Thursday, August 9, 2018

9/8/18: BRIC PMIs trace Global economy's slowdown at the start of 3Q

Recent PMIs for BRIC show a weaker start to 3Q 2018, in line with moderating growth outlook for the global economy:

In summary, Composite PMIs for July show Russia, China and Brazil underperforming global composite index, with India being the only BRIC economy trending in line with the global economy.  Much of this dynamic was down to Manufacturing sector, with Services supporting global economy to the upside:

The biggest downside momentum came from Russia's sub-50 reading in Manufacturing, followed by significant decline in growth activity in the sector in Brazil, and a more moderate slowdown in China:

For Russia, weaknesses in Manufacturing sector, for now offset by strengths in Services, are unpleasant reminders that the economy is still fundamentally on near-zero growth path, despite early 2018 hopes for 1.9-2 percent growth projections. For China, there are growing signs of the adverse impact of Trade War with the U.S. taking their toll on growth and cost dynamics.

Saturday, August 4, 2018

4/8/18: Collapsed Labor Share of Economy 1947-2016

The frightening fate of the U.S. labor is best highlighted by the share of labor in economic output. Fred database only provides the data through 2014, and then stops. BLS provides data through 3Q 2016, and then stops. No one bothers to measure the contribution of the largest factor of production to the economy any more. Here is the BLS data:

The share of labor contribution in total economic output has, basically, collapsed. The slide started with the technological revolutions of the 1960s and 1970s, followed by computerization and supply chain management revolutions of the 1980s and 1990s. But the real collapse took place starting with 2002 post-dot.Com bust. Despite the tight labor markets and very low unemployment, labor share never really recovered from this decimation.

If this chart offers a stark cross-reference to socio-political environment we are living in today, such cross-referencing is not ad hoc. Labor is what we, people, have to supply in return for the life's necessities and luxuries. For the majority of us, it is ALL that we can supply.  Even our assets, such as homes and pensions savings are, ultimately, tied to labor, not to capital, because their performance is linked to our peers' labor-paid demand. A middle class house is an asset to other middle class households. It is not an asset to the jet-set shopping for homes in the Hamptons. When that demand collapses, as is currently happening in a number of rapidly ageing economies, real assets we hold turn out to be if not completely worthless (, at least severely depressed in value (

So a decline in economic value added share accruing to labor is a transfer of income (and therefore wealth) from those who work for living to those who invest for living (invest in technology and/or financial assets). This game is a zero sum game even after we account for pensions funds and household investments: someone loses (labor), someone gains (investors). It is made even worse by higher taxes on labor and by transfers via monetary policy (Quantitative Easing).

The only way to offset such transfers is to vest labor with claims to financial returns. In other words, by providing workers with shares in the financial markets. Simply taxing and shifting income from higher earners to lower earners won't do the trick, because some higher earners are generating their income through labor (and human capital), while others are doing so through inherited and acquired financial assets. Taxing income of the latter implies taxing incomes of the former, which, in turn, depresses returns to investment in human capital (or, ultimately, returns to investment in labor).

Basic income structure of the future will have to achieve exactly that: create broad share ownership of financial instruments linked to financial and technological capital amongst those supplying labor.

Thursday, August 2, 2018

2/8/18: M&A Activity: More Concentration Risk Signals

In recent media analysis of the markets, less attention that the rise in shares buybacks has been given to the M&A markets. And there are some interesting observations to be made from the most recent data on these.

Top level (see for details) analysis is that the overall M&A markets activity is remaining at cyclical lows:

As the chart above shows both values and volumes of M&A activities are shrinking. But the numbers of mega deals are rising:

Per chart above, overall transactions in excess of $1 billion are at an all-time historical high. Per FactSet: "the first half of 2018 has reported the second-highest level of deals valued over $1 billion with 200 deals; the highest level was attained in the first half of 2007 with 210 deals. It is also worth noting that the streak of billion-dollar deals started in 2013, and since then there have been over 100 billion-dollar deals in each half-year. Even in the run-up to the financial crisis the streak was only three years (2005 to 2007). And to help complete the pattern, the dot-com boom had a similar three-year streak of 100 billion-dollar deals in each half-year from 1998 to 2000."

