Chris Manfre, Ph.D.

Agency cost of debt as incentive for executive inside debt: Evidence from empirical study The substantial holdings of inside debt cause both academia and industry to wonder about the reasons. Jensen and Meckling (1976) suggest that debt-like compensation could lower the agency cost of debt. Nevertheless, empirical evidence is still lacking for whether the management really chooses to use inside debt as mitigation of agency cost of debt. In this study, recently published in our journal Corporate Ownership and Control, the author from the USA uses the value of non-tax-deductible deferred compensation from the ExecuComp database as the measure of inside debt, leverage as the proxy for agency cost of debt, and examines the causal effect of changes in leverage on inside debt. Using phased increases in corporate income taxes in US states between 2006 and 2016 using difference-in-differences regression, the author identifies the causal effect of tax-motivated corporate leverage on the balance of deferred compensation. Firms increase their deferred compensation balance by $85,000 with a 1% increase in leverage. This finding implies changes in the agency cost of debt as a potential reason for variations in inside debt values and provides evidence for Jensen and Meckling’s (1976) theory. #corporategovernance #debt #agencycosts #boardofdirectors #finance Find the full-text paper below https://lnkd.in/drX84AVs

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Monitor: US BSL CLO New Issue Arb Trend Since 2017 The median arbitrage metric YTD at 195 bps is actually lower than in both 2022 and 2023, but this year’s new issue volume has already far exceeded the past two years’ volume on an annualized basis. Similarly, 2018-vintage deals had the lowest median arbitrage metric at 191 bps, but 2018 was a record-breaking year for new issue #CLO volume at the time. On the other hand, 2020-vintage deals had the best median arbitrage metric at 243 bps, but their new issue volume was the lowest. If you’re interested in learning more about the premium content or would like a walkthrough of the website via Zoom, please don’t hesitate to email me at [email protected]. https://lnkd.in/e6sUTfjw

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"So is the US under Trump now poised to abandon decades of grand strategy built around the retention of strategic primacy and the related denial of pre-eminence to any peer competitor, especially one which seeks to capture the commanding strategic heights of Eurasia?" - Peter Varghese Actually, the USA is going to continue blundering on in pursuit of #hegemony. There is no sign of any realization, in the United States, that the world, at large, has had an absolute gutful of this display of power without purpose. It will just keep doubling down on this destructive grand strategy. What started with the #BRICS rejection of US Hegemony is now propagating to the polity of US allies, where the people within these *democracies* are sick and tired of their own captured leadership dancing to the tune of a foreign power. There is now an elaborate global propaganda network, established by State, and operated through the mainstream media, to maintain the *fiction* that our democracies *represent* the interests of their host nation state. They do no such thing. They are captured. This abuse of US power and influence is now destabilizing Western democracy from within. That process has already started in Germany. Europe has been wrecked by the Ukraine-Russia proxy war. The internal political strife will just keep building until it boils over. In short, the USA is pissing in its own swimming pool. In this Cold War, it is the *allies* that will suffer internal political chaos. The non-aligned movement of the first Cold War saw this one coming and have all moved to the sidelines. They are making their own lifeboat while the West destroys itself by torching its own values at the behest of the USA. The USA is a safe investment destination for now. It is the West outside of the USA which will be destroyed by US Foreign Policy. As a mark of this, the G20 organizers in Brazil could not be bothered waiting for President Joe Biden to turn up for the group photo. He does not matter. Outside of the West, the USA has lost all serious political influence. This will leave US Foreign Policy free to destroy its allies from within. It is all so mindlessly stupid. It is both a tragedy and a comedy.

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Measured Steps The headliner for economic news this week will be the policy decision announced on Wednesday after the November FOMC meeting. THE WEEK AHEAD We continue to expect the Fed to dial back the pace of its rate cuts to a 25bps step down, consistent with market pricing (99% odds), and consensus expectations. The real headliner for the week will be the results of the 2024 Election, which will hopefully be decided by tomorrow night - GO VOTE! Other notable data releases this week include: 1) The final Sept print for Durable Goods Orders, which are not expected to be meaningfully revised from the -0.8% m/m decline reported in the preliminary print 2) The preliminary 3Q print for productivity (consensus: 2.5%) and unit labor costs (1.0%) 3) October Purchasing Manager Indexes (PMI) for services industries from ISM and S&P Global which are both expected to reflect continued economic growth WEEK IN REVIEW There was a long list of economic data releases last week, with the most important report wrapping the week: the October jobs report, which revealed much weaker job growth than expected during the month (-28k vs 70k consensus), a meaningful downward revision (-112k) to prior months' job growth, while the unemployment rate ticked up modestly by 10bps to 4.15% in part due to a tick down in the labor force participation rate. More than 1.9m workers were either unable to work (512k) or forced to work part-time (1.41m) due to bad weather caused by Hurricane Milton, but all of these workers are counted as employed in the household survey. Hurricane impacts on the establishment survey were less obvious, while Boeing strikes & furloughs resulted in a clear ~40k drag on job growth in the manufacturing sector. Additional detail on the hurricane impacts may become apparent once the CPS data is released later this week, otherwise we will need to wait for state-level jobs data to come out on Nov 17. Q3 GDP growth was a solid 2.8% q/q saar, supported by robust consumption growth of 3.7%. Sept PCE inflation was roughly in-line with expectations, with headline up 0.2% m/m and core (ex food and energy) up 0.3%. Wards Total Vehicle Sales for October were better than expected at 16m saar, up from 15.8m prior. #ArchEmployee #WeekAhead #Jobs #Unemployment #Hurricane #Fed #Rates #Inflation

