Really good links - Interest on reserves - China - S&P correlation - Recalculation

Roger Farmer - Interest on reserves - "May 18, 2006 was an important day. It was the day when the Bank of England began to pay interest on reserves. In October 2008 the Fed followed suit. This monumental change in policy gave the Bank an important new tool in its arsenal. It allowed the Bank to influence the economy not just through expansion or contraction of the stock of money, but also through the composition of its balance sheet."

Ambrose Evans-Pritchard - China - "Diana Choyleva from Lombard Street Research said China has a delicate task ahead. Rampant overheating has given way to a "sharp cyclical downswing", yet China cannot easily unleash another stimulus blitz without risking inflation. They are in the "nasty quadrant " of the economic cycle where all choices are hard, though China is not as far gone as over-cooked India."

James Mackintosh - S&P correlation - "In fact, the tendency of the top 1,000 US stocks to move in the same direction as the overall market – their correlation – hit its highest point since at least 1950 in July, according to Barclays Capital. Correlations between the blue-chip S&P 500 index and the mid-sized S&P 400 reached 98 per cent while the blue-chip and small company indices were 99 per cent correlated over three months; contrast this with Citigroup’s figures showing just 68 and 72 per cent correlation, respectively, over 10 years. The options market is pricing in high levels of future correlation, too.
        This matters. The whole point of paying a fund manager to select stocks is that he or she is supposed to beat the market. But if the shares of both “good” and “bad” companies perform similarly, that manager has little chance of success. It is bad enough that so few mutual fund managers are able to beat the market even in normal times. Additional headwinds for active managers will persuade more investors to give up on highly-paid humans and switch to cheap computer-run index trackers."

Tweet of the day - Garett Jones - Recalculation and ZMP (Zero marginal product) workers - "Kocherlakota and Williamson find a Recalculation, with some ZMP workers loitering nearby. http://ow.ly/2t3HH"

Scott Sumner is back.