Monday, November 30, 2015

30/11/15: WarningSignals on Secular Stagnation Threats

The readers of this blog know that I have been covering the twin theses of Secular Stagnation (long-term trend in slowdown of global growth) consistently over recent years.

Here is an interesting summary of the theses and literature on it, with extensive references to this blog (among other sources):!Where-are-we-on-Secular-Stagnation/covf/565464fb0cf29e70f2253e70.

My own view summarised most recently here:

Sunday, November 29, 2015

29/11/15: Simple analysis of the EU-Turkey 'deal' on refugees

What does EU-Turkey refugees 'deal' means:

  • With closure of land-crossing, duration of refugees passage to Europe over sea is going to be up;
  • This means that cost of smuggling refugees will rise, which means safety of refugees during crossing is down (due to quality of boats / procedures, as their ability to pay higher costs is severely restricted, and due to longer crossing routes); 
  • Thus, risk of losses of lives is up 
  • Which will require greater sea monitoring & rescue missions efforts to avoid horrific losses of lives (unless EU abandons all and any humanitarian considerations);
  • Which means EU dilemma of what to do with sea-crossing refugees has gone even less solvable, whilst adding a new dilemma of facing Turkey acting as a physical barrier for legitimate refugees, triggering potential humanitarian crisis on Turkish borders.
So, in summary, it is hard to see how the 'deal' is not a humanitarian crisis gone more acute.

Friday, November 27, 2015

27/11/15: More Tiers, Lower Risks, But Higher Costs: FSB Latest Solutions to Systemic Crises

The Financial Stability Board (a mega quango set up under the G20 cover to make policy recommendations aimed at assuring that Too-Big-To-Fail banks are brought under some international oversight) has recently issued its position on the bank capital shortfalls under the assessment of their balance sheets designed to ‘prevent taxpayers bailouts of lenders’.

The FSB report based on stress tests stated that big international banks operating globally will have to raise anywhere between EUR42 billion and up to as much as EUR 1.1 trillion in funding by 2022 to cover the shortfall in bailable (special) tier debt that can be written down in the case of a bank running into trouble in the future. The tests explicitly covered what is known as banks’ Total Loss Absorbing Capacity (TLAC) - debt that can be converted into equity when a bank fails, in effect forcing debt holders to shoulder the cost of bank collapse and freeing taxpayers from the need to step in. The TLAC approach to bank funding also breaks the pari passu chain of rights distribution across the banks’ liabilities, separating (at last) depositors from bondholders. (1)

In releasing its estimates for TLAC shortfall, the FSB also provided final guidance as to the levels of TLAC it expects to be held by the globally important TBTF banks: 16% of total bank risk-weighted assets by 2019, rising to 18% by 2022. (2)

To be clear, the TLAC cushion is not an iron-clad guarantee that in a future crisis, depositors’ bail-ins and taxpayers’ supports won’t ever arise. Instead, it is just a cushion, albeit at 18 percent target - a significant one. And the cost of this insurance will also be material and likely to be shared across depositors and borrowers worldwide. Current estimates show the cost of 16% hurdle for TLAC to be around 2% of total income of the largest banks, spread over roughly 4 years, this would imply that up to 1/3 of average bank interest margin can be swallowed by the accumulation of cushion. Maintenance of this cushion will also require additional costs as TLAC instruments will likely carry higher cost of funding.

In a silver-lining for Western banking groups, the hardest hit banks amongst the 30 Globally Systemically Important Banks (GSIBs) (3) FSB are four Chinese banks: Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, will no longer be exempt from TLAC. These banks currently hold no senior debt liabilities that can count as a part of TLAC cushion. In total, there are 60 GSIBs covered by TLAC, but in Europe, some 6,000 smaller banks are also covered by the Minimum Requirement for Eligible Liabilities (MREL) due in January 2016.

The core point for both, the MREL and TLAC is the issue of ‘loss-absorbing capital’. While the issue has been with regulators since the end of the Global Financial Crisis (2010), there is still no clarity on the mechanics of how this concept will work in the end. Currently there are three channels through which liabilities can be subordinated (bailed-in) in case of a crisis. All relate to bank-issued debt instruments:

  1. Contractual channel for subordination: banks can issue senior subordinated debt (tier-3 debt) which ranks ahead of tier-2 debt already outstanding in case of normal crises, but is bailable in the case of a structural crisis. 
  2. Statutory channel: bank-issued debt can be subordinated by statute.
  3. Structural channel: bailable debt is issued through a holding company to be subordinated to debt issued by the bank itself.

Euromoney recently covered these channels, concluding that whilst all three channels are complex, contractual channel is the hardest to structure. It appears that FSB view is that the contractual channel is the one to be pursued. In contrast, Italian authorities have pursued statutory channel, with legislative proposal to make un-guaranteed depositors super-senior liabilities, bailable only in the last instance. German legislation currently in draft stage will make all bonds suboridinatable in the case of bank insolvency. Another case of statutory instrument that defines contractual subordination channel is Spanish regulator introduction of a legislation that will simply subordinate all tier-2 debt by creating a tier-3 debt wedged between senior and tier-2 debt. In contrast, two Swiss GSIBs - Credit Suisse and UBS - have issued at holding company bonds in 2015, opting for the structural channel to subordination. Finally, in the U.S. the Federal Reserve already applied (as of October 30, 2015) the TLAC standards, covering eight of the biggest U.S. banks, with total shortfall of long-term debt arising under TLAC rules estimated at $120 billion. On November 9, U.S. giant Wells Fargo & Co announced that it will need to issue between $40 billion and $60 billion in new debt to cover TLAC requirements, with $40 billion representing the minimum required volume.

