Monday, June 1, 2020

1/6/20: COVID19 and European Banking

McKinsey research note on European banks' potential losses due to COVID19 is quite on the money:

With more than 1/3rd of European executives expecting "a muted recovery that would lead to sharp drops in banks’ revenue, a squeeze on their capital, and a hit on return on equity", European banks can expect revenues to drop by 40 percent plus, and ROE drop 11 percentage points in 2021.

And the problems are strategic. COVID19 is actually accelerating changes in customers' demand for services. "McKinsey’s European customer survey shows how customer behavior and needs have changed over the past month: digital engagement levels have climbed up to 20 percent, the use of cash has halved, 30 to 40 percent of customers have expressed a greater need for advice, while 20 to 40 percent want products to help them through the crisis.4 Pension shortfalls are a particular challenge with those close to retirement facing a very immediate problem."

Alas, European banks, especially those operating in the 2008-2014 crises-hit economies, such as Ireland, Italy, Spain and Portugal, are utterly unprepared for these shifting trends. I wrote about these problems in a series of two article for The Currency here: and

1/6/20: U.S. political culture and mass protests: "Russia-gate" Season X, Episode Z

The U.S. media has been quick in accusing Russia of stirring the current wave of violence that is sweeping across the U.S. cities. As daft as it may sound, Russia has now been effectively elevated to the national cause of every malaise in many major U.S. media outlets. As quipped on Twitter by Seva Gunitsky, politics professor at University of Toronto,

Well, the problem, of course is that the U.S. leads the rest of the advanced economies in domestic political violence in recent years.

The above chart comes from Samuel J. Brannen Christian S. Haig Katherine Schmidt "The Age of Mass Protests: Understanding an Escalating Global Trend", Center for Strategic & International Studies, 2020. Note that Europe in the above includes countries that are outside the EU27, such as Russia and Ukraine. The entire continent of Europe has consistently fewer anti-government protests than North America, which includes Mexico and Canada. North American data here is heavily dominated by the U.S.

And this is not a new phenomena. Police brutality and racism, racially-based violence and violent protests are not new for the U.S., and all of these events predate the existence of Russia as an independent state, as established here: The full paper is here:

1/6/20: 3 months of COVID19 impact: BRIC Manufacturing PMIs

BRIC Manufacturing PMIs are out for May, showing some marginal improvements in the sector. However, of all four economies, China is the only one that is currently posting activity reading within the statistical range of zero--to-positive growth. Brazil, Russia and India remain deeply underwater.

Please note, these are quarterly PMIs, not monthly, based on GDP-weighted shares of manufacturing sectors and monthly PMI data points. 

Sunday, May 31, 2020

31/5/20: S&P500 Shares Buybacks: Retained Earnings and Risk Hedging

Shares buybacks can have a severely destabilizing impact on longer term companies' valuations, as noted in numerous posts on this blog. In the COVID19 pandemic, legacy shares buybacks are associated with reduced cash reserves cushions and thiner equity floats for the companies that aggressively pursued this share price support strategy in recent years. Hence, logic suggests that companies more aggressively engaging in shares buybacks should exhibit greater downside volatility - de facto acting as de-hedging instrument for risk management.

Here is the evidence:

Note how dramatically poorer S&P500 Shares Buybacks index performance has been compared to the overall S&P500 in recent weeks. Since the start of March 2020, S&P500 Shares Buybacks index average daily performance measured in y/y returns has been -15.04%, against the S&P500 index overall performance of -0.89%. Cumulatively, at the end of this week, S&P500 Shares Buybacks index total return is down 10.18 percent against S&P500 total return of -0.967 percent.

While in good times companies have strong incentives to redistribute their returns to shareholders either through dividends or through share price supports or both, during the bad times having spare cash on balancesheet in the form of retained earnings makes all the difference. Or, as any sane person knows, insurance is a cost during the times of the normal, but a salvation during the times of shocks.

Saturday, May 30, 2020

30/5/20: The Cost of Not Shutting Down

Sweden is the case study for the COVID19 impact absent an aggressive shutdown of social interactions. And it is not a great one:

29/5/20: COVID19: US vs EU27 comparatives

Ok, here are the latest comparatives for the U.S. of A and EU27 in terms of COVID19 statistics. As always, comments in the charts:

The U.S. vs G7 and EU27 statistics are:

29/5/20: COVID19: Worldwide Cases and Deaths

There is still no signs of slowdown in the number of daily reported infections in the worldwide data for COVID19. In fact, 29/5/2020 marks the new all-time peak in the rate of new cases additions:

Aptly, with a lag, trends in daily reported deaths are starting to show signs of potential reversal from the recent lows:

Huge caveats worth keeping in mind in the above data interpretation, including the facts that:

  1. More recent vintages of cases has been shifting to countries and regions with weaker public health systems, resulting in potential decline in testing rates, accuracy and reporting; and
  2. Data for COVID19 is severely VUCA in its nature, as discussed here:

