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Philip Pilkington

Philip Pilkington

Phillip Pilkington works in investment and has contributed to numerous online and print media outlets as a freelance economic journalist.

Articles by Philip Pilkington

FX Crises and the Trajectory of Interest Rates

September 22, 2021

In this post, I want to get a sense of foreign exchange crises since 2008. The data that I am using is taken from the World Bank. It is not perfect. It is a bit spotty and could be improved upon. It is also annual data, so it will not pick up intrayear crises. But it is solid enough that it should give us a good first cut on the dynamics of foreign exchange crises.

The first question to ask is simple enough: how many foreign exchange crises were experienced in this time period? For our purposes, we will define a foreign exchange crisis as any time a currency fell by 15% or more in a single year. Here are the number of such crises in every year since 2008.

The next feature we want to explore is whether these crises were resolved or not. A foreign exchange crisis is – in

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Is China Facing a Minsky Moment?

September 21, 2021

As Evergrande looks about to default on its debt many are asking whether this might be a Lehman moment for China. That is, are we about to see a wave of defaults that bring down the Chinese financial system as we did in Western countries in 2008?

Much of the discussion is based on a misunderstanding. The Western financial system as it stood in 2008 was a largely laissez-faire system. There were, of course, regulations in place and there were also protections – most notably, deposit insurance. But ultimately, the system was basically market-based.

This is what led to problems. When banks saw their loan-books turn sour they were faced with the very real possibility of default. True, the central banks – and some misguided governments., like Ireland – ultimately bailed them out,

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Inflation, the Quality Factor and Distribution

September 16, 2021

In a previous post I undertook a very simple analysis to show that factor investing during inflation helps investors to stop from simply treading water – at least, if history is any guide. An interlocutor asked if I’d looked into quality factors and I said that I would get around to it.

In fact, there is something very interesting in the quality factor analysis – something that highlights an aspect of inflation that is not properly appreciated by most economists and investors.

First, let us take a look at how returns stack up during inflations for the standard Fama-French quality factors. Once again, I will be using my ‘factor enhancement’ ratio – that is, the ratio of average returns during various levels of inflation relative to the total average return for that factor.

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Investing During Inflation

September 7, 2021

Recently I have been looking at whether inflation might be in the pipeline. The jury is still out on that, but caution would be wise given the current situation.

That leads to a rather obvious question: what should investors do during an inflation?

First off, if we are to be naive stock investors, how much does inflation impact stock market returns? We can see the impact in the following chart.

But this chart simply does not capture the pain investors feel during proper inflations. In order to get a sense of this, let’s zoom in on the ‘decade of hell’ – the inflation period 1972-82.

As we can see, basically all of investors’ nominal stock market gains were wiped out during this inflation.

Were there alternatives? Many will point to commodities and their derivatives.

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Podcast on Inflation and Labour Shortages

September 6, 2021

I appeared on the Bullhouse podcast again to discuss some of the recent work I have done on inflation. I also talk about how the impact of COVID19 and the policy responses to it risk resulting in major labour shortages and a return to a 1970s-style inflationary regime.

Podcast: Inflation and Labour Shortages

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Forecasting Future Inflation Using Private Sector Indices

September 2, 2021

In our last post we saw that private sector indices for used car prices and for rent prices were highly predictive of future changes in the corresponding CPI component indices.

The next logical step is obvious: we should use this information to build an aggregate CPI index that factors in this forward-looking information to get a prediction of inflation over the next six months.

In all honesty, I was a little reticent to do this. Not to put too fine a point on it, but it is a pain in the rear to do this sort of forecasting. You need to strip the CPI series right down using the component weights and then rebuild it using the private sector forecasts and weighting them accordingly.

But, since inflation is such a hot topic right now, I figured it was probably worth doing this

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Using Private Sector Data to Forecast Future CPI Moves

August 31, 2021

Back in early August, my old colleague James Montier and I released a White Paper on inflation. In it we argued that our baseline scenario was that we would see transitory inflation caused by the extreme supply shocks caused by the lockdowns. We drew an analogy to the end of rationing in Britain after WWII, where we saw temporary price increases in the markets for rationed goods.

Further, we argued that any sustained inflation would require a wage-price spiral. That is, in order for inflation to feed on itself, the price rises would have to give rise to wage rises that then spurred further price rises.

Since we wrote this, it appears that there are, in fact, anomalies in the labour market. Many service sector jobs appear to be finding it hard to get workers. Some are blaming

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Podcast Appearence on the Bullhouse

August 27, 2021

Yesterday I appeared on the Bullhouse podcast with Kenna for a very interesting discussion about a wide range of financial and economic topics.