Per Fed, U.S. GSIBs will be required to hold:

  • A long-term debt balance of 6% of their respective GSIB surcharge of risk-weighted assets or 4.5% of total leverage exposure, whichever is greater; 
  • Maintain a TLAC amount of 18% of RWAs or 9.5% of total leverage exposure, whichever is greater. 
  • Maintain sufficient high-quality assets (proposed in 2014) as well as a cushion to raise capital levels by an additional $200 billion, over and above the industry requirements. (4)

The key problem with the most functional - contractual and statutory - channels is that TLAC approach requires creation of a new tier-3 debt that has to be ‘wedged’ between current senior and tier-2 levels. And this, as noted in Euromoney article (5) can violate the pari passu clauses already written into existent bank debt.

In simple terms, the regulatory innovations aiming to address the need to break the link between the state and the banks, including for the systemically important banks, seems to continue going down the route of creating added tiers of risk absorption that improve, but not entirely remove the problem of banks-sovereign contagion. At the same time, all these innovations continue to raise the cost of running basic banking operations - costs that are likely to translate into more expensive credit and lower credit-related activities, such as capex and household investment. On long enough time frame, if successful, the new tier of bank debt can, if taken to higher ratios, displace the problem of pari passu vis-a-vis the depositors. Question is - at what cost?

(1) Some basic details are available here:, and

27/11/15: The Welfare State Going Broke, and You Know It...

Bruegel’s  Pa Huttl and Guntram Wolff have recently posted on results of their study, under a handy title “Lack of confidence in the welfare state in the year 2050” (link here).

One chart sums up key evidence:

Thus, across eight European countries,

  • Majority of those polled felt that by 2050 public welfare systems will provide inadequate supports for pensions (59.5% of those polled) and for the unemployed (52.4%). 
  • Roughly half of those polled thought that care for the elderly (49.5%) will be inadequately supplied by the public welfare systems, and 
  • Over 45% thought that healthcare supply will fall short of their expected standards (45.4%). 

Darn scary numbers these are, even though, in my opinion, these are still too optimistic. The levels of implied state debt relating to what we call 'unfunded obligations' - contractually specified future commitments across pensions and healthcare benefits (excluding statutory, but non-contractual obligations) implies much lower probabilities of the modern welfare states being able to sustain current levels of funding.

Good example is the U.S. where current official debt stands at around USD18.5 trillion, whilst unfunded civilian and military pensions, plus Social Security and Medicare, inclusive of other contractually set Federal commitments and contingencies add another USD46-47 trillion to that (you can read more on this here)

Thursday, November 26, 2015

26/11/15: Counting Down to ECB's Big Surprise...

Counting the week to December 3rd ECB meeting, I have to ask one simple question: does anyone over in Frankfurt has a clue what they are doing?

Earlier this week, Reuters reported on a conversation with an unnamed ECB source

Here’s what we have learned:

  1. Things are far from smooth in the Euro area. We had some serious talking up on Money Supply side earlier this week, and we had incessant chatter about improving credit conditions. We even had promises of accelerated purchases in December (to offset holidays). But the ECB still appears to be directionless in so far as it still views QE road as insufficient. Menu of options is as wide as ever: more government bonds buys, deeper cuts to deposit rates, including a possible two-tier charge, purchases of municipal and regional debt, and even “buying rebundled loans at risk of non-payment has been discussed in preparatory meetings, although such a radical step is highly unlikely for now”. You really have to wonder: do they have any sense of direction (other than strictly forward)?
  2. "There are some who say you should surprise markets. But you cannot surprise indefinitely. Sooner or later, you are bound to disappoint." That is per ECB official. Wait a second, sooner or later? Just how many iterations of this circus will we be looking at? ECB’s commitment (rumoured) to push through a major surprise is a desperate bet. If surprise works, markets are likely to overshoot fundamental valuations on all fronts: from EUR/USD and EUR/Sterling to major equities indices and bond prices. But overshooting is not likely to hold unless the ECB continues to surprise the same markets. If, as likely, inflation remains anchored at low levels over the time of these surprises, the ECB will find itself in a situation where the only way to trigger any positive response from the markets will be to double down on every turn. Scared yet?..
  3. ”We have deflation, so you have to do something," said a second person. "How this all looks in a few years, nobody knows." And that is the scary bit - it appears that no one is willing to venture a field view deeper than a few months. Back to that directionless driving…
  4. Things, however, are clearly not working for Count Draghul: “Failing to [surprise the markets with expanded QE] so risks disappointing investors who expect ECB policy-setters to bolster a one-trillion-euro plus programme of quantitative easing when they meet on Dec. 3, in a move so significant it has been dubbed 'QE2’.” It seems the Euro area monetary policy is now equivalent to showing up in an alligator park with a crate of chickens: the faster you throw them, the closer you get to becoming a meal yourself, yet try not throwing any at all and you are a meal. And as an aside, what kind of a strategist bets on surprise and then pre-leaks all possible routes for such a surprise?..  
  5. Meanwhile, the gators are getting a sight of the chicken man slipping into their pond: “One person familiar with the matter said [non-performing loans that ECB might consider buying] could be packaged with more creditworthy loans before being put up for sale [to ECB]. "You could buy rebundled non-performing loans, combined with good loans," said the person. "If we get to that, then things are very bad.”” Oh dear, slice-and-dice tranches of MBS anyone? The ECB is moving closer and closer to tracing Lehman strategy ca 2006…
  6. If the ECB does buy municipal and regional debt, we are in yet another fiscal corner. Buying such paper will absolutely nothing to stimulate private sector capex. But it will loosen the purse for local governments, thus undoing all the ECB-led efforts to reign in fiscal profligacy. And, given the horrific state of public finances across the Euro area, it will set up the ECB to support municipals and regions for many years to come.

So for now, we have captain Draghi steering the ship at faster speeds and with greater determination. Except we don't quite have any idea of the exact course. Thursday should be fun…

26/11/15: Ireland on Inequality Heat Map

Much has been said about inequality in Ireland. On TV off TV and elsewhere. Much of it is, sadly put, locked out factoids.

