inflation expectations, October 29, 2009.
This commentary explains a relatively new method of uncovering inflation expectations, real interest rates, and an inflation-risk premium. It provides estimates of expected inflation from one month to 30 years, an estimate of the inflation-risk premium, and a measure of real interest rates, particularly a short (one-month) rate, which is not readily available from the TIPS market. Calculations using the method suggest that longer-term inflation expectations remain near historic lows. Furthermore, the inflation-risk premium is also low, which in the model means that inflation is not expected to deviate far from expectations.

• Daniel Indiviglio (the Atlantic): The ugly commercial real estate picture, November 11, 2009.
Building owners will default on $500 billion to $750 billion of mortgage debt. This equals as much as 54% of the $1.4 trillion in loans that will come due in four years.

• Marcin Kacperczyk, Stijn Van Nieuwerburgh and Laura Veldkamp (Stern School of Business): Attention allocation over the business cycle, September 22, 2009.
The researchers developed a model that uses an observable variable – the state of the business cycle – to predict attention allocation. Attention allocation, in turn, predicts aggregate investment patterns. Because the theory begins and ends with observable variables, it becomes testable. They applied their theory to a large information based industry, actively managed equity mutual funds, and studied its investment choices and returns. Consistent with the theory, which predicts cyclical changes in attention allocation, they found that in recessions, funds’ portfolios (1) covary more with aggregate payoff-relevant information, (2) exhibit more cross-sectional dispersion, and (3) generate higher returns. The results suggest that some, but not all, fund managers process information in a value-maximizing way for their clients and that these skilled managers outperform others.

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