We discussed a number of different topics. Some of these were as follows:

Whether there is a property bubble in the US and internationally right now.The potential bubble in the junk bond market and its implications.Why the risks in the market for rental properties are idiosyncratic this time around.How real estate is now a financial asset and why it should be thought of in context with a person’s broader portfolio.The specifics of the London property market and the idiosyncratic shock we saw there last year.The debt-for-equity swap and how low interest rates have not led to the ‘euthanasia of the rentier’ but rather has led to an

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Systematic Detection of Housing Bubble – Part II: Linear Trends and Points-Based Detection

August 26, 2021

In the last piece on detecting housing market bubbles, I an through some of the problems with using standard-scoring. Here I will provide two solutions; one complex, the other simple. But before we move forward with this, we must understand one other problem when it comes to determining whether a housing bubble is indeed a housing bubble.

This problem is not, like standard-scoring, related to how we manipulate the data. Rather it is related to how we define a housing bubble itself. The best way to approach this is to give examples. Below I show two very different real house price series; one from Norway, the other from Ireland.

Here we see two series with two very different properties. The Norway series shows steady, upward growth in real house prices over the past 30 years.

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Systematic Detection of Housing Bubble – Part I: Z-Scoring and It’s Problems

August 24, 2021

In a recent piece in Newsweek that got some attention, I made the case that the United States is currently experiencing a housing bubble. The next logical question is obvious: are other countries? After all, the 2008 meltdown was a global crisis; the US was not alone in its housing bubble.

In order to try to detect housing bubbles ideally we would like some sort of systematic framework that we can deploy. The problems with using this approach when it comes to hosuing bubbles, however, are not widely appreciated. In this post I am going to highlight some of the core problems here and in the next post a will propose a remedy.

The most obvious approach to building a systematic housing bubble detection is to get access to a widely published time series for multiple countries and

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Quantifying the Impact of Vaccine Failure on Earnings Per Share

August 23, 2021

In a post last week, I raised the possibility that the vaccines might not get the virus under control this winter. Since the markets still seem to be pricing in vaccine success, this could have implications for investors. How might we think this through in more depth?

One way to do this is by looking at the Google Mobility Index and seeing if it is any good at explaining EPS growth in the S&P. Here I take an aggregate construction from the index that encompasses all of the economic variables – transport, retail, grocery and workplace movement. I also push the mobility index forward one quarter which seems to give a more reasonable fit – presumeably due to an accounting lag with the EPS data.

Looks pretty good. Here is the same data in linear regression space.

Okay, so at

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Double Bubble Trouble

August 20, 2021

Two weeks ago I wrote a piece for Newsweek outlining potential troubles in the junk bond market. I pointed out that there is a strong possibility that enormous junk bond issuance is floating companies that otherwise would have gone bankrupt due to the lockdown measures. Here is that piece:

The Next Financial Crisis is Coming

But that is not the only bubble on the horizon. The lockdowns and work-from-home appears to have driven investors pretty kooky because we also have what appears to be a major housing bubble inflating. I have outlined this in a piece I published today which can be read here:

Are We About to Repeat the 2008 Housing Crisis?

If you add up the employment in the threatened sectors you get a range of anywhere between 8% and 10% of total employment in the

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Vaccine Failure, Market Expectations and Inflated Valuations

August 19, 2021

For the last year and a half the biggest sentiment driver in markets has undoutedly been COVID-19. This is perfectly reasonable as the virus is probably the biggest single driver of variables that matter in financial markets – from inflation expectations to earnings. Yet it has been striking that most financial analysts have been outsourcing their analysis of the trajectory of the virus to those in public health.

In theory this is reasonable. Many are assuming that the public health experts are, well, experts. And since financial analysts are not experts in epidemiology, deferring to those that are is a rational course to take. Yet if this pandemic has made one thing crystal clear it is that the public health experts are far from infallible.

This seems to be coming to a head

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Inflation, Real Earnings and Recessions

August 11, 2021

In my previous post, I laid out some issues with the methodology being used to explore the relationship between inflation and asset prices.

One issue that I raised was with respect to the observation that inflation below 1% seemed to lead to lower stock market earnings. In the previous post I pointed out that this was likely misleading: it was unlikely that the low price growth itself was giving rise to such poor earnings; it was far more likely that this was mainly being driven by recessions that in turn caused low price growth.

In this short post, I hope to be able to show this. Here we will be using a different sample due to our needing quarterly real GDP figures to do the calculations. Here is the full sample of real earnings growth categorised by inflation bucket.