You see, inequality is a tough thing to measure. So we have loads of various metrics to go by and none are ‘perfect’.

Here is a slightly more comprehensive view via @Jim_Edwards

What the above shows is that across comparable economies, Ireland is mid-range in terms of inequality. Right next to Canada and Austria - two societies that few would consider to be viciously unfair to their residents. Not that there is no room for improvement, mind.

That said, the chart does miss some relevant data for Ireland - the wealth distribution. Which we are, arguably, not a shining example of.

I am not going to repeat my arguments about the relationship between tax system and wealth inequality (you can read them here:, but it is worth noting that we rank well in terms of real wages growth and gender pay gap, as well as health status. We rank average in terms of all other metrics, save for involuntary part-time employment, which - by the way - is improving. I am not too keen on including arbitrary metric of ‘Digital Access’ in the scoring, however.

As an aside, the above table also fails to measure underemployment (you can read on this here:

26/11/15: Refugee Camps Are the Cities of Tomorrow

Given the plight of refugees and the current global crisis involving movements of people displaced by wars, famines, natural disasters and internecine governments, the problem of designing facilities for refugees is non-trivial and extremely important. Here is a fantastically informative interview by DeZeen on the topic:

Quote: "These are the cities of tomorrow," said Kleinschmidt of Europe's rapidly expanding refugee camps. "The average stay today in a camp is 17 years. That's a generation. In the Middle East, we were building camps: storage facilities for people. But the refugees were building a city."

26/11/15: On a long enough time line: Irish corporate inversions

Recently, I covered the Pfizer-Allergan ‘merger’ just as Irish media navel gazed into the usual ‘jobs for Ireland’ slumber.  [You can trace much of it from here:]

Now, few links that catch up with my analysis:

  1. Irish Times reported that the Exchequer may gain up to EUR620m in Pfizer’s Allergan deal, annually. Key quote: “Last year, Pfizer paid an effective tax rate of 26.5 per cent as a US company. Post-merger, it expects to pay between 17 and 18 per cent across the group. In Ireland, it will pay our 12.5 per cent tax rate on any international income routed through the new Dublin operation.” Err, Irish Times, no. Pfizer will be paying lower effective rate than 12.5% because it will be able to avail of the famous/infamous OECD-allegedly-compliant ‘Knowledge Development Box’. How much lower? Ah, who knows.
  2. Bloomberg covers the same deal with a heading: “Pfizer's Viagra Tax Dollars Head to Dublin as U.S. Loses Again”. A bit of a miss, as Ireland already milks Viagra fortunes, though with the new ‘investment’ that will most likely increase. Key quote: ““We are not pushing for inversions,” Irish Finance Minister Michael Noonan told reporters in Brussels on Monday, referring to the controversial transaction meant to cut corporate tax rates. The agency charged with winning investment for Ireland “never promotes inversions. It’s a decision for the two companies.” While Noonan said Allergan and Pfizer were plainly merging for “tax advantages,” the government has no problem with the deal as both companies had “substantial” operations in Ireland.” You have to be laughing… the same defence [we are not doing anything, all their fault] has been used in the past by Swiss and other tax havens to justify the arrival of tax-‘optimising’ money into the banks vaults. Now, it is Ireland’s turn. But for comical relief, we have this: “Patrick Coveney, chief executive of Greencore Group Plc, the Irish food company that’s the biggest sandwich maker in the U.K., told state-owned RTE Radio in Dublin on Tuesday that Pfizer’s proposed deal builds on its and Allergan’s presence in Ireland.” Yes, sandwich maker knows a thing or two about pharma and biotech. Next up: newsagent comments on new nuclear power plant design in the UK…
  3. Not to be left behind, U.S. politicians are jumping on a carbon copy of the bandwagon too scared to actually join the bandwagon itself. Per Zerohedge: “Hillary Slams "Unfair" Tax Inversions After Sanders Calls Pfizer/Allergan Deal "Disaster For Americans”” Apparently, following in the footsteps of the completely out-of-touch Bernie Sanders, Hillary Clinton “firmly believes businesses should get ahead by building a stronger economy here at home, rather than using tax loopholes to shift earnings overseas, or to move abroad to escape paying their fair share.” Hillary went on to do what politicians do best: promise to do something. “In the weeks ahead [no idea when] I will propose specific steps to prevent these kind of transactions… I urge Congress to act immediately [pretty definitive timeframe when urging other to do something though] to make sure the biggest corporations pay their fair share, and regulators also should look hard at stronger actions they can take to stop companies from shifting earnings overseas.” So in basic term, Hillary has nothing to say other than that she has to say something. That’s novel.

All of this would be gas were it not serious. Despite Irish Government promises to curb ‘harmful’ tax practices, despite our vocal ‘compliance’ with the spirit of the OECD ‘reforms’, Ireland remains a premier destination for tax inversions from the U.S. Worse, everyone now knows this, and no one is doing anything about it. Worse, yet, everyone is next going to be aware of the simple fact that no one is doing anything about it.

On a long enough timeline, things will be easier in the short run as Irish Exchequer milks the rest of the world for tax optimising commissions. In the long run… well, we might have to start looking into how we will pay all these future pensions when the penny finally does drop in Washington and Berlin…

Wednesday, November 25, 2015

25/11/15: Nama: That Gift Horse's Mouth...

Back in June this year, I posted about 10 most egregious cases of apparent mis-pricing of assets relating to Nama sales:

Now, we can add a new one. Per Irish Times report (

“Blackstone, the world’s biggest private equity firm, is on track to make a profit of €43 million on two office buildings it bought in Dublin’s south docklands only two years ago. The company has agreed sale terms at €123 million for the Bloodstone Building and an adjoining block on Britain Quay – 54 per cent more than the €80 million paid for them towards the end of 2013.”

