From the Spring 2024 Syllabus:
The global economy in disarray, enormous debt levels all over the world, much of it issued at negative yields just prior to a once-in-a-generation surge in inflation prompted in part by central banks’ bane of existence (adverse aggregate supply shocks), bank failures, questions about the world’s ‘safe asset’, the possible end of the U.S. dollar’s decade-long bull market, the Eurozone someday emerging from its existential crisis…this is the backdrop for this year’s GFM course.
There are two main modules in GFM. The first is around the yield curve—its slope and position and recent changes in both—and the second is around exchange rates. Seems simple enough, but so much is packed into those two themes.
• Module 1: Slope, Position and Change in the Yield Curve
When the yield curve is upward sloping, banks’ interest income tends to be positive, as their borrowing costs (i.e., deposit rates) are low and their lending rates can be high.
But starting about two years ago the U.S. yield curve shifted up and inverted, leading to bank failures (e.g., Silicon Valley Bank) and recession predictions. Indeed, yield curve inversions have occurred prior to every U.S. recession since 1970. The U.S. yield curve inverted in November 2022 and since January 2023 it has been more inverted than since the Volcker Fed. Does the recent prolonged inversion suggest a coming recession and, if so, when?
SBV failed in part because it was blindsided by the U.S. yield curve’s upward shift and inversion. What will the U.S. yield curve do over the coming 12 months? This question is intimately related to
· The World's Safe Asset. Long-term U.S. interest rates, after a prolonged period near record lows, have surged 300bps since mid-2021. What are the likely movements of long-term rates in 2024?
In this module we’ll focus on the U.S. and the Euro Area’s core and periphery.
• Module 2: Currency Movements over the Long- and Medium-Terms
For currency movements we’ll focus on two horizons: long- and medium-term. Over the longer-term, the nature of the world’s international financial system will drive currency movements. Will the U.S. dollar remain the world’s reserve currency? Or will the world move to a bilateral monetary system with China at one end and the U.S. at the other? Over the medium-term, currency movements are usually a function of macro fundamentals and capital flows. Indeed, the U.S. dollar usually trends for long periods and is currently on an abnormally long-lived bull run, having appreciated substantially since 2011. What explains recent currency movements, and what will the likely directions be for 2024 and beyond? Is "king dollar" over or just getting started?
• Module 3: EME Currencies
You’ll apply all of the frameworks from the first two modules in your EME Country Presentations. Relative to the dollar, many EME currencies have weakened substantially over the past decade. Where are EME currencies headed over the next year? As a US-based investor, would you invest in EME local currency bond markets?
• Floating Module: We’ll also have a session “Using Macro to Predict Long-term Bond and Equity Returns.” Can we map macro into predictions of equity and bonds returns over the next 5-10 years?
In Global Financial Markets, we will tackle these issues and more. The main objective is to develop the technical skills that enable students to improve their understanding of current conditions—we primarily use ‘real-time’ cases and current data—in global financial markets, especially those for currencies and long-term interest rates. We focus on global financial markets, but because interest rates and exchange rates are driven by, among other things, the state of the economy, and in turn impact future economic performance, students can use this course to solidify their knowledge of global economics.
Throughout, our thinking will be anchored in models—technical notes will both elaborate on the models and help students translate them into actual data series—but our applications will be from the real world. The anchoring in theory is important: In your careers you will come across many ‘fad’ explanations for why the past didn’t turn out as planned or why the future will be different. With the experience of applying a small toolkit of theory to many situations, you will have the ability to examine fad explanations—indeed, any explanation—within a tight logical framework.