Unless you willingly prefer to ignore reality, you likely know that politics is intricately connected with the investment banking world. Let’s take a look at employment growth by U.S. president since 1948. Unsurprisingly, employment growth expanded the strongest during the Clinton and Reagan administrations.

Employment Growth

During the Clinton administration, employment grew by a little over 20 percent. The Reagan administration places second at about 17 percent. Fast-forwarding to the two most recent administrations, things do not look nearly as bright.

During the George W. Bush’s administration (Bush II), the employment picture expanded by a couple of percentage points.  The Bush II administration was hindered by two recessions – the bursting of the technology bubble and the global financial crisis.

Following the George W. Bush’s administration, the Obama administration’s experience has been just as weak (weaker if you solve for trend growth). President Obama came into office about in the middle of the 2008/2009 recession.  Since bottoming out early in his second year of office, the U.S. economy has slowly added jobs, only recently gaining a little bit stronger pace after four years of anemic growth. Overall, if the current administration is lucky, it could see employment growth a little bit better than the Eisenhower administration (thanks to the weakness in the last year of the Eisenhower administration).


GDP Growth

Switching to GDP, here is a look at GDP growth by U.S. president. Unsurprisingly given the performance of employment during their presidencies, GDP expanded the strongest during the Clinton and Reagan administrations. During the Clinton Administration, GDP grew by about 35 percent. During the Reagan Administration, GDP expanded by about 30 percent.

Fast forward to the two most recent administrations and again, things look relatively poor. At this point in his presidency (6 years), GDP was up about 16 percent during the George W. Bush’s Administration. Through the 6 years of the Obama Administration, GDP is up about 13 percent.

Where did the growth go in the past 15 years?



Overall, the investment banking universe is intricately connected with the political world.  Always has been, and likely always will be. In looking at the performance of the economy – as measured by jobs – by U.S. President, it does not look very good for the most recent administrations. If the economy is able to survive another two years without a hiccup in the overall employment picture (probably unlikely), the Obama administration might make it to third worst since 1948 (for 2 full-term serving presidents).

A third worst performance would put the Obama administration far behind the employment growth experienced during the Clinton and Reagan years and about in line with what happened during the Bush II years if one excludes the global financial crisis.

When switching from the employment picture to the GDP picture, not a whole lot changes.  The Reagan and Clinton years were the best, and the two most recent administrations saw uncharacteristically slow GDP growth.

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It’s not uncommon to see investment bankers check the state of the gold market at least a few times a day. Of all the markets in the world, it’s one of the few that everyone finds fascinating.

Movements in the gold market can signal pending inflation, slowing economic growth, unwise budgetary decisions, and other interesting indicators. The gold market also has a much broader reach than any other market, in that traders, politicians, and many others care about what the price of gold is doing. Given the interest from the investment banking world in general, we thought it might be interesting to see which economic unit’s inflation rate has the greatest impact on the price of gold.

Here is a look at the relationship between the price of gold and four selected economic unit’s inflation rates over the past 15 years.  You might be surprised by which one moves the price of gold the most.

U.S. Inflation and the Price of Gold

First, let’s review the relationship between the inflation rate in the U.S. and the price of gold. Perhaps surprisingly, the two are not as closely related as some might think. At times, the inflation rate in the U.S. moves fairly closely with the price of gold, such as in 2008 and 2009. This conventional wisdom finding breaks down a number of times, though, such as the divergence seen in the most recent years (2013 and 2014).

Inflation Movements and the Price of Gold - United States

Europe’s Inflation and the Price of Gold

The next graphic is a look at the inflation rate in Europe and the price of gold. Interestingly, the two look even less closely related than the inflation rate in the U.S and the price of gold. As with the experience in the U.S., there are times when the two generally moved together (2008/2009 and 2012/2013). There’s also been some divergences, such as the 2005/2006 and 2014 periods.

Inflation Movements and the Price of Gold - Europe

Russia’s Inflation and the Price of Gold

The third graphic is a look at the price of gold and the inflation rate in Russia. Perhaps less surprising, the two look as though they generally don’t move together, with the exception of, for example, the most recent movements in both.

Inflation Movements and the Price of Gold - Russia

China’s Inflation and the Price of Gold

The following graphic is a look at the inflation rate in China as related to the price of gold. Interestingly, this looks as though the two move generally together, with fewer exceptions than the U.S. and Europe.

Inflation Movements and the Price of Gold - China

Which One Wins?

With the four economic units’ inflation rates shown, which one is most correlated with gold price movements? The answer, surprisingly, is Russia on the downside and China on the upside (see the following correlation matrix).

Interestingly, the inflation rate in Russia (and the U.S. and Europe) is negatively related with gold price movements.  This means that, contrary to popular belief, an increase in the inflation rate in Russia (and, again, the U.S. and Europe) is correlated with a decrease in the price of gold (that is, without doing any sophisticated econometrics).

In contrast, the inflation rate in China is positively related with gold price movements.  This means that when the inflation rate in China rises, so does the price of gold (in general).

Correlation Matrix2.fw


If you were asked which economic unit’s inflation rate moves the price of gold the most, you probably would have said the U.S.  Now you can see that the gold market appears to care more about what is going on in China and Russia than inflation conditions in the U.S., at least when looking at the correlation of these economic units’ inflation rates with the price of gold.

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The investment banking world is intricately involved in influencing the direction of interest rates. Of the many factors that “surprised” many in the investment banking business in 2014 was the continued downward pressure on interest rates.

Essentially, at the start of 2014 the presumption among most in the investment banking universe was that global growth would accelerate, with inflation going along for the ride. That didn’t happen. Instead, global growth weakened and the yield on interest bearing securities weakened as well. This is the conventional wisdom explanation.

Is the “Global Growth Was Weak” explanation right? The “global growth” explanation for declining yields in 2014 is not the only possible explanation. There’s a demographic explanation as well.


The demographic explanation is simply this.  The aging of the workforce is putting downward pressure on interest rates through a demand-side mechanism.  Essentially, with a larger portion of the workforce being made up of older Americans, there’s a greater demand for Treasuries and other interest bearing assets.

Here’s the evidence.

The left side of the graph is the younger population’s (16-34) share of the workforce.  The percentage of the workforce between 16 and 34 has been declining significantly since 1981, peaking in 1981 at an amazing 53 percent.

The figure “recently” bottomed in early 2011 at around 41 percent.


The Yield

What have interest rates done over the same period? The yield on the 10-year note peaked in September 1981 at around 15 percent. Since that 1981 peak, the 10-year yield has precipitously declined, reaching a bottom of about 1.5 percent in July 2012.

What’s Happened Since 2012?

The figure shows that perhaps there is a long-run correlation between the two, but does it explain the 2014 interest rate surprise? Well, here’s a zoom look at the relationship since 2012. Interestingly, the relationship may also have a short-term connection as well (although, there’s certainly a lag).


The figure shows that the share of the working age population 16 to 34 bottomed in mid-2011. The yield bottomed a year later in mid-2012. Fast forward to 2014. The share of the working age population 16 to 34 experienced a slight peak at a little more than 41.3 percent in mid-2014 and has since slightly declined. Likewise, in early 2014 the yield on the 10-year note peaked in early 2014 and has precipitously declined.

Perhaps causal, perhaps not.


Overall, the investment banking world may want to pay more attention to demographics when explaining interest rate movements, and less towards the conventional wisdom of “stronger or weaker than expected economic growth.”

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Thinking About Economic Growth in 2014 and 2015

January 5, 2015

It has been an interesting year for economic growth. Overall, the world economy grew by about 3.5 percent on a real, price differential adjusted, basis.  The growth of 3.5 percent was relatively decent, although, of course, it was not even. Perhaps surprisingly, the 2014 GDP growth figures show a widely uneven experience in the amount of […]

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An 2015 Outlook for Investment Banking Jobs

December 22, 2014

The 2014 year is almost over.  Being good analysts, it seems like a good idea to review how investment banking employment did through the year and what the industry can expect for 2015. A Look Back at 2014 – Actual Employment The first graphic is a look at total investment banking industry employment since 1990.  […]

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Six Big Central Banks May Cause Investment Bankers Heartburn in 2015

December 9, 2014

The global economy started 2014 off with moderate strength.  Since then, its status has been downgraded to moderately weak. Entering 2015 with this background, there’s one question investment bankers certainly have on their mind. Which of the big 6 central banks will cause investment bankers the most heartburn in 2015? Let’s take a look. European Central Bank […]

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Government Spending – Do Investment Bankers Fall on the Side of the Germans or the French?

November 24, 2014

Among the more hotly debated issues in the investment banking world is the issue of government spending, and in particular government spending in Europe. The fundamental question is: Should European nations continue to reduce the costs of government services (i.e. reduce government spending to the point of a balanced budget)? Germany answers this question with an honest […]

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