In other words, we have vulture fund that bough completed properties two years back and managed to squeeze 54% appreciation out of them by doing virtually nothing new, adding virtually no new value. And Nama added zero value to the buildings as well as it got them off Sean Dunne in fully completed form.

The cherry on the cake (for Blackstone) is that it bought the above buildings for roughly EUR100 million, along with a third building: Hume House on Pembroke Road in Ballsbridge. Blackstone is yet to sell Hume House. So Blackstone actual returns on Nama purchase will be going up and up.

The Irish Times article also references another Nama ‘deal’ for the taxpayers. “Early in 2013, King Street Capital bought the Bishop’s Square office building on Kevin Street for €65 million and last January it sold it on to Hines, the international property company, for €92.5 million – a price rise of more than 42 per cent.”

That would be the deal described here:

So between these two ‘deals’, Irish taxpayers have foregone collective EUR70 million. Thanks, Nama!

Tuesday, November 24, 2015

24/11/15: Over-skilled & Under-Employed: Welcome to the Brave New World of Europe

Irish policymakers are keen telling us that jobs creation has been robust and of high quality in recent years. Which, thus, begs a question: why does OECD data show Ireland as having one of the most severe mismatches between workforce skills and employment?

Apparently, based on OECD data, Irish economy is not exactly offering jobs on par with our fabled skills. And, apparently, based on OECD data, our illustrious workforce holds a big untapped potential for productivity gains that are not being realised by the inflows of MNCs and FDI and domestic economy jobs creation to-date.

OECD doesn't quite offer an Ireland-specific explanation of this paradox, but it does offer an insight as to why the same phenomenon plagues virtually all of Europe:

Apparently, the quality of firms (or their systems for allocating Human Capital or both) in Europe is just not up to par. It turns out that the Irish disease of underemployment is a European disease.

This is especially tragic, given that we have a huge over-skilling present in the economy - in basic terms, our skills levels are too high for what our economy is capable of absorbing:

Few years ago, I quipped in my Sunday Times (now defunct) column that we are heading for Unemployed PhDs crisis. It looks like we have arrived.

So welcome to the Brave New World where years in education and training and years of on-the-job experience count for zilch when it comes to affording pensions, savings and investments.

24/11/15: Captured Economics and the Victim State

Per Simon Wren-Lewis: “…Perhaps the problem at the heart of the Eurozone is that economic policy advice in Germany has been effectively captured by employers' interests, and perhaps the interests of banks in particular.” (source here)

For one caveat: economics as profession has been largely captured by the state.

The European states are, of course, themselves have been captured by corporatist interests, including (but not limited to) those of big businesses and banks. One can make a similar argument about other (non-European) states too. Which makes the capture of economists by business only a part of that more corroded chain, and not an exclusive part. Otherwise, how can one explain that it is State-employed economists and State-aligned economists (with State boards positions and State research contracts) that so vocally defend the very same corporate welfare that Simon Wren-Lewis seems to correctly worry about?

My view on the subject was covered here:

In simple terms, enough whitewashing the State as a victim of business interests - instead, time to see the State as a willing participant in a corporatist system that allows capture of policy development and implementation mechanisms and institutions by vested interests that define the State.

24/11/15: Europe's Dead Donkey of Productivity Growth

Remember the mythology of European productivity miracles:

  1. The EU is at least as competitive as the U.S. (with Lisbon Agenda completed, or rather abandoned);
  2. The EU growth in productivity is structural in nature (i.e. not driven by capital acquisition alone and not subject to cost of capital effects); and
  3. The EU productivity growth is driven by harmonising momentum (common markets etc) at a policy level, with the Euro, allegedly, producing strong positive effects on productivity growth.
Take a look at this chart from Robert J. Gordon's presentation at a recent conference:
The following observations are warranted:
  • EU convergence toward U.S. levels of productivity pre-dates major policy harmonisation drives in Europe and pre-dates, strongly, the creation of the Euro;
  • EU productivity convergence never achieved parity with the U.S.;
  • EU productivity convergence was not sustained from the late 1990s peak on;
  • The only period of improved productivity in the EU since the start of the new millennium was associated with assets bubble period (interest rates and credit supply).
Darn ugly!

But it gets worse. Since the crisis, the EU has implemented, allegedly and reportedly, a menu of 'structural' reforms aiming at improving competitiveness.  Which means that at least since the end of the crisis, we should be seeing improved productivity growth differentials between Europe and the U.S. And the EU case for productivity growth resumption is supported by the massive, deeper than the U.S., jobs destruction during the crisis that took out a large cohort of, supposedly, less productive workers, thereby improving the remainder of the workforce levels of productivity.

Here is a chart from the work by John Van Reenen of LSE:

Apparently, none of this happened:
  • EU structural reforms have been associated (to-date) with much lower productivity growth post-crisis than the U.S. and Japan;
  • EU jobs destruction during the crisis has been associated with lower productivity increases than in the U.S. and Japan;
  • All EU programmes to support growth in productivity, ranging from the R&D supports to investment funding for productivity-linked structural projects have produced... err... the worst outcome for productivity growth compared to the U.S. and Japan.
And the end result?

I know, I know... a Genuine Productivity Union, anyone?...

Saturday, November 21, 2015

21/11/15: Be Kind to Economic Forecasting Dodos...

Oh, spare a kind thought for the economists... crippled by the intellectual feebleness of algebraic (and utterly useless) models and hamstrung by the need to sell 'good news' to naive retail clients pounded by the sell-side 'research', they have it tough in this life. And the things are going to get tougher.

So far, in anticipation of the U.S. Fed hikes, virtually all economics analysts working for sell-side stuff brokers have been declaring their firm conviction that once the Fed raises rates, things are going to be off to a neatly clean start - the U.S. economy will shake off any risks to growth, while the Euro area economy will get a devaluation boost from stronger dollar.

Which, by the way, may or may not happen, but as Reuters article (link here) clearly shows, it wouldn't be the economists crowd that will have any idea what is going to happen.