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Prolegomena to a Discussion of Inflation, Asset Returns and Real Earnings

August 10, 2021

Many today are examining the impact that inflation has on asset prices. One of the best papers on the topic is by Harvey et al and it is well worth a look. What I am going to write here does not refute these sorts of analyses, but I think it raises issues that at least serve to lower our confidence in the findings.

The issues that I want to explore are as much methodological as they are empirical, but these two aspects can be approached simultaneously.

When analysing equity returns, the tendency is to examine what has happened in the past and extrapolate this into the future. There is nothing inherently wrong with this approach and it certainly gives us one window into the dynamics of asset markets, but sometimes it can prove misleading. This especially so when it comes to a

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Why Lower Yield Treasuries Are More Attractive Than Higher Yield

August 3, 2021

In what follows, I want to draw out some implications of an interesting post by Greg Obenshain at Verdad Capital. In the post, Obenshain laid out data showing a number of things about Treasury bonds. Most notably, that they are a great investment if you are worried about the prospect of a recession or depression – and this is so no matter at what starting yield you are investing.

One of the exhibits Obenshain showed, however, did not get sufficient attention. I think that it may have something to tell us about how we can start to think about his findings in an actual investment context.

Let us frame the discussion in terms of a standard 60/40 portfolio. But let us ignore the 60 for the moment and focus on the 40. Typically, the 40 can be disaggregated into cash and bonds.

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New Review of My Book

February 19, 2020

A nice review of my book by Marc Morgan has appeared in American Affairs. Morgan works with Thomas Piketty at the World Inequality Lab at the Paris School of Economics. He is doing interesting work on profit accounting and determination.
I would also note that Morgan attended the same secondary school (high school) as me in Dublin. Apparently, Christian Brothers College, Monkstown — although not a very prominent school in any meaningful sense — is creating a lot of heterodox economists. Or, perhaps, the children of my generation found the free market nostrums they were handed by the pre-2008 politicians so nauseating that they decided to critically study economics. Who knows?
Morgan’s review is excellent and although I could pick over details, I won’t bother. I will note one thing,

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How Far Can We Push This Thing? Some Optimistic Reflections on the Potential For Economic Experimentation

April 29, 2019

Readers are probably aware that there is quite a lot of discussion of Modern Monetary Theory (MMT) and the potential for fiscal experimentation batting around at the moment. Others have weighed in on this already, and I have little to add.
It is striking, however, that most of the push-back — where there is push-back — is not focused on trying to discredit the idea that we should engage in fiscal experimentation. Indeed, the notion that we should engage in fiscal experimentation seems to be, if not mainstream, at the very least part of the discussion.
Yet, vulgar strawman-style arguments against MMT aside, no one seriously disputes the fact that if too much fiscal expansion is undertaken the economy will eventually hit a hard inflation barrier, past which any increase in spending

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Some Reviews of My Book

March 6, 2019

I have come across two academic reviews of my book which can be found here and here. There is also a nice popular review in the Irish Times that can be found here.

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2017 Presentation on Ireland

December 26, 2017

My 2017 presentation on Ireland and the Eurozone has been uploaded to YouTube. See the previous post for the link to the full conference, which includes the Q&A.
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Presentation on the Irish Economy

November 8, 2017

On Monday of this week I gave a presentation on the current state of the Irish economy at a conference on the future of Europe at the LBJ School of Public Affairs. My presentation begins around the 33 minute mark and is followed by some Q&A. It can be accessed here:

Presentation on the Irish economy

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Book Launch in Parliament Earlier This Year

July 13, 2017

On Tuesday 16th of March 2017 Robert Skidelsky and I launched my book The Reformation in Economics in the Clement Attlee room in the House of Lords. It has taken some time to upload these videos of Robert’s and my comments. Most of the speeches were captured but I have included my own text below (I did not end up sticking to the written comments verbatim).
On a separate note, Brian Romanchuk has written a short review of the book here.
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Hi everybody,

Thanks very much for coming. I’m pleased to see that you’ve shown some interest in the book.
I won’t beat around the bush. I’ll get right to it.
What is the key question that the book seeks to address? It is this.
To what extent is economic theory an ideology and to what extent can it be thought of

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To What Extent Is Economics an Ideology and to What Extent Is It a Useful Theory?

January 13, 2017

By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory. The views expressed in this interview are not those of his employer
Ever since the Enlightenment many societies have moved away from justifying their existence and formulating their aims through recourse to religious language. Gone are the days of the ‘Great Chain of Being’ which justified the natural and social orders all the way from the plants and trees through the commoners, via the nobility and the King all the way up to God the creator. What replaced these ideologies were ideas about ‘Progress’ – how the good society was attained through Progress and what such Progress would look like. Progress, it

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Why the Pollsters Totally Failed to Call a Trump Victory, Why I (Sort Of) Succeeded – and Why You Should Listen to Neither of Us

November 14, 2016

The views expressed in this article are the author’s own and do not reflect the views of his employer.