In other words, markets reward concentration risk taking. Mega deals generally add value through increased valuation of the acquiring firm, and through synergies on costs side. But they do not generally add value in terms of future growth capacity. Smaller deals usually add the latter value. Divergence between overall M&A activity and the mega-deals activity is consistent with the secular stagnation theses.

2/8/18: Shares Buybacks: the Evil Symptoms of an Ever More Evil Disease

Yesterday, I have posted a quite unusual (for my normal arguments) defense of the shares buybacks. Normally, as the readers of this blog know, I see buybacks as a net negative to organic investment. However, that view needs to be anchored to the economic conditions prevailing on the ground. In other words, buybacks are net negative for investment and organic economic growth, unless buybacks are companies' rational responses to specific economic and policy conditions.

With this in mind, here are my thoughts on the subject of buybacks that have accelerated in recent years:

The proposition that shares buybacks are ‘starving’ (aka slowing) the economy is false. And it is false for a number of reasons, listed below:

Reason 1: Stock buybacks can ONLY slow down economic growth in the conditions when new investment by firms can generate higher economic value added than other uses of funds in the economy (e.g. investment by other agents, than the firm, or increasing aggregate demand by investors recycling gains from buybacks into general consumption, etc). Currently, this does not appear to be the case. In fact, firms are hesitant to invest in the economy even when we control for buybacks. Thus, buybacks are similar to dividends: payouts of dividends and higher buybacks rates may signal lack of profitable investment opportunities for the firms.

Reason 2: Stock buybacks can slow down economic growth if they increase cost of capital for the firms. With equity capital (shares) being made superficially more expensive than debt (QE, tax preferences, demographic shifts in clientele reasons, etc), this is not the case. equity capital is currently more expensive than debt as a funding source for new investment for listed companies. While this situation may reverse in time (which it did only on very rare occasions in the past), companies today can borrow cheaply to retire expensive equity. This might not make sense from the economy point of view (rising degree of financial leverage, increasing risk of destabilising increases in debt carry costs, etc), it might make sense from the company and management point of view.

Reason 3: Stock buybacks can harm economic growth if they reduce returns on productivity (theory of labour productivity being unrewarded via slow wages growth). This too is not the case, because labour productivity and TFP have been collapsing since prior to the increases in shares buybacks. I wrote enough about this on this blog before in the context of the twin secular stagnations theses.

So what does the story of skyrocketing shares buybacks really tell us? The reality, consistent with Reasons 1-3 above, is that stock buybacks are a SYMPTOM of the disease, not the disease itself. Shares buybacks are driven by secular stagnation: more specifically, primarily by supply-side secular stagnation (S-SSS), and are second-order related to demand-side secular stagnation (D-SSS). How?

S-SSS implies lack of profitable investment opportunities for short and medium-term investments by the firms. With falling TFP & labour productivity, and with demographically-induced slowdown in demand, this is patently so. S-SSS also implies the need for protracted QE and other distortions in capital funding costs that disincentivise equity capital relative to debt funding channels.

D-SSS implies that with demographic, structural shifts in economic activity across generations, etc, aggregate demand side of the economy is getting pressured. Which means, again, 2nd order effects, adverse pressure on supply side.

So shares buybacks are NOT a disaster, nor a disease. The disease is the structure of the economy, with
- Technological & human capital productivity and innovation stalling,
- Adverse demographics undermining future economic capacity,
- Infrastructure investments yielding lower potential growth uplifts,
- Policies (monetary & fiscal) stuck in the 20th century extremes,
- Increasing concentration, monopolisation & oligopolization of the economy and the markets resulting in reduced entrepreneurial activity.

Shares buybacks & resulting wealth inequality or concentration are not orthogonal sets to the political & policy mismanagement that marks the last 25 years of our (Western) history. They are DIRECT outcome of these.

So, go ahead, political punks. Make the markets day. Shut down shares buybacks, so you can keep gerrymandering the economy, manipulating the markets, & bend the society to your desired ends. The longer you do this, the more you do this, the tighter is the lid on the pressure cooker. The more spectacular the blowout to follow.

Wednesday, August 1, 2018

1/8/18: Household Debt and the Cycle

So far, lack of huge uplift in household debt in the U.S. has been one positive in the current business cycle. Until, that is, one looks at the underlying figures in relevant comparative. Here is the chart from FactSet on the topic:

What does this tell us? A lot:

  1. Nominal levels of household debt are up above the pre-crisis peak. 
  2. Leverage levels (debt to household income ratio) is at 17 years low.
  3. Mortgage debt is increasing, and is approaching its pre-crisis peak: mortgage debt stood at $10.1 trillion in 1Q 2018, just 5.7% below the 2008 peak. 
  4. Consumer credit has been growing steadily throughout the 'recovery' period, averaging annual growth of 5.2% since 2010, bringing total consumer debt to an all-time high of nearly $14 trillion in early 2018. 
  5. While leverage has stabilized at around 95%, down from the 124% at the pre-crisis peak, current leverage ratio is still well-above the 58% average for 1946-1999 period.
  6. The above conditions are set against the environment of rising cost of debt carry (end of QE and rising interest rates). In simple math terms, 1% hike in interest rates will require (using 95% leverage ratio and 25-30% upper marginal tax brackets) an uplift of 1.19-1.24% in pre-tax income for an average family to sustain existent debt carry costs. 
The notion that the U.S. households are financially non-vulnerable to the cyclical changes in debt costs, employment and asset markets conditions is a stretch, even though the current levels of risks in leverage ratios are not exactly screaming a massive blow-out. Just as the U.S. Government has low levels of slack in the system to deal with any forthcoming shocks, the U.S. households have little cushion on assets side and on income / savings balances to absorb any significant changes in the economy.

As we say in risk management, the system is tightly coupled and highly complex. Which is a prescription for a disaster. 

1/8/18: Dynamic patterns in BTCUSD pricing: is there a new down cycle afoot?

Bitcoin Cycles Analysis in one chart:

As the above suggests, BTCUSD dynamics are signalling continued structural pressures on Bitcoin prices and the start of the new double-top down cycle. The Great Unknown remains with the behaviour of the buy-and-hold investors who dominate longer-term BTC markets. Increase in market breadth with arrival of more active traders from the start of 2018 has not been kind to Bitcoin. More institutional investment flowing into the cryptos market has been, on average, a net negative for the crypto.

Tuesday, July 31, 2018

31/7/18: 65 years of profligacy and few more yet to come: U.S. Government Deficits

The history and the future of the U.S. Federal Government deficits in one chart:

Which shows, amongst other things, that

  1. The post-2000 regime of deficits has shifted to a completely new trend of massively accelerating excessive spending relative to receipts;
  2. The legacy of the Global Financial Crisis and the Great Recession far exceeds traditional cyclical increases in deficits;
  3. The more recent vintage of the Obama Administration deficits has been more moderate compared to the peak crises years;
  4. The ongoing trend in the Trump Administration deficits is dynamically exactly matching the worst years of Obama Administration deficits, despite the fact that the underlying economic conditions today are much more benign than they were during the peak crises period under the Obama Administration; and
  5. Based on the most current projections, by the end of the year 2023, the U.S. is on track to increase cumulated deficit from USD 12.227 trillion at the end of 2016 to USD 20.466 trillion.  This would imply an average annual uplift of USD 1.177 trillion, which is significantly higher than the average annual increase in deficits of USD 838.3 billion recorded over the 2009-2016 period.
The good news is, fiscally responsible,  financially conservative, taxpayer interests-focused Republican Party has given full support to the Trump Administration on what in fact amounts to a restoration of the peak crises period trends in deficits accumulation.

30/7/18: Broader Unemployment vs Official Unemployment: Ireland

In the first post (see above) looking at the broader measures of unemployment and dependency ratios, recall that CSO publishes several extended series for broader unemployment rates. 

The official unemployment rate at 1Q 2018 stood at 6.4 percent (well within the pre-crisis historical range of the average of 5.31 percent and the 99% confidence interval of (3.70%, 6.92%). In more simple terms, statistically, the current official unemployment rate is indistinguishable from the average rate prevailing in 1Q 1998 - 4Q 2007. Which is the good thing, implying that in official terms, Irelands economy has recovered from the crisis at last. In fact, the recovery in official terms has been attained in 4Q 2017.

However, the CSO also reports the PLS2 measure of broader unemployment. The Above analysis was based on reported PLS1 data, covering unemployed plus discouraged workers, as a percentage of the labour force. Adding to the PLS1 those in potential additional labour force (basically able bodied adults who are neither employed nor unemployed, nor discouraged, and are not in studies or formal training), the CSO gets PLS2 measure of broader unemployment. In 1Q 208 this number read 10.2% of the Labour Force, plus Potential Additional Labour Force, which was statistically higher than the pre-Crisis average of 6.1% (falling into the 99% confidence interval range of (4.39%, 7.81%). In other words, the economy has not yet recovered from the Crisis based on PLS2 broader unemployment measure.

Extending PLS2 to cover all unemployed, plus those who want a job and not seeking for reasons other than being in education or training, in 1Q 2018 the broader PLS3 unemployment measure stood at 14.2 percent, unchanged on 4Q 2017. As with PLS2, the 1Q 2018 reading for PLS3 falls well beyond the range of the pre-crisis historical average of 8.36% (with 99% confidence interval of (6.52%, 10.20%).

As noted above, by two broader unemployment measures: PS2 and PLS3, Irish economy has not recovered from the crisis, even if we take a relatively benign recovery measure of the economy reaching the pre-crisis 1Q 1998 - 4Q 2007 average rate of unemployment. 

Worse, taking 4 year moving average and a 4 year rolling standard deviation in PS3 rates, 1Q 2018 PLS3 rate of 14.2% is closer to the upper margin of the 99% confidence interval for 1Q 2018 based on prior 4 years of data (the CI is given by (9.81%, 15.63%) range). Which means that 1Q 2018 data shows no statistically significant break-out from the PLS3 broader unemployment dynamics of the past 4 years. The same holds for the 5 years MA and rolling STDEV. 

So while the official unemployment readings are showing a very robust recovery, broader measures of unemployment continue to trend in line with the economy still carrying the hefty legacy of the recent crises. 

30/7/18: Ireland's employment data: Official Stats vs Full Time equivalents

Based on the most current data for Irish employment and working hours, I have calculated the difference between the two key time series, the Full Time Equivalent employment (FTE employment) and the officially reported employment.

Let’s take some definitions on board first:
  • Defining those in official employment: I used CSO data for “Persons aged 15 years and over in Employment (Thousand) by Quarter, Sex, and Usual Hours Worked”
  • Defining FTE employment, is used data on hours per week worked, using 40-44 hours category as the defining point for FTE. 
  • A note of caution, FTE is an estimated figures, based on mid-points of working time intervals reported by the CSO.

Based on these definitions, in 1Q 2018, there were 2.2205 million people in official employment in Ireland. However, 51,800 of these worked on average between 1 and 9 hours per week, and another 147,300 worked between 10 and 19 hours per week. And so on. Adjusting for working hours differences, my estimated Full Time Equivalent number of employees in Ireland in 1Q 2018 stood at 1.94223 million, or 278,271 FTE employees less than the official employment statistics suggested. The gap between the FTE employment and officially reported number of employees was 12.53%.