Here are two charts from Reuters:

Now, give this a thought: 2014 and 2015 were relatively 'trend' years for the U.S. economy. And yet, in both cases, analysts surveyed by Reuters vastly, massively, grossly missed the boat on their forecasts. The dodos did predict back in January 2015 that 1Q 2015 growth will be 2.8%, missing the mark by 3 percentage points. And they did chirp out a forecast of 2.5% growth for 1Q 2014 back in January 2014, missing the reality by a massive 5.4 percentage points.

And to give you some more flavour, here is a summary of IMF forecasts for advanced economies (not just the U.S.):

Which confirms the aforementioned truth: economic forecasts ain't got a clue where the major advanced economies are heading, with or without Fed rate hikes.

It would be laughable, if this was not serious: the same types of economists inhabit the forecasting halls of the Fed, providing 'technical (mis-)guidance' to the FOMC on which the decision to hike rates will be made. In other words, the blind are driving, the deaf are navigating them and we are all the passengers on their happy runaway train.

So buckle up. When Fed hikes rates, things might go smooth or they might go rough - we just don't know. But we do know as much: all these economic forecasters have not a clue what will happen...

Friday, November 20, 2015

20/11/15: For all that growth thinking, say 'Thanks' to the U.S. for leveraging up

While leadership of Ireland ponders the fortunes of our 'globally connected' (yet somehow always exceptional) economy, here is an actual global picture of who drove Europe's (and Ireland's) 'exporting economy' model of economic expansion.

The chart below plots current account imbalances by region as % of global GDP from 1980 through today.

Source here.

Since 1983, there has been only one, that i right, one year (1991) when the U.S. did not run a current account deficit. By converse, since 1994, there have been just four years when the EU run a statistically noticeable current account deficit.

Thus, leveraging of the U.S. economy, including through trade, household demand and corporate tax 'optimisations' was the consistent driving force behind the miracle of European growth (and global growth in general) since at least 1983. Since 2011 - the coincidentally very year of Irish recovery - U.S. deficits and growing deficits from the ROW have been coincident with rising surpluses for the EU.

Table below (compiled using IMF WEO database data) shows cumulated current account balances from 1980 through 2015 for the main groups of economies and the U.S. expressed in billions of euro:

For the readers' convenience, I shaded U.S., Euro area and EU positions. This shows just how dramatic was the acceleration in U.S. deficits position since 1997 compared to 1980-2015, and how symmetrically significant was the acceleration in the EU surpluses.

In a way, all strategy of 'national development policies' talk aside, brutal reality of the years ahead is that unless someone else picks up the U.S. leveraging game, there is little scope for the externally-driven economic models of Europe in the future.

Irish exceptionalist insiders should pause for some thought... perhaps on their way to a fancy state sponsored lunch at the Castle...

20/11/15: Gold's 'Road Back'?

No love for gold from Europe...

20/11/15: The Inversion Debate Isn’t Over: Credit Suisse

A brief Credit Suisse note on corporate inversions, with an honourable mentioning for Ireland: over the story covered on this blog earlier (see background here including further links).

I especially like that little twist on tax optimisation that are inter-company loans: whilst the original inversion leads to a direct negative impact on tax revenues for our trading and investment partners, it adds a cherry on the proverbial cake by reducing companies' tax liabilities even further through lending to U.S.-based business.

OECD compliant, it all is...

20/11/15: U.S. Households' Deleveraging: Painful & Long

An interesting set of charts plotting trends in U.S. household credit arrears over time, courtesy of the @SoberLook

Three things stand out in the above. 

Per first chart, credit cards debt is the only form of credit that saw arrears drop below pre-crisis levels. It also happens to be the form of debt that is easiest to resolve - largely unsecured and easily written down. Mortgages debt arrears - while declining significantly from crisis peak - still remain at levels above pre-crisis averages. Ditto for all other forms of household debt. 

Also per first chart, improving labour markets conditions are doing zilch for student loans arrears. These remain on an upward trend and close to historical highs.

Thirdly, from the second chart, new volumes household credit in arrears in 3Q 2015 are broadly consistent with the situation in the same quarter in 2014, with new arrears falling to 4Q 2007 levels, but still running at levels well above 2003-2006 levels.

This, in an economy characterised by more robust labour markets than those of Europe and by personal insolvency regimes and debt resolution systems more benign than those in Europe. In simple terms: deleveraging out of bad debt is a painful, long-term process. Good luck to anyone thinking that raising rates will do anything but delay it even longer and make the pain of it even greater.

Tuesday, November 17, 2015

17/11/15: Irish Rents: Welcome to More Consumer Whacking by Government

In efficient market, pre-announced policy changes get priced into market valuations before the policy change takes place. This was the case with the Gazprom's Nord Stream pipeline (working paper on this is forthcoming) and this is also true for much more liquid markets for rents.

Behold, Irish Government's latest stab at creating policies-driven evidence (or in other words, screw ups):

As expected, Irish landlords were quick to price in future freezes in rents in advance of such freezes coming into force. Which means that already beleaguered Irish renters can now pay even more in rents over an even longer time horizon. Double whacking of consumers by the incompetent policy designers continues unabated...

Monday, November 16, 2015

16/11/15: IG Insights Summit: Markets Outlook

Recently, I took part at the IG Summit in Dublin on a panel covering the future direction of financial markets. Here is the link to the panel video:

Sunday, November 15, 2015

15/11/15: Ifo World Economic Climate Indicator 4Q

Ifo’s World Economic Climate Indicator for 4Q 2015 released recently shows further deterioration in global economic growth conditions, despite all the optimism talk in Europe and the U.S.

Ifo’s headline World Economic Climate index posted a reading of 89.6 for 4Q 2015, down on 95.9 in 3Q 2015 and below 95.0 rearing for 4Q 2014.This is the lowest reading since 4Q 2012 and is well below the 2012-present average of 94.7 and the historical average of 95.0. 4Q 2015 marks second consecutive quarter of declines in index reading.

In terms of key components of the headline index:

  • Present Situation index fell to a low of 86.0 in 4Q 2015 from already unimpressive 87.9 reading in 3Q 2015. This marks the lowest reading since 1Q 2013 and the second consecutive quarterly decline in the index. 
  • Expectations 6 months forward sub-index was down at 93.0 in 4Q 2015 from 103.5 in 3Q 2015 and is below 98.2 reading for 4Q 2014. The index reading is the lowest since 4Q 2012 and is down on 102.1 average reading for the period starting with 1Q 2012. Historical average for the sub-index is at 99.2 which is well above the 4Q 2015 reading.

In summary, global economic activity is once again showing signs of weakness with negative momentum not abating, but accelerating into 4Q 2015 despite massive glut of monetary liquidity and despite sharp reduction in energy costs.

Saturday, November 14, 2015

14/11/15: My Comment on Portuguese Political Crisis

Two comments from myself on the topic of Portugal's political crisis effect on country macroeconomic and fiscal positioning: and

Full comment in English:

Do you think the financial markets and the debt agencies will move its focus from Greece to Portugal now and later on for Spain near or after theDecember 20 elections?

The latest euro area ‘periphery’ political crisis - the collapse of the Centre-Right Government in Portugal - sets the stage for a potential replay of the logistics of the Greek crisis of Summer 2015 scenario.

Both the markets and European leadership are likely to present the crisis as an isolated event, linked to the lack of ‘programme ownership’ in Portugal and not indicative of the broader political and policy trends across the EU. In other words, all official players in the sovereign debt markets will attempt to paint Portuguese situation as a ‘one-off’ event with no risk of contagion to other member states. As a result, rating agencies’ downgrades can be expected only if the crisis persists or if the new Government includes the elements of what is perceived to be ‘extreme Left’. At the same time, the rhetoric surrounding political crisis will be shifted into the discussion of domestic failures and the allegedly destructive role of populist politics. The key to this approach is the clear desire by the European leaders to contain the spread of political opportunism and limit the extent to which democratic politics can transmit public anger and dissatisfaction with post-crisis recovery from one ‘peripheral’ state to another, namely from Portugal to Spain and Italy, as well as, potentially, to Ireland which is likely to face elections in the first quarter of 2016. There are strong incentives for European authorities to send a warning message to Spanish electorate and political elites before December 20th elections, albeit it is difficult to see how such a warning can be structured in the case of Portugal. In my view, we are likely to see renewed talks about Portugal’s compliance with fiscal harmonisation rules and, potentially, a warning concerning the risk of the country running excessive deficits in 2016-2017 on foot of political realignment.

How do you evaluate the present risk of Portugal regarding the debt sovereign market? Yields will go for new highs in 2015?

Currently, CDS markets are pricing in 15.5% chance of sovereign default (under ISDA2003 rules) for Portugal, up on 14.5% a week ago, compared to 3.5% for Ireland, down from 3.8% a week ago. The trend to-date suggests some increased pressure on sovereign risk position for Portugal that has been priced in since the appointment of the Centre-Right Government and this is consistent with a view that relatively sharp increases in government debt yields represent possible overshooting of risk valuations. Two critical aspects of the crisis in the context of debt sustainability view are: how long the new political impasse will last and what signals a new Cabinet will send after appointment. If the crisis continues over a relatively prolonged period of time (more than a week) and /or if the new Cabinet is slow in clearly defining its position vis-a-vis the European policy direction toward sustained fiscal and structural reforms, bond yields are likely to continue rising, putting pressure on Portugal’s access to new funding. Absent significant worsening of the political crisis, Portugal’s debt sustainability dynamics are likely to remain hostages to economic fundamentals: the rate and the nature of economic growth over 2015-2016, rather than to political risks.

Most likely, given the degrees of uncertainty relating to the political nature of the latest crisis, DBRS will take a ‘wait-and-see’ position, issuing negative watch warning on its ratings, but staying out of moving for an outright downgrade this time around. However, the risk of the downgrade remains significant and the impact of such a downgrade can also be material. Given that all major rating agencies have already downgraded Portugal Sovereign ratings, a DBRS downgrade will force the ECB to either halt purchases of Portuguese bonds in its QE programme or to issue a waver for eligibility criteria. In the former case, pressures on sovereign yields are likely to be severe making new issuance of debt much more costly proposition.

Note: DBRS did take a 'wait-and-see' position on Friday (see here)

14/11/15: More Evidence U.S. Capex Cycle is Still Lagging

In a recent post (link here), I covered the issue of shares buy-backs and the lack of capex at the S&P500 constituents level. A recent report by Credit Suisse titled "The Capital Deployment Challenge" takes a look at the same problem.

Per report: "Companies in the US market are currently in great health as corporate profitability is approaching historical highs. This high level of profitability has produced record levels of corporate cash, and thereby has created a challenge for managers: how to allocate all of this excess cash. Companies may choose to reinvest in their businesses – organically or through M&A – or they may return the cash to capital providers, through dividends, share buybacks or by paying down debt..."

"Historically, companies have deployed an average of 60% of cash flows in capital investment (28% in organic growth and 32% in M&A) and have returned  26% to shareholders (12% dividends and 14% share buybacks). In the past several years, the capital allocation balance has swung away from growth towards buybacks and dividends: capital invested has dropped to 53% (27% organic growth and 26% M&A), while cash returned to shareholders has increased to 36% (15% dividends and 21%

A handy chart to illustrate the switching:

So Credit Suisse divide the S&P500 universe into two sets of companies: reinvestors and returners. The former represents companies which predominantly direct their cash balances to organic reinvestment and/or M&A, whilst the latter are companies that prefer, on balance, to use cash surpluses for dividends and/or shares buybacks.

The report looks at three metrics across each type of company: underperformers within each group - companies that underperformed their peers average in terms of total shareholder returns, outperformers - companies that outperform their peers average, and average across all companies.

Chart below shows the extent of differences across two types of companies and three categories in terms of cash flow return on investment (CFROI):

The chart above "shows that the initial level of returns on capital is generally lower for reinvestors than for returners, with an average of 9% and 11%, respectively. The reinvestors and returners who outperformed their peers both improved their CFROI. However, the outperforming reinvestors generated a greater operating improvement (180bps vs 150bps for returners)."

Which is all pretty much in line with what I said on numerous occasions before: no matter how you twist the data, average returns to not re-investing outpace returns from investing. Meaning that: either companies are getting worse at identifying and capturing investment opportunities or investment opportunities are thin on the ground. Or both...

Friday, November 13, 2015

13/11/15: Dublin: Overpriced Office Space is Back... Any Wonder?

A neat set of charts from Knight Frank report showing commercial real estate mapping of Dublin relative to other European cities

To start with: returns over 10 years to December 2014:

Here are some more charts

The key point from the above is that historical valuations for Dublin property have been distorted to the upside by the pre-2008 boom, whilst subsequent collapse has driven prices back to below their fundamentals-determined valuations. However, forward expectations by the markets participants are now pricing in a significant medium- to long-term rebound in commercial property rents and values that are implying fundamentals well ahead of anything consistent with the ‘normal’ 4.5-5 percent yields. In other words, we are heading toward 2-2.5 percent yields, assuming current trends persist, or into another correction downward.

Absent robust supply increases, the former is more likely than the latter. With rates normalisation still some time away, the former is also more likely than the latter. And the longer the former goes on, the bigger will be the latter, eventually.

These dynamics, in return, underpin also residential markets, where credit supply tightness in house purchasing sector is pushing rents up to stratospheric levels, with rents currently in excess of October 2008 levels.

Welcome to the economy where largest land-owner - Nama - thinks developers are only good to attend horse races.

13/11/15: Fitch Survey of European Investors' Outlook

Fitch survey of European credit investors shows that “the risk posed over the next 12 months by adverse developments in one or more emerging markets was high” at 59% up from 45% in previous survey in July. European investors continue to see EMs as the key drivers of downside fundamentals risks for 2016, with 3/4rs (80%) of all respondents saying EMs sovereign (corporate) fundamentals are likely to deteriorate in 2016 compared to 2/3rds (60%) in July survey. Some more details:

  • 29% of respondents see low commodity prices as the main risk to EMs, 
  • 26% see the key driver as slower global growth, 
  • 24% are expecting a Fed rate rise to be a key trigger for EMs risks amplification, and 
  • 21% cite high debt levels as the main driver. 

Fitch global growth forecast of 2.3% for 2015. Table below supplies IMF forecasts and historical comparatives:

Strangely enough, much of this focus on the EMs for European investors is probably down to the European economy having settled into what appears to be its 'new normal' of around 1.2-1.4% growth pattern - sluggish, predictable and non-threatening, thereby shifting focus for risk assessments elsewhere.

Thursday, November 12, 2015

12/11/15: Can't Get That Tax Haven Genie Back Into the Bottle

For the massive industry of Irish analysts, economists and experts working hard on denying that there is a problem with our corporation tax regime, behold this view: "Ireland ... is one of the world’s most important tax havens or offshore financial centres."

And as I noted on numerous occasions, our beggar-thy-neighbours policy or strategy for economic development is no longer a matter of esoteric academic considerations: "It is true that the tax offering did help attract large amounts of investment, ...and European membership helped keep Ireland off tax haven blacklists that apply to classic tax havens such as Cayman and Bermuda... ...What is more, Ireland has triggered ‘beggar my neighbour’ competition from other nations, meaning it has to constantly offer new and larger subsidies to mobile capital, just to keep up. ... [Ireland's] corporate tax haven strategy (and the financial centre strategy, below) have transmitted harmful spillover effects onto other countries, notably the U.S. which has seen Ireland help facilitate a massive transfer of wealth from ordinary taxpayers to mostly wealthy shareholders."

Read the full report here: And prepare for a choir of deniers to start their song again tomorrow, aided and funded by the lobby groups and, in some cases, by the state.

Wednesday, November 11, 2015

11/11/15: The Gig Economy: A Challenge

Last week, I spoke at CXC Corporate event “Globalization & The Future of Work Summit” in Dublin covering the topic of major economic disruption coming on foot of the evolving Gig Economy. I covered some of the background aspects of my presentation in an earlier blogpost here.

Here are my slides from the presentation (I will be posting a video link once it becomes available).

11/11/15: New Cost Estimates of European Refugees Crisis: Ifo

Back in September, German think tank, CESIfo estimated the cost of European refugees crisis to be at around EUR10 billion (Germany costs alone). Yesterday (with update today), the Institute released updated estimates:

Crucially, per above release, the Ifo pours some serious cold water on the commonly repeated in the media claims that refugees can provide a substantial boost to the German economy due to their alleged employability.

11/11/15: Take a Buyback Pill: U.S. Corporates Shy Away from Capex

As buy-backs of shares inch down as the drivers of U.S. stocks valuations (chart below), things are not going much smoother for the hopes of a capex cycle restart in the U.S. corporate sector.

As the following chart from Goldman Sachs research shows, 2015 has been shaping up as yet another year of decline in investment pipeline for U.S. companies. Capex and R&D investment share of aggregate cash holdings by S&P 500 companies is expected to hit 41% this year, down from 47% in 2014 and 2013 and marking the lowest reading since 2007. Worse, Goldman expects 2016 figure to be even lower at 40%.

Goldman figures relating to ‘Investment for Growth’ indicator include M&As, which in my opinion should not be considered in this context, as success rate of M&As is extremely low (historically at around 30%) and current M&A valuations are frankly bonkers. 