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Jay Powell just backtracked on a whole bunch of premeditated policy. The Nick Timiraos article (WSJ) is a very good guide to read and understand just what Powell did and why he changed. It is clear the Fed did have a predetermined policy. And the Fed was prepared to ignore a whole bunch of stuff to follow through with their plan. It was only when a really whole bunch of unexpected stuff cascaded down for jobs and inflation that Powell did not expect that he could no longer ignore it. The BURNING QUESTION I HAVE IS ...is ...is why was Powell on that bandwagon to begin with? Inflation over its target for 3-yearw running is 'no big deal??' but keeping inflation close to a 50-year low (...that can't be sustained) is a priority??? On what planet? That is really something worth looking into. My report explores the issues... enjoy... See link to my substack below. Jay Powell what happened to you?

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For different reasons China will end up in a trade war with most of the world as they refuse to promote (and for socio-political reasons the average Chinese consumer is resistant) domestic consumer demand. Still ploughing government money into excess manufacturing capacity that they then seek to export. As Krugman says this is bizarre policy. This will create geopolitical pressures internally and externally for China that are very dangerous for the world.

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Does anyone know when and who used the term "uphill capital flows", which refers to capital flowing from developing to developed countries, contrary to the theoretical expectation that it should flow from slower-growing rich countries to faster-growing poor ones, first?

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April's inflation data is shaping up as much better than Q1's (3.0% annualized core PCEPI, vs. 4.4% in Q1), but still not "good". To hit the Fed's March projection of year-end 2024 inflation (which was coupled with 50-75 basis points of rate cuts), we'll need even lower numbers going forward: around 0.16% M/M, matching what we experienced in May-Dec 2023. (Another way of saying it: April's data moved us a little further away from the Fed's goals, despite the improvement.)

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THE FED’S FINANCIAL STRESS INDEX IS AT ITS LOWEST LEVEL SINCE BEFORE THE 2008 FINANCIAL CRISIS: WHAT COULD GO WRONG? The currently low level of the St. Louis Fed’s Financial Stress Index depicted in the accompanying chart (constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators) raises some interesting questions in this very challenging macro environment. Firstly, given the continued strength of the U.S. economy and the relative absence of financial stress in the system, is the current consensus view that we will see significant interest rate declines in 2024 justified? It is the current belief that we will see rate cuts while simultaneously avoiding a recession that has been propelling stock markets. We find this notion paradoxical and consensus opinion vulnerable to disappointment. Why should interest rates decline in the absence of a recession and benign financial stress conditions? We think we will eventually see lower interest rates, but only after evidence of a significantly slowing U.S. economy appears. Unfortunately, the effect of a slowing economy will hurt stock market averages. Perhaps those hoping for lower rates should be careful what they wish for. Secondly, periods of low levels of financial stress (such as we’re currently experiencing) tend to precede spikes in financial stress that harm equity markets. The low level of the Stress Index may be one factor that has produced the current very bullish levels of investor sentiment. The rally in markets may continue for some time, but we think it prudent for investors to be alert for signs of a change in trend, for there is no shortage of potential catalysts for volatility. As difficult as the current macro investing environment is, we remain excited at the opportunities that will be provided by the volatility we anticipate, from both the long and short sides of the market and across asset classes. Each month in our paid service, the Global Investment Letter, I update my investing activities, as well as comment on major global equity, fixed income, currency, and commodity markets. If you found this post of interest, you’ll find the Global Investment Letter of value. To view free sample issues of our paid service and to receive our free (exclusive to those that sign-up) weekly investment comment please visit: https://lnkd.in/e3BaS3P