I defined the above gap as “Employment Hours Gap” (EHG): a percentage difference between those in FTE and those in official employment. A negative gap close to zero implies FTE employment is close to the official employment, which indicates that only a small proportion of those in employment are working less then full-time hours.

All the data is plotted in the chart below

Per chart above, the following facts are worth noting:
  1. In terms of official employment numbers, Ireland’s economy has not fully recovered from the crisis. The pre-Crisis peak official employment stands at 2.2522 million in 3Q 2007. The bad news is: as of 1Q 2018, the same measure stands at 2.2205 million.
  2. In terms of FTE employment, the peak pre-Crisis levels of employment stood at 1.9261 million in 3Q 2017. This was regained in 3Q 2017 at 1.9444 million. So the good news is that the current recovery is at least complete now, after a full decade of misery, when it comes to estimated FTE employment.

The improved quality of employment as reflected in better mix of FT and  >FT employees in the total numbers employed, generated in the recent recovery, is highlighted in the chart as well, as the gap has been drawing closer to zero.

One more thing worth noting here. The above data is based on inclusion of the category of employees with “Variable Hours”, which per CSO include “persons for whom no usual hours of work are available”. In other words, zero-hours contract workers who effective do not work at all are included with those workers who might work one week 45 hours and another week 25 hours. So I adjust my FTE estimated employment to exclude from both official and FTE employment figures workers on Variable Hours. The resulting change in the EHG gap is striking:

Per above, while the recovery has been associated with a modestly improving working hours conditions, it is now clear that excluding workers on Variable Hours’ put the current level of EHG still below the conditions prevailing in the early 2000s. More interestingly, we can see a persistent trend in terms of rising / worsening gap from the end of the 1990s through to the end of the pre-Crisis boom at the end of 2007, and into the collapse of the Irish economy through 2012. The post-Crisis improvement in Employment Hours Gap has been driven by the outflows of workers from the Variable Hours’ to other categories, but when one controls for this category of workers (a category that is effectively ‘catch-all-others’ for CSO) the improvements become less dramatic.

Overall, FTE estimates indicate some problems remaining in the Irish economy when it comes to the dependency ratios. Many analysts gauge dependency ratios as a function of total population ratio to those in official employment. The problem, of course, is that the economic capacity of someone working close to 40 hours per week or above is not the same as that of someone working less than 20 hours per week.

Note: More on dependency ratios next. 

30/7/18: Egg Misses the Face at the Atlantic Council: Dodgy Banks, Dodgy Reports

Buzzfeed report throws unwanted light onto the tight rope walking at the Atlantic Council, where some august fellows are earning cash on the sidelines of private sector clients with questionable reputation:

A Report On Money Laundering At Latvian Banks Raises Questions About Conflict Of Interest At The Atlantic Council

Buried at the end of the report is this quote from Damon Wilson, the council’s executive vice president: "Every Latvian politician has worked with and knows us..." Which does lift the proverbial rug just a notch over the proverbial pile of history compiled underneath the Council: the organization has been a de facto go-to shop for framing politics of Eastern Europe. The real scandal, of course, is right there. Just imagine the screams from the media if a private initiative, say called Cambridge Analytica, uttered a similar statement in public? And yet, the AC can make such a statement in defence of its activities. Smell the salts?

30/7/18: Impact of Terrorist Events on European Equity Markets

Our recent paper on the impact of terrorist events on equity markets valuations in Europe has been published in the Quarterly Review of Economics and Finance (November 2017):

Monday, July 30, 2018

30/7/18: Annotated History of the U.S. Treasury Yield Curve

Courtesy of the forgotten source (apologies) a neat summary chart plotting the timeline of the 10 year U.S. Treasury yield:

For referencing purposes…