H/T to @prchovanec

Take a look at stripped out mix of real investment against buybacks in ratio terms, per Goldman’s reported data:

As shown above, relative weight of shares buybacks in terms of cash allocations by U.S. carpets has been on the rising trend now in comparison to Capes & R&D spending since 2009 and it has been flat since 2010 on for the ratio of buybacks to dividends. In fact, combined weight of M&As and buybacks ratio to Capex & R&D is now at 0.98, the highest since 2007.

In simple terms, there is little indication in the Goldman (and other) numbers of any restart of Capex cycle and all indication, major U.S. corporates are living in a world of surplus liquidity and shortages of investable strategies and opportunities. 

Tuesday, November 10, 2015

10/11/15: Keiser Report from Kilkenomics 2016

My interview with Max Keiser and Stacy Herbert in Kilkenny :

Enjoy. (from 3:26 on).

10/11/15: The Miracle Pill of Rent Controls: San Fran

Rent controls are all the rage in Dublin kommentariate classes. But here is some evidence on their effectiveness in that centre of ‘egalitarianism’/‘tech elitism’ of San Fran:

Source: h/t to @ninjaeconomics 

You can see details

Controls in San Fran have been a long running feature of the market, so one could have expected for these to at least induce lower volatility in rents. As the chart above shows, that is not the case and volatility - poor-cyclical - remains in place. As per levels of rents, why, San Fran rents are just plain insane.

So, Dublin's rationale for introducing rent controls is: we need more moderate rents to sustain growth of younger, innovation-focused enterprises. In San Fran, of course, rent controls have covered property market that sees younger, innovation-focused enterprises forced to pay 25-33% premia in wages terms to sustain hiring.

Over to the kimmentariate.

10/11/15: Debt and Deleveraging: European Corporates

Debt crises are long running things. Reinhart and Rogoff have said so before and continue to remind us about it often enough to think that by now, everyone would be cognitively aware of this aspect of the modern day economy. But, given the hopping and stomping associated with Europe's latest bout of 'fakecovery', some of our media do still require a reminder: debt crisis are long running things.

Want a picture to go with that? Why, here is a chart from BAML research note on the subject of European corporate deleveraging:
The above, really, says three things:

  1. Deleveraging is still the rage: 2015 percentage of European companies continuing to deleverage is 57% - second highest over the entire time span between 2008 and today; 
  2. Last time the rate of deleveraging fell was in 2011 and ever since, it continued to rise or stay put;
  3. Taken 1 and 2 above, the entire narrative of 'credit-starved' companies in the European space is a bit questionable. As far as demand goes, only 43% of European firms are interested in increasing debt levels today, the second lowest since the start of the Global Financial Crisis.

10/11/15: First Anniversary of Ruble's Free Float

1 year old 'free-float' Ruble to USD and EUR:

It has been pretty breathtaking ride to revaluations and a baptismal by fire. And amazingly non-exciting world of CBR interventions:

Monday, November 9, 2015

9/11/15: Lessons from German reunification for a European Fiscal Union: Sinn

CESIfo's Hans-Werner Sinn has just torn a massive hole in the parasail of European 'federalistas' of French 'harmonise-everything' variety. His summarised view is presented here: A longer version is published by CESIfo on November 9th.

Key point in both is that "The fiscal union demanded by Hollande now is an understandable attempt to compensate for the lack of competitiveness of the southern EU countries by resorting to international transfers, but these transfers would cement their lack of competitiveness and drive Europe into permanent stagnation. The travails of German reunification should be a warning against pursuing this course."

In other words, East German experience, per Sinn, suggests that fiscal (tax and transfers) union even with debt mutualisation (aka replacing national debts with federal debt) is not a road to achieving economic convergence across the EU Member States, but a road to human capital and investment transfers from uncompetitive 'South' to competitive 'North'. In effect, dressed up as a social ills salvation, it bears a prospect of sealing tight existent competitive differentials and making 'South' a permanent dependency sub-Union.

Pretty darn tough stance.

Saturday, November 7, 2015

7/11/15: U.S. Mint Sales of Gold Coins: October

Total sales of U.S. Mint gold coins came in at 44,500 oz per 94,500 coins sold (including both Eagles and Buffalos). This marked a significant decline in sales y/y, with volume by weight down 49.7% y/y and the number of units sold down 33.7%. Average weight of coin sold was down 24.2% y/y to 0.4709 oz per coin.

As chart above indicates, October fall-off in demand came after the end of 3Q that saw total volume of coding gold sold by the U.S. Mint rising incredible 234% y/y (compared to 3Q 2014) by weight and 305% y/y in terms of number of units sold. 

At a total of 471,000 oz sold over 934,500 units in 3Q 2015, last quarter was the best one since 2Q 2010 in terms of volume by weight sales and the best in history of the series (from 1Q 2006) in terms of number of coins sold.

Not surprisingly, scale fall off in demand in October can be explained by the moderation in demand back to cyclical normal. As shown in the chart above, overall October sales figures came in below the period average for May 2013 through present. However, stripping out three main outlier peaks in demand, the average comes to 49,978 oz - closer to the October reading of 44,500 oz. In historical comparatives, demand for gold coins in October was 38th lowest by total weight and 56th lowest by coins counts for any month from January 2006 though present.

Another point worth making is seasonality. Over 2006-present horizon, October saw significant decline sin demand for gold coins in seven out of 10 years, with insignificant changes m/m recorded in one month. In other words, October tends to be a more bearish month of U.S. Mint coins sales.

Final point worth making is that correlation between demand for U.S. Mint coins (by total oz weight) continued to show negative 12 months correlation with gold price. In October, this correlation stood at -0.58, slightly less in absolute value than in September (-0.59) and below -0.72 correlation in October 2014. Overall, negative correlation remained in every month from April 2014 on, suggesting stable demand interest from investors on foot of gold price declines.