It has been a big year for the newsletter. In 2021, subscriber numbers doubled. This year, they more than tripled. As I noted this time two years ago, the pre-history of this newsletter goes back to 2003 and some of you have been along for the ride since then. The form and content has shifted over time as it adapted to changes in my day job. A big thank you to those who gave the newsletter a shout-out during the course of the year.
Best as I can tell, the modal subscriber is an offshore financial market participant, although subscribers run the gamut from undergraduate students, to members of parliament, to RBA Board members and a former chief of staff to a Vice President of the United States. That is a broad audience to cater to.
I won’t do a ‘top ten as voted by you’ like I did last year as the growth in subscribers means it would need to be done on a subscriber-adjusted basis to be meaningful and that’s not a simple lift from Substack’s stats. The sidebar already has a ‘most popular’ menu. Instead, I will pick out a few highlights from my own perspective.
Inflation
I was particularly happy with this post from 20 January, which precisely called the first of the big inflation surprises in 2022, though actually for the Q4 2021 release:
In previous years, we had highlighted the structural break in the domestic inflation process relative to offshore as a key driver for local markets. That relationship normalised from the end of 2021, although not in a target-consistent fashion. With the RBA’s balance sheet expansion having caught up with the rest of the world, the domestic inflation process caught up too. On a trimmed mean basis, we had a fleeting two quarters of inflation outcomes consistent with the RBA’s target range in Q3 and Q4 2021, after seven years spent below target. For a central bank that benchmarks itself based on the amount of time spent in the band, it has not been a great performance.
Inflation was obviously a big theme globally this year and vindicated our long-standing contention that the low inflation seen pre-pandemic was a monetary policy choice and not due to non-monetary factors as many other analysts mistakenly suggested. Many of those same analysts also argued that monetary policy was ineffectual in raising inflation. You don’t hear those arguments much anymore.
US December non-farm payrolls
I continued to forecast a few key data releases for the US and Australia throughout the year. The US non-farm payrolls model, in particular, did a good job calling the above-market outcomes for employment, although even those above market forecasts typically underpredicted actual gains.
The final forecast for this year is for December non-farm payrolls released on 6 January. The Chicago Fed National Activity Index is not updating again until next year, apparently due to a data availability issue, but we have substituted an estimated value for that model input, yielding a payrolls forecast of 222k for December. The unemployment rate is forecast to be steady at 3.7%, although the estimate declines on an unrounded basis, so there is downside risk to that number. No consensus reported for this release as yet or at least none I could quickly find.
The BoJ and YCT
Contrary to some prominent hedge funds, I argued around mid-year that the RBA’s exit from yield curve control was a poor model for understanding the sustainability of the BoJ’s yield target:
The BoJ’s December 20 policy board meeting finally widened the band around its yield target from 25 to 50 basis points, but the target itself otherwise remains intact. The decision was very much of the BoJ’s own choosing, as evidenced by the market reaction. Of course, some analysts are already calling ‘short BoJ the trade of 2023.’
The BoJ’s approach to YCT is in fact the reverse of the RBA’s. The RBA adopted YCT to avoid having to expand its balance sheet. This approach failed when YCT lost credibility and the RBA was faced with the choice of capitulating to the market’s view or purchasing the entire targeted bond line. As we argued at the time, YCT was inevitably pro-cyclical, causing the Bank to do more bond buying just at the point the market was saying the stance of policy was wrong.
The BoJ went the other way, only adopting YCT after it had bought so much of the stock of the 10-yr JGB that the market became largely non-traded. YCT became a substitute for bond buying, although the credibility of the YCT was still backed by a willingness to intervene on a massive scale if needed, as we showed in this chart:
As we argued mid-year, in the context of rising global yields, the BoJ’s YCT approximated Lars Svensson’s ‘foolproof way’ of escaping a liquidity trap, albeit through bond rather than foreign exchange market intervention. BoJ Governor Kuroda’s terms ends in April next year and he may well leave behind him a target-consistent inflation rate.
Energy
The top performing S&P 500 sector in 2022 was, for the second year in a row, energy. You were all overweight energy, right? Not coincidentally, energy was the worst performing of 11 sectors in 2018-20.
The RBA review
For me, the big development in 2022 was the announcement of the RBA review. I was pleased to have had some input into the terms of reference and the selection of the review panel. The terms of reference exceeded my expectations in terms of scope (see The review of the RBA: everything is on the table and that’s good). I lodged a confidential submission in my own right and met with the review secretariat. That’s about as much as I can say while the review is ongoing. One prediction we can make for 2023 fairly confidently is that the RBA will be a different institution by this time next year.
As a subscriber, you can take some of the credit (or blame) for these developments because you provided an audience for me to rehearse many of the arguments and much of the evidence I put to Treasury in framing the review and then to the review itself. Whatever influence the newsletter might have, you are all part of it.
TANSTAAFL
The newsletter will be going paid in February 2023. There is already a paywall on some of the archive. Hopefully, I don’t have to pitch long-term readers too hard on the newsletter’s value at this point. This observation about reader-supported publications from Substack co-founder Hamish McKenzie might also resonate:
There will an introductory, limited-time, discount to reward long-time readers. There will also be large standing discounts for the educational, government and non-for-profit sectors. Those discounts run-off email domains (.edu, .gov, .org etc), so if you currently subscribe by private email, you might want to update your subscription to your institution’s email address to ensure that you qualify (as always, be sure to whitelist this domain).
There will be a discounted annual rate, but I reserve the right to discontinue publication at any time. In that eventuality, I will offer a pro-rata refund to anyone who wants one. There will also be a founder’s rate for those who want to gratuitously encourage this project. Subscription rates will be Australian dollar-denominated (AUD-USD is ~0.6700 currently), so check rates against your own currency if you are reading this from offshore.
I will be taking a break over the Christmas-New Year period. See you in 2023!
ICYMI
Elon Musk could implement ActivityPub on Twitter. He would ensure the site’s long-term reach while Twitter users will have the cake (be on Twitter) and eat it too (not be beholden to its rules).
The Money Supply Is Shrinking: The Fed Should Pay More Attention.
Nicholas Eberstadt’s postcard from Australia: ‘their deer-like creatures, for example, are called “kangaroos.”’
Memes and themes: