Sunday, July 21, 2019

21/7/19: The Budgets of Wars: An Updated Study of U.S. Military Stocks Performance

A new and much-improved version of our paper "The Budgets of Wars: Analysis of the U.S. Defense Stocks in the Post-Cold War Era" is now available at SSRN:


Thursday, July 18, 2019

17/9/19: Flight from Fundamentals is Flight from Quality: Corporate Risk

Great chart via @jessefelder highlighting the extent to which the bond markets are getting seriously divorced from the normal 'fundamentals' of corporate finance:

Corporate debt has expanded at roughly x2 the rate of growth of corporate earnings since the start of this decade. And corporate bond yields are persistently heading South (see: and investment for growth is falling (see: Which continues to put more and more pressure on corporate valuations. As a friend recently remarked, at 2% interest rates, the game will be over. It might be over at 2% or 3% or 1.5%... take your number pick with a pinch of sarcasm... but one thing is certain, earnings no longer sustain markets valuations, real corporate investment no longer sustains financialized investment models, and economy no longer sustain real, broadly-based growth. Something must give.

Tuesday, July 16, 2019

16/7/19: Corporate Yields are Heading South in the Euro Land

Some of the euro area's junk-rated corporate debt is now trading at negative yields, and over 15% of near-junk debt is also charging the lenders to provide cash to financially weaker companies:

Source: WSJ

While the overall stock of negative yielding debt (sovereign and corporate) is now nearing $13.5 trillion worldwide:
Source: Bloomberg

All in 51 percent of all European Government bonds are trading at negative yields, and just over 30 percent of all investment grade corporate bond issued in Euro.

The percentage of negative yielding debt amongst junk-rated corporates is small. Bank of America ML estimated that the percentage of BB-rated European corporate bonds with negative yield rose from 0.225% at the end of May to 1.5% at the end of June. Back then, 14 companies had junk-rated bonds rated BB or lower with negative yields, with total market value of $3 billion.

The chart below plots corporate junk-rated bond yields index for the euro issuers:

Meanwhile, Greek Government bonds auction this week went into a massive demand overdrive. Greece sold more than EUR13 billion worth of 7-year bonds, almost EUR11 billion more than it planned originally, at the yields of 1.9 percent, or 2.4 percentage points above the Eurozone benchmark average. The spread to Eurozone benchmark has now fallen from 3.73 percent in March sale. In fact, U.S. 7 year bonds are selling at a yield of 1.97 percent, implying lower yields for Greek debt than the U.S. debt.

Here is the chart plotting Euro area sovereign yield curves for AAA-rated and for all bonds:

The yields on AAA-rated debt are negative out to 13 years maturity, and for all bonds to 8 years maturity. 

16/7/19: Monetary Policy Paradigm: To Cut or To Cut, and Not to Not Cut

QE is back... almost. After a decade plus of failing to deliver on its core objectives, and having primed the massive bubble in risky assets, while pumping sky high wealth inequality through massive monetary transfers to the established Wall Street elites... all while denying that we are in an ongoing secular stagnation. So, courtesy of the unpredictable, erratic and highly uneven economic parameters performance of the last 12 months, we now have this:

Because, for all the obvious reasons, doing more of the same and expecting a different result is the wisdom of the policymaking in the 21st century.

Saturday, July 13, 2019

13/7/19: A New Era of Entrepreneurship? Not in Data so Far...

We are living in the Great New Era of Entrepreneurship that started in 2013 (according to someone at Forbes) and the academia is pumping high entrepreneurship training and education (the Golden Era, according to some don from Stanford). Living in all of this 'game changing' stuff around you can be daunting, inducing FOMO and other behavioural nudges toward dropping everything and launching that new unicorn doing something disruptive and raking in the miracle dollars that everyone around you seems to be minting out of thin air. Right?

Well, not so fast. Here's the data from the U.S. - that 'super-charged engine of enterprising folks':

Hmm... anyone can spot the 'New Era' in entrepreneurship out there, other than the one with historically low rates of business creation?

13/7/19: Mapping the declines in jobs creation

Increasing market power concentration, falling entrepreneurship, rising concentration amongst the start ups, unicorns and billions in investment, the markets have been rewarding larger companies at the expense of the smaller and medium enterprises for years. And this has had a problematic impact on human capital and jobs creation.

Here is the data on the levels of employment in medium-large companies over the years, based on the U.S. markets data:

In simple terms, per each dollar of investors' money, today's companies are creating fewer jobs - a trend that was present since at least 2000, and consistent with the onset of the Goldilocks Economy. But the most pronounced collapse in jobs creation from investment has been since 2017. Excluding recessionary periods, in 2002-2006 average annual decline in the number of employees per $1 billion in market valuation was 3.45%. Over 2009-2013 this number rose to 4.73% and in 2014-2019 the rate of decrease averaged 8.05% per annum.