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A few underreported thoughts on the strong March employment report. Nonfarm employers added 303,000 jobs in March and job growth for the prior two months was revised slightly higher. The household data were also strong and hours worked and average hourly earnings slightly topped expectations. The unemployment rate fell 0.1 point to 3.8%. At first glance this is another strong employment report. I am traveling this week and only had a brief chance to review the data. One thing that jumps out is the strong growth in healthcare and government employment. Seasonal adjustment is likely boosting the headline payroll growth. Remember overall payrolls, and particularly healthcare and government payrolls, plunged at the onset of the pandemic (March and April). The decline was so severe in 2020 that it is continuing to impact seasonal adjustment today. Since we did not have another pandemic this year, means the seasonal factors flatter any employment gain in March and probably April of this year. We continue to expect nonfarm payroll growth to slow to around 160,000 per month around the middle of this year. We are still maintaining our view that the Fed to begin to cut the federal funds rate in June and look for three quarter point cuts this year. The risk that the Fed will do less than this has risen but we still see the Fed beginning to cut rates this summer. The composition of job gains and rise in hours worked suggest real GDP growth topped 2% in Q1. Our tracking estimate puts Q1 growth at 2.4% and we will update our forecast after we review the March CPI report. Please take a look at our latest CAVU Compass and feel free to share it. Read more of this month's CAVU Compass macroeconomic report here: https://lnkd.in/eKEphKVN To request a PDF copy of this report, please email: [email protected] #marketcommentary #economicforecast #economicoutlook #macroeconomics

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Freeman's essay is here... he roundly excoriates sanctioneering: "The net effect of American sanctioneering and protectionism is to make the world ever less than the previous sum of its parts. The new U.S. stand on trade and investment: * Substitutes geopolitical risk judgments based on national security paranoia for comparative price and quality as the basis for business decisions, thereby reducing global economic efficiency, growth, and prosperity. * Exempts uncompetitive domestic oligopolies – which now dominate the American economy – from competitive pressures to produce better, cheaper products. *Deprives U.S. producers of economically desirable production inputs and locks in inflation. *Replaces quasi-judicial dispute settlement mechanisms in international trade with zero-sum contests of economic power. *Undermines global monetary reserve and trade settlement systems and encourages the formation of competing currency blocks and exchange mechanisms. *Divides the world into multiple segregated political and economic blocs, restricting trade and investment flows with other blocs or countries to the detriment of global prosperity and economic efficiency. *Constitutes a pivot to further stagnation and technological decline, not a realistic approach to reindustrializing America. *Drives the world toward attempted military rather than diplomatic solutions to problems, most of which cannot be resolved on the battlefield. " Amen to all of that. Huge investment implications for anybody with a brain who can use it. #NewWorldDisorder https://lnkd.in/gwk_nTeN

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US Economy – Growth on Track for Now… Dr. Scott MacDonald writes: The International Monetary Fund (IMF) has just released its April 2024 Economic Outlook. According to the Washington-based multilateral agency, the U.S. is on track for 2.7% real GDP growth rate in 2024, driven by strong household spending and investment (with a fair amount coming from the federal government). The big issue for the U.S. economy is inflation. The IMF forecasts U.S. inflation for 2024 at 2.9%, well above the Fed target. Chairman Powell has repeatedly stated that he will not lower interest rates until the Fed is confident that the “inflation rate is moving sustainably down toward 2.0%.” The most recent economic data, March retail prices rose by an unexpected 0.7%, indicating that the economy is still running hot. While most attention is on retail and consumer prices, it is also worth noting that in March, the ISM Manufacturing PMI hit positive territory for the first time in 16 consecutive months. The ISM Services PMI has been in positive territory for 15 consecutive months and does not appear ready to slow anytime soon. Equally important, the data shows that the surge in immigration has significantly expanded the labor force, but has had little impact on wages, which remain in positive territory (growing at 3.1% in March). Moreover, labor markets are still tight with unemployment at 3.8% in March. This takes us back to the Fed. The worst thing that the U.S. central bank could do is to prematurely cut rates and have inflation bounce back. Additionally, both Biden and Trump economic platforms indicate that more money will have to be printed to finance large future budget deficits; growing money supply through the issuance of a massive amount of Treasury bonds will add to inflationary pressures. And, both Biden and Trump are talking about raising tariffs, which means prices will go up for many Chinese goods that are not easily replaceable. All of this leaves the Fed to hang tough on inflation, which translates into a stingy approach to rate cuts. We think that June and July are off the table for interest rates cuts and chances are increasing that there will no cuts in 2024. #muniland #municipalbonds https://ow.ly/SI3850RhwAn

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Ferguson's Law (proposed by Niall Ferguson) states that any great power that spends more on debt interest than on defense will not stay great for very long. If the US doesn't change course and soon, it will most likely test this law over the next few years. Looking at it from a different angle, this figure illustrates one of the reasons why economies have been so resilient despite rising interest rates. I think after the GFC, we are used to imbalances piling up on private balance sheets in periods of low interest, which then unwind with a crash when interest rates rise. This is the thrust of both the Austrian theory of business cycles and Fisher's debt-deflation theory, both of which provide decent mental maps to some of the leverage-driven crises of the last few hundred years. A lot of the imbalances that piled up in AEs during the ZIRP environment of the last 15 years, however, showed up not on private balance sheets, but on public ones - which is at least partly why private demand has remained so resilient. As this CBO projection illustrates, there has been very limited appetite to get debt and deficits under control in many of these economies - with the result that interest burdens are becoming increasingly onerous now that these governments actually need to pay coupons. The good news is, it's not too late for the US to fix this. It is, however, going to require adults in the room.