The election of Donald Trump as president of the United States will likely go down in history for any number of reasons. But let us leave this to one side for a moment and survey some of the collateral damage generated by the election. I am thinking of the pollsters. By all accounts these pollsters – specifically the pollster-cum-pundits – failed miserably in this election. Let us give some thought as to why – because it is a big question with large social and political ramifications.
Some may say that the polls were simply wrong this election. There is an element of truth to this notion. The day of the election the RCP poll average put Clinton some three points ahead of Trump

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Achtung! My Book is Coming Out Soon: Here Is a Brief Overview and Some Media Links

May 31, 2016

Hi everyone – or, at least, whoever is left out there. As you probably know, this blog has been shut down since October 2014 and I have pretty much fallen off the face of the planet. Actually I’ve been working in investment where I’ve found a job that allows me to pursue non-mainstream economic research.
Some of you may recall that I was writing a book during the last days of this blog. I’m happy to say that this book is now fully completed and has been accepted for publication by Palgrave Macmillan. The provisional publication date for the book will be October 2016 and the price will be around £19.50. The book’s title will be: ‘The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory’.
The book will not be a rehash of material that is available on this

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The International Labour Organisation… Almost Correct

October 2, 2014

I have an article up on Al Jazeera this week. It may be the last journalistic article I write for some time as I start a new job next week. But this one deserves some brief discussion because the material it deals with is hugely important to the politics of the moment.
In the article I discuss a joint report by the ILO, the OECD and the World Bank. The ILO have clearly spearheaded this one. It has their fingerprints all over it. The ILO are pretty fantastic really. They are one of the only large-scale economic institutions that are talking sense today. Indeed, in the report the authors make a properly Post-Keynesian case for why the economy is stagnant: that is, it has to do with skewed income distribution and a low marginal propensity to consume among those in whose favour

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The Economic Consequences of the Overthrow of the Natural Rate of Interest

October 1, 2014

For quite a few months I have, on this blog, been alluding to a paper that I had written which showed that the natural rate of interest is implicitly dependent on the EMH in its strong-form in order to be coherent. I have finally published this paper (in working paper form) with the Levy Institute and it can be read here:
Endogenous Money and the Natural Rate of Interest: The Reemergence of Liquidity Preference and Animal Spirits in the Post-Keynesian Theory of Capital Markets
Some notes on the paper.
The motivation for the paper was that when reading up on endogenous money during my degree I found that mainstream economists had largely integrated it in their more recent models. This integration, as the paper notes, usually took the form of a Taylor Rule. I should be clear that

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Noah Smith Fumbles Argument, Endorses Post-Keynesian Endogenous Money Theory

September 29, 2014

Economists say the darnedest things sometimes. They often say things that are factually inaccurate. Noah Smith put his foot in it recently when he claimed in a Bloomberg article: It seems like the only people who don’t instinctively believe in credit-fueled growth are academic economists. Now, this seems odd to me. In the article he …

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Keynes’ Theory of the Business Cycle as Measured Against the 2008 Recession

September 26, 2014

In this post I will explore Keynes’ theory of the business cycle. He discusses his views in Chapter 22 of the General Theory and I think they hold up pretty well today. At the beginning of the chapter he notes that the business cycle — so-called, because it is not really a “cycle” at all despite what Keynes says in the chapter — is a highly complex phenomenon and that we can only really glean some very general features of it.
Keynes opens with a very clear quote on what he thinks to be the key determinate:
The Trade Cycle is best regarded, I think, as being occasioned by a cyclical change in the marginal efficiency of capital, though complicated. and often aggravated by associated changes in the other significant short-period variables of the economic system.
Recall that the

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On the Two Departments of Monetary Macroeconomics

September 25, 2014

At the moment I am doing some research for a project that I might be working on soon. The project will be to provide a useable introduction to Post-Keynesian theory for those working in financial markets. Actually, I hope to write a book on this in the future, so this project is something that I have been interested in for a long time.
The more I studied Keynes’ own work and the work of some of his better interpreters the more I came to the same conclusion: Keynes was first and foremost a financial or monetary economist. I knew that others had also come to this conclusion — Hyman Minsky famously comes to mind — but I was not aware that a great deal of work had been done in this direction.
In actual fact, it has. HM Treasury economist Geoff Tily released a fabulous book in 2010 on

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