13/7/19: BRICS and G7

As a side note: the BRICS now have a bigger share of the world economy than the Euro area and the U.S. combined:

In 2019, BRICS combined GDP will surpass (using PPP-adjusted GDP) that of G7 economies, and in 2020, based on IMF forecasts, it will exceed the combined share of the world GDP for the US + EU27 economies.

Not a single BRICS economy is currently represented in G7. Dire...

13/7/19: BRICS Current Account Surpluses: Its Russia and China Story

China and Russia dominate BRICS' current account dynamics and this is not about to change.

Both China and Russia have been posting strong current account figures in recent years, and this is not changing with the onset of the Russia sanctions in 2014 and the Trump Trade Wars in 2018. The two economies clearly dominate the emerging markets' current account dynamics in terms of both the sign of the balances (surpluses) and their magnitudes.

The caveat for Russia is that its current account gains are coming in at the time of relative weakness in its exports and net capital outflows:

Meanwhile, per latest data, U.S. trade deficit with China has widened once again as Chinese exports to the U.S. contracted by ca 7.8 percent y/y, while U.S. exports to China fell 31.4 percent. Which means the U.S. trade deficit with china is up 3 percent compared to June 2018.

It is a classic textbook example on how to lose 'bigly' from a trade war.

13/7/19: Russian v European Dependency Ratios: 1950-2100

Doing some numbers crunching on a different project, I just came across this interesting database from the UN showing population projections through 2100. One interesting aspect of this data is the forecasts/projections for the dependency ratio - basically, a number of working age population per 100 people of non-working age.

There are caveats attached to the analysis of this data, including the changes in the duration of the working age (over the years, younger age dependency has moved toward 24 years from 19 years due to extended period spent in education, while for older age dependency, the mark has been moving from 64 years to 69 years as the last year in working age group). These caveats aside, here is a really eye-opening chart:

We consistently hear about the demographic catastrophe that has visited Russia since 1990-1991 collapse of the USSR. We are also constantly hearing the claim that the Russian society is demographically so challenged, it is running out of people. The chart above shows that, actually, that is not exactly true. Russia has been showing pretty decent readings on population dependency ratio compared to its peers ever since the mid-1970s. More so, through 2020, the estimates from the UN suggest that Russia is performing better than its peers in Europe in terms of overall dependency. This is expected to change - to the detriment of the Russian society and economy - in 2030-2040, but thereafter, Russia is expected to once again perform better than overall Europe.

Similar picture arises when one looks at more modern definition of dependency age ranges:

This data suggests that the popular narrative about the relative decline of Russian population dynamics compared to other European states is at least highly imperfect.

13/7/19: Great Recession in Europe and the U.S. Great Depression

In a one-chart summary, why Euro has been a painfully failing experiment in monetary policy:

The above chart shows the comparative in real GDP levels between the Great Depression in the U.S. (1929-1936) and the Great Recession in Greece (starting from 2008 with data through 2018, and then using IMF estimate for 2019 published in April 2019 WEO, and IMF WEO forecasts from 2020 through 2024, data from 2025 on is taken at a linear trend using 2024 growth forecast). In simple terms, the U.S. real GDP reached its pre-Great Depression levels in the 7th year following the onset of the crisis, although some estimates put this to year 10, depending on the base used.  Greek Great Recession is now in year 11, and counting. By the end of 2019, the IMF estimates that the Greek economy will be 22.1 percent below the 2007 levels, and by 2024 (the furthest IMF forecast we have), it is expected to be 16.2 percent below the 2007 levels.

While one can make the point on Greece's 'unique status' as an economy that should never have been in the Euro in the first place, three arguments stand out against this point:

  1.  Greece is a member of the Eurozone, and if this membership was attained over all rational arguments against it, this very fact shows that the Euro is a poorly structured monetary arrangement; 
  2. As a member of the Eurozone, Greece should have been provided with monetary and fiscal tools for addressing the massive crisis the country experienced. Per chart above, it clearly was not accorded such: and
  3. Greece is hardly the only economy in this situation. Italy is patently in the same boat, and as shown in the chart below, nine out of the EA19 states have experienced longer duration of recovery from the Great Recession than the U.S. from the Great Depression.

Wednesday, July 10, 2019

10/7/19: Financialising Stagnant Growth: From Japanified Economy to Christine Lagarde

Monetary policy since the GFC of 2008 has been characterised by the near-zero (and even negative) policy rates, negative bank rates, negative Government debt yields and rampant asset price inflation. The result has been zombification of the advanced economies.

Here is the latest advanced estimate of the Eurozone real GDP growth based on the CEPR/Banca d'Italia Eurocoin indicator:
Current forecast for 2Q 2019 growth in the Eurozone, based on Eurocoin indicator is for 0.17% q/q expansion. June Eurocoin sits at 0.14%, the lowest since September 2013. The growth rate forecast has now been sub-0.25% (below 1% annual) in five months (through June 2019) and counting. Meanwhile, the link between growth and inflation has been weakening, as shown in the chart below:

Both, from the point of view of view of the current data relative to 1Q 2019 and to 2Q 2018 and to Q1 2018, growth rates are shrinking, per above. The ECB, however, remains stuck in the proverbial hard corner (chart next):

 Five years into zero policy rates, inflation is gradually creeping up (chart above), but growth is nowhere to be seen (chart next):

Worse, tangible fundamentals (captured by the models, like Eurocoin) of economic growth are becoming less and less consistent with actual growth outruns - a feature of the economy that is becoming dependent on things other than real investment and real demand for generating expansion in GDP. Both, the chart above and the chart below, highlight this troubling fact.
All of this suggests that we are in the period in economic development that is fully consistent with the secular stagnation thesis: traditional tools of monetary and fiscal policies are no longer sufficient in generating real economic growth. Instead, these tools help sustain economies overloaded with debt. It is an extend-and-pretend model of economic development: as long as corporates and households can be supported in carrying existent debt loads through monetary accommodation, the economy remains afloat (no recession, nor crisis blowout), but the levels of debt are so prohibitively high that no new debt can be accumulated to generate economic expansion.

The markets know as much. Investors know that zombie loans (loans with no capacity of servicing them should interest rates rise) mean zombie banks. Zombie banks mean zombie new borrowing markets. Zombie new borrowing markets mean zombie real investment by households and companies. Zombie investment means zombie demand. Zombie demand means deflationary supply. Rinse and repeat.

This knowledge in the markets is tangible. It takes a change in investors expectations (as in recent changes in outlook toward the reversal of the monetary tightening in the U.S. and Europe) to reprice assets. No actual value added growth enters the equation. Assets are no longer being priced on their productive capacity. And the markets are now fully finacialised. Which is to say, they are now fully monetary policy-driven.

Enter Christine Lagarde, the new head of the ECB. Lagarde's appointment is hardly an accident or a politically correct nod to women in leadership. It is the only logical choice of the financialised zombie economics of the monetary policy. To re-start borrowing or debt cycle, the EU is hoping for mutualisation of the sovereign debt markets. In other words, it is hoping to leverage the only unencumbered asset the EU still has: surplus countries' bonds. Lagarde's job at the ECB will be to run the creation of the eurobonds, bonds that will proportionally link euro area members' bonds into a single product to be monetised by the ECB as a support for market pricing. There is probably EUR 2-3 trillion worth of the international and monetary demand for these, opening up the room for more borrowing and more fiscal spending.

Monday, July 8, 2019

7/7/19: Employment to Population Rate in the U.S.: General Labor Force vs African Americans

With 'booming' and 'tight' labor markets, the White House is only happy to argue these days that we are in a Golden Era of employment/unemployment for all, including the African Americans. Is this, in fact, the case?

Firstly, I am not too keen on the arguments that any President in office should get the credit for jobs creation. At the very best, Presidential decisions simply support jobs creation by the private sector, and can be instrumental in creating jobs (albeit less in sustaining them) in the public sector. Secondly, jobs are just numbers, unless they are distinguished by their quality - something that is hard to do.

But the White House claims are usually about the aggregate jobs numbers / statistics, as opposed to the more granular analysis. So it might be worth taking them to the test.

One comparable - across different cohorts and time periods, as well as business cycles - metric is that of employment to population ratio. It takes total number in employment and divides it into the total population of working age for a specific group. Here is the chart (data from FRED database with calculations performed by myself):

Across the entire workforce, E-to-P ratio is sitting at 60.6%, statistically indistinguishable from the historical average of 60.64%, and 4.1 percentage points below all time high of 64.7%. For the category 'Black or African American', the E-to-P ratio is currently at 58.2%, which is above 55.13% historical average and is 3.2 percentage points below all time high of 61.4%.

Which means that current reading for African Americans population in terms of employment-to-population ratio is better, relative to their own historical trends than for the overall population. But, the ratio is still lower for African Americans than for the overall population in level terms.

What about the historical positioning of the gap between the overall population E-to-P ratios and that for the African Americans?

The gap between the employment-to-population ratio for the African Americans and that for the overall population is around the lowest levels it has ever been and is well below the historical average.

So, yes, the claims that employment has been relatively strong for both the general population and for the African Americans pans out to be true in at least this metric, which is - as noted above - by far not the only metric that matters.