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In MarketWatch on what India’s election results mean for equities: "In our view, investors should discount any political noise and focus on fundamentals. India's economic growth story is unlikely to change with GDP set to continue expanding at a relatively robust 6%-plus in the coming years," said Shumita Deveshwar, chief India economist at TSLombard. #india #indiaelections #indiapolls #indiavotes #indianequities #indiastocks #emstocks https://lnkd.in/daCeaXtZ

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FOMC Statement Key Takeaway: The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance over the past year. In our estimation the Fed noting that its dual mandate has moved into better balance and is no longer exclusively focused on price stability and is now prepared to reduce a policy rate this is too restrictive for an economy that has an inflation rate at 2.5% and is steadily moving towards the 2% target. Thus, we are confident that the Fed will reach its target in 2025.

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Hurry up and wait: this week we get an update from the #Fed and a look at labor market conditions through July. However, the FOMC statement on Wednesday is not expected to include a #rate cut - at most, it will merely set the stage for a September rate cut. This week's key data release will be the July #jobs report on Friday, which is expected to show a continued cooldown in job growth with #unemployment holding at 4.1%. Tomorrow we'll get the June Job Openings and Labor Turnover Survey (JOLTS) data, which is expected to show a return to the broader downtrend for job #openings after ticking higher in May. Two other key labor market data points will be released this week: unit labor costs and the Employment Cost Index. Both are expected to show a continued easing of #wage growth in Q2. On the #housing market, home prices are expected to continue to cool on an annual basis, while June pending home sales likely bounced back modestly after declining the prior two months. This Week's Notable Data Releases Include: Housing Market 1⃣May FHFA House Price Index: 0.25% m/m sa⬆️from 0.2 in April 2⃣May S&P CoreLogic CS 20-City: 6.5% y/y⬇️ from 7.2 3⃣Jun Pending Home Sales: 1.1% m/m sa⬆️from -2.1 Labor Market 1⃣Jul Nonfarm Payrolls: 175k, sa⬇️from 206 2⃣Jul Private Payrolls: 150k, sa⬆️from 136 3⃣Jul Unemployment Rate: 4.1% sa ↔️ from 4.1 4⃣Jun JOLTS Job Openings: 8,055k, sa⬇️from 8,140 5⃣ Jul Average Hourly Earnings: 0.3%, sa ↔️ from 0.3 6⃣Jul Average Weekly Hours: 34.3 ↔️ from 34.3 7⃣Jul Labor Force Participation Rate: 62.6% sa ↔️ from 62.6 8⃣Jul ADP Employment: 150k, sa ↔️ from 150 9⃣2Q Employment Cost Index: 1% q/q sa⬇️from 1.2 Economic Activity 1⃣2Q Nonfarm Productivity: 1.8% q/q saar⬆️from 0.2 2⃣2Q Unit Labor Costs: 1.8% q/q saar⬇️from 4 Consumer 1⃣Jul Conf. Board Consumer Confidence: 99.5⬇️from 100.4 2⃣Jul Wards Total Vehicle Sales: 16.2m saar⬆️from 15.29 Manufacturing 1⃣Jul ISM Manufacturing: 48.8⬆️ from 48.5 2⃣Jun Durable Goods Orders: -6.6% samr ↔️ from -6.6 ---------------------------------------------------------------- Notable Developments in Last Week's Data ► Q2 GDP growth was stronger than expected, but so was inflation. ► June new & existing home sales were both disappointing, along with cooler than expected June real consumption growth, while consumer sentiment continued to decline. On net, the #market put more emphasis on the weaker data as market odds of a Sept rate cut increased to ~110% (i.e., a small chance of a 50bps cut) by market close on Friday, up from ~100% at the end of the prior week. #ArchEmployee

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SO APPARENTLY NOW IT'S MY WORD (1X CUT) AGAINST JOSEPH STIGLITZ (2X CUTS +) IN THIS CNBC ARTICLE. https://lnkd.in/d3-AgaR2 #markets #economies #Fed #wealthmanagement

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Pat Bustamante has put together a great note on the divergence between the states and yet we see a convergence with inflation. We have indeed calculated a trimmed mean for each capital city. Just like the broader CPI they do trend to track with the national average (maybe due to the fact we only survey the capital cities for prices and not the regions) and only diverge in extreme situations. Let me know if you would like more information our our Capital Cities Trimmed Mean. #inflation #CPI

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