Friday, May 29, 2020

29/5/20: COVID19 Data: One Hell of a Mess

I haver compiled a summary of all COVID19 data for top 50 countries (all countries with more than 10,000 recorded cases as of May 29, 2020). Here are thee tables. Alphabetically, in 2 tables:

So, here are interesting observations:

  • Out of 50 countries only 11 countries are statistically 'average' or statistically 'normal'. All other 39 countries are statistically distinct from the average. Note: I am using 95 percent confidence level, adjusting for non-normal distribution.
  • Of these 39 countries, 21 countries are performing significantly better than average in terms of pandemic severity (in official numbers terms), and 9 are performing significantly worse.
  • 9 countries present an ambiguous case, when compared to the average.
Key takeaway from this: there is, basically, no point of talking about 'normal' experience with  COVID19 numbers. The system of this pandemic is extremely VUCA - high volatility, uncertainty, complexity and ambiguity of data and data dynamics imply that countries comparatives are at best handled with extreme care and on a case-by-case basis, as opposed to by referencing global averages.

Non-normality of data is severe and should steer analysis toward the median as a more valid (but still poor) central tendency measure, rather than the average.

Incidentally, as an aside, this calls into question all and any linear models that are being fitted to the COVID19 data, as, for example, in the case of the infamously bizarre research from JP Morgan claiming no changes in R0 rates during- and post-lockdowns.

Here is an illustrative case: Russia. Russian stats on COVID19 have been throughly washed through the Western media with usual scepticism and allegations that Kremlin is manipulating the data. Statistically, however, Russia is an outlier that is close to some semblance of a norm (especially considering the median).

Here is a summary:

In other words, Russia is somewhat 'normal' in the number of cases detected per 1 million population, and in death rates per 1 million of population, but 'abnormal' in having low reported death rates per case identified. There are 7 countries amongst top 50 case countries that have lower death rates per 1,000 cases, but statistically, there are 20 countries that are indistinguishable from Russia in terms of deaths per 1,000 cases reported. 

Go figure... the data is a fine mess. 

Thursday, May 28, 2020

28/5/20: America's Scariest Charts Updated

It is Thursday, so time to update U.S. initial unemployment claims counts and labor markets charts for the data through the end of last week:

A summary table first:

Per latest, initial unemployment claims increased in the week through May 23rd by 1,914,958, marking a major slowdown on the previous weeks' increase, but still running new unemployment claims additions at a rate in excess of 1 million per week, for the 10th consecutive week.

This means that from the start of March 2020 through the week ending May 23rd, total number of initial unemployment claims filed in the U.S. stands at 37,198,539. For comparison, cumulative jobs losses in all recessions since 1945 and through the recession of 2009-2010 amount to 31,664,000.

Adjusting for timings of new unemployment claims and for the most current data on actual non-farm employment, the chart below provides an estimate for current non-farm employment in the U.S.:

Current estimated non-farm employment is at 121,021,000, down from 152,442,000 in February 2020. Current employment, therefore is estimated at around the levels last seen in October 1997.

The chart below plots the history of the initial unemployment claims, using 26 weeks (half-year) cumulative:

In the entire history of the data series for initial unemployment claims, prior to COVID19, there is only one week in which total claims exceeded 1 million mark, the second week of January 1982, when the new claims hit 1,073,500. During the Great Recession, the worst week for initial unemployment claims saw claims rising 956,791. Over the last 10 weeks, the average weekly initial claims filings stood at 3,719,854, which is roughly equivalent to five worst weeks of the Great Recession combined (weeks of 27/12/2008 - 24/01/2009).

Here is a chart showing U.S. employment index across past recessions and post-recession recoveries:

Wednesday, May 27, 2020

27/5/20: Falling Velocity of Money

Despite massive money printing by the Fed in the years post-GFC and again since the start of the COVID19 pandemic, velocity of money in the U.S. is actually shrinking.

The latest bout of falling velocity of money started with what appears to be a new wave of precautionary savings by the households:

However, as the chart above also indicates, propensity to trade financial and real assets has been declining in recent years, from the start of the Global Financial Crisis on.

You can see a massive spike in precautionary savings in March 2020 in the following graph:

These charts indicate that the Fed's ability to support demand side of the economy is declining, as consumers have been drastically reducing their willingness to spend. They also suggest that investment markets liquidity has declined over time. All together, the above charts show the declining effectiveness of monetary policy in the age of ultra low interest rates.

27/5/20: Germany: Employment and Business Activity Show Gentle Uptick in May

Germany employment conditions improved slightly in May, based on ifo Institute survey:

The gains are in line with the Business Activity survey results:

However, both business expectations (major driver of improvement) and current conditions (remaining deeply under water and actually still deteriorating in May) are well below 2009 crisis reading: