Friday, March 30, 2018

29/3/18: Credit downgrades and the sunny horizons of peak growth

The global economy is picking up steam. The U.S. economy is roaring to strength. 2018 is going to be another 'peak year'. Tax cuts are driving equity valuations up. Corporate balance sheets are getting healthier by a day... and so on.

The positivity of recent headline has been contrasted by the realities of the gargantuan bubble in corporate debt. A bubble that is not going to get any healthier any time soon. In fact, based on the latest data (through 4Q 2017) from the S&P Global Market Intelligence, H1 2017 trend toward relatively balanced (or rather relatively moderately negative skew) credit ratings has turned decisively negative in 2H 2017. Worse, 4Q 2017 dynamics were markedly worse than 3Q 2017 dynamics:

Which brings up the following question: if things are getting downgraded that fast, what's likely to happen with the Fed policy 'normalization' impact on the corporate credit markets? Answers on tears-proof napkins, please.

Thursday, March 29, 2018

29/3/18: Matthew Rojansky on U.S.-Russia relations

It is rather rare that an occasion comes up on which I comment on political issues directly (absent the prism of economics or finance). A rarer, yet, are the occasions when such comments involve a positive assessment of the power-broker or 'power elite' analysts contributions on the topic of the U.S.-Russia relations.

This is an occasion to do both. Here is an interview that is a must-watch:

In it, Matthew Rojansky, Director of the Wilson Center’s Kenan Institute, discusses US-Russia relations in the Trump-Putin era and makes several pivotal points, some of which I have raised before, but I have not heard being raised by an analyst who is, like Rojansky, is wired into Washington elite. At just over 5 minutes, is is a MUST-watch.

Monday, March 26, 2018

25/3/18: Average Tariffs: 2000-2016

So how do the world's largest 50 economies (by size) score when it comes to the average trade tariffs they have in place? Who is the free trade champion? And who is not?

Here is the data on top 50 largest global economies (I have aggregated EU members of the top 50) into one group, as they share common tariffs against the rest of the world:

Source: data from the World Bank

One thing is clear: tariffs did come down quite substantially between 2000 and 2016. Average world-wide tariff in 2000 stood at just over 8.69%, which fell to just under 4.29% by 2016.

Another interesting fact is that the U.S. average tariff of 1.61% is matched by the EU's 1.6%, with both higher than Australia's 1.17%, Canada's 0.85%, Japan's 1.35%, and Norway's 1.02%. So, the free trade champions of the U.S. and EU are, sort of, poorer than average for the advanced economies, when it comes to trading free of tariffs protection.

Third point worth noting relates to the BRICS: these the largest emerging economies, jointly accounting for 32.0% of the global GDP (PPP-adjusted). Brazil's average tariff in 2016 stood at 8.01%, down from 12.69% in 2000. Russia's average tariff in 2016 stood at 3.43% and we do not have that figure for 2000, while India's was at 6.32% (down from 23.28% in 2000), China's fell from 14.67% in 2000 to 3.54% in 2016, while South Africa's average tariff declined from 4.5% in 2000 to 4.19% in 2016. So, amongst the BRICS, today, Brazil imposes the highest tariffs (86.8% higher than the global average), followed by India (47.4% above the global average), S. Africa (2.3% below the global average),  China (17.4% below the global average), and Russia (20% below the global average). In other words, based on average tariffs, Russia is the most open to trade economy in the BRICS group, followed by China.

Of course, tariffs are not the only barriers to trade, and in fact, non-tariff protectionism measures have been more important in the era of the WTO agreements. However, the data on tariffs is somewhat illustrative.

Here is the same data, covering 2010 and 2016 periods, arranged by the order of magnitude for 2016 tariffs:
Source: data from the World Bank

Sunday, March 25, 2018

24/3/18: Secular Stagnations Visit Morgan Stanley

Morgan Stanley jumps onto the secular stagnations thesis band wagon: and adds an obvious cross-driver to the equation: monetary policy heading for the end of the Great Liquidity Wash.

25/3/18: Quantum computing and cyber security: a perfectly VUCA mix?

One interesting topic worth discussing in the context of VUCA and systemic resilience is quantum computing. The promise of quantum computing offers a prospect of altering completely the existent encryption methods effectiveness. 

Here is one view: suggesting that quantum computing is not a threat to current cryptographic systems, although the core argument here is that it is not a threat in its current state.

There is a lot of technical stuff involved, but an interesting topic from geopolitical risks perspective for sure, and involves long term strategic positioning by the usual adversaries, the U.S. and China. 

24/3/18: Dysfunctional Labour Markets? Ireland’s Activity Rates 2007-2016

Having posted previously on the continued problem of low labour force participation rates in Ireland, here is another piece of supporting evidence that the recovery in unemployment figures has been masking some pretty disturbing underlying trends. The following chart shows labour force Activity Rates reported by Eurostat:

Note: per Eurostat: "According to the definitions of the International Labour Organisation (ILO) the activity rate is the percentage of economically active population aged 15-64 on the total population of the same age group."

Ireland’s showing is pretty poor across the board. At the end of 2016, Irish labour force activity rate stood at 69.3%, or 16th lowest in the EU. For Nordic countries, members of the EU, the rate stood at 71.2, while for Norway, Switzerland and Iceland, the average rate was 78.2.

Over time, compared to 2007-2008 average, Irish activity rate was still down 1.6 percentage points in 2016. In the Euro area, the movement was up 2 percentage points. Of all EU countries, only two: Cyprus and Finland, posted decreases in 2016 activity rates compared to 2007-2008 average.

For an economy with no pressing ageing concerns, Ireland has a labour market that appears to be dysfunctionally out of touch with realities of the modern economy. In part, this reflects a positive fact: Ireland sports high rates of younger adults in-education, helped by our healthy demographics. However, given the structure of Irish migration (especially net immigration of the younger skilled workers into Ireland) and given sky-high rates of disability claims in Ireland, the low activity rate also reflects low level of labour force participation. In this context, younger demographic make up of the country stands in stark contradiction to this factor.

According to Census 2016, "There was a total of 643,131 people with a disability in April 2016 accounting for 13.5 per cent of the population; this represented an increase of 47,796 persons on the 2011 figure of 595,335 when it accounted for 13.0 per cent of the population." (Source: However, "Of the total 643,131 persons with a disability 130,067 were at work, accounting for 6.5 per cent of the workforce. Among those aged 25-34, almost half (47.8%) were at work whereas by age 55 to 64 only 25 per cent of those with a disability were at work." Another potential driver of low economic activity rate in Ireland is the structure of long term care within the healthcare (or rather effective non-existent structure of such care), pushing large number of the Irish people of working age into provision of care for the long-term ill relatives.

Here is the OECD data (for 2016) on labour force participation rates:


24/3/18: A Traders’ Nightmare: When all Risks Coincide

Really great analysis of recent volatility spike (early February correction) from the BIS Quarterly:

“The VIX is an index of one-month implied volatility constructed from S&P 500 option prices across a range of strike prices. …Because it is derived from option prices, theoretically the VIX is the sum of expected future volatility and the volatility risk premium. Model estimates indicate that the rise in the VIX on 5 February far exceeded the change in expectations about future volatility (Graph A1, centre panel). The magnitude of the risk premium (ie the model residual) suggests that the VIX spike was largely due to internal dynamics in equity options or VIX futures markets.”

“Indeed, the considerable expansion in the VIX futures market – market size (ie total open interest) rose from a daily average of about 180,000 contracts in 2011 to 590,000 in 2017 – means such dynamics are likely to have had a growing impact on the level of the VIX.”

And the dynamics were spectacular. Per BIS:
“Among the growing users of VIX futures are issuers of volatility exchange-traded products (ETPs). These products allow investors to trade volatility for hedging or speculative purposes. Issuers of leveraged volatility ETPs take long positions in VIX futures to magnify returns relative to the VIX – for example, a 2X VIX ETP with $200 million in assets would double the daily gains or losses for its investors by using leverage to build a $400 million notional position in VIX futures. Inverse volatility ETPs take short positions in VIX futures so as to allow investors to bet on lower volatility.” One that comes to mind immediately is XIV. 

And things went spectacularly South for these, once VIX started heading North.
“The assets of select leveraged and inverse volatility ETPs have expanded sharply over recent years, reaching about $15 billion at end-2017 (Graph A1, right-hand panel). …many market participants use these products to make long-term bets on volatility remaining low or becoming lower. Given the historical tendency of volatility increases to be rather sharp, such strategies can amount to “collecting pennies in front of a steamroller”.

“Even though the aggregate positions in these instruments are relatively small, systematic trading strategies of the issuers of leveraged and inverse volatility ETPs appear to have been a key factor behind the volatility spike that occurred on the afternoon of 5 February. Given the rise in the VIX earlier in the day, market participants could expect leveraged long volatility ETPs to rebalance their holdings by buying more VIX futures at the end of the day to maintain their target daily exposure (eg twice or three times their assets). They also knew that inverse volatility ETPs would have to buy VIX futures to cover the losses on their short position in VIX futures. So, both long and short volatility ETPs had to buy VIX futures. The rebalancing by both types of funds takes place right before 16:15, when they publish their daily net asset value. Hence, because the VIX had already been rising since the previous trading day, market participants knew that both types of ETP would be positioned on the same side of the VIX futures market right after New York equity market close.”

“The scene was set.” Or put differently, once information about leveraged funds having to go long at the end of the day became market information, arbitrage went to work like a sledgehammer over trading books. The impact risk, compounded by adverse price movements, went through the roof. The two key changes in trading environment were made even more egregious by the fact that intraday spreads are usually higher toward the day close, and risk of non-execution had become completely intolerable for the leveraged funds. Which means spreads ballooned. This was a classic trading nightmare:

“There were signs that other market participants began bidding up VIX futures prices at around 15:30 in anticipation of the end-of-day rebalancing by volatility ETPs (Graph A2, left-hand panel). Due to the mechanical nature of the rebalancing, a higher VIX futures price necessitated even greater VIX futures purchases by the ETPs, creating a feedback loop. Transaction data show a spike in trading volume to 115,862 VIX futures contracts, or roughly one quarter of the entire market, and at highly inflated prices, within one minute at 16:08. The value of one of the inverse volatility ETPs, XIV, fell 84% and the product was subsequently terminated.”

Friday, March 23, 2018

23/3/18: Still Printing Their Ways Into Prosperity: The Big Three

Just a gentle reminder... the QE is still going on, folks...

As of mid-March, total assets on BOJ, ECB, PBOC and Fed balancesheets have amounted to USD 20.6 trillion, excluding PBOC - USD 14.9 trillion. In Q4 2017 terms (the latest comparable data for GDP), US Fed's assets holdings amounted to 22.4% of GDP of the country, ECB's to 38.9% and BOJ's to 94.5%.  In three largest advanced economies in the world, the Central Banks' created liquidity (printing money for Governments) remains the only game in town, when it comes to sustaining both, asset prices and fiscal profligacy.

Thursday, March 22, 2018

22/3/18: The Fed is boldly going where it was going before

My article on yesterday's Fed meeting is now up on Business Post page:

And a handy chart from Bloomberg on the relative size of the U.S. Fed's balancesheet, compared to other major Central Banks:

My key takeaway from the Fed meeting:

On the net, the Fed opted to continue underwriting the complete lack of fiscal discipline sweeping Washington these days. Since taking office, the current Presidential Administration has embarked on two major fiscal stimuli, involving the Tax Cuts and Jobs Act 2017 and the Government funding agreement that was delivered to the Congress late Wednesday night. The latter amounts to $1.3 trillion of new spending, $700 billion of which will flow to Pentagon. The new Bill will push projected 2018 U.S. fiscal deficit beyond $1 trillion mark, up on $665 billion last year. In January, President Trump has promised a third stimulus - the proposed $1.5 trillion infrastructure development plan - to be delivered later this year. By committing to continue slow deleveraging of the Fed’s  $4.4 trillion balance sheet, and by holding steady on small-step rates increases through 2018, Powell is de facto sustaining financing support for the swelling Federal deficits.

With calm and poise, the Fed’s new Chairman delivered no surprises, no dramas, a little dose of bitter medicine, and a lot of hopes. Unsurprisingly, dollar fell back 0.77 percent against the basket of major currencies, stocks slipped by less than 0.2 percent, and yields ended the day lower, following some volatile trading, while the yield curve flattened in the wake of the Fed’s decision. Like the FOMC projections for economic growth, the markets’ reaction to the Fed’s musings lacked conviction.

Wednesday, March 21, 2018

20/3/18: Market Power and 5 Macroeconomic Puzzles: Rotten State of the ‘Competitive Markets’

Washington Centre for Equitable Growth has recently published a new modified version of the neoclassical model attempting to explain a number of empirical facts. A paper by Gauti Eggertsson, Jacob A. Robbins, Ella Getz Wold, titled “Kaldor and Piketty’s Facts: The Rise of Monopoly Power in the United States” (February 2018: departs from the empirical observation that the empirical facts of the real economy can be reconciled with in contrast to the traditional neoclassical models. Specifically, per authors:

  • “(P1) An increase in the financial wealth-to-income ratio despite low savings rates, with a stagnating capital-to-income ratio.”
  • “(P2) An increase in Tobin’s Q to a level permanently above 1.” So that stock market value of assets exceeds productive value of assets.
  • “(P3) A decrease in the real rate of interest, while the measured average return on capital is relatively constant.” So profit margins on investment rise.
  • “(P4) An increase in the pure profit share, with a decrease in the capital and labor share.” So shareholders get to carry away more in returns, while capital suppliers and workers get less.
  • “(P5) A decrease in investment-to-output, even given historically low borrowing costs and a high value of empirical Tobin’s Q.” In  other words, low investment, even as the interest rates (cost of investment) fall.

Table 1: Factor shares. 5-year moving averages

The paper then modifies the standard neoclassical model. The authors introduce a market concentration distortion: “an increase in monopoly profits, [coupled] with a decrease in the natural rate of interest”.

To justify this, they, first, “depart from perfect competition, and posit that market power allows firms to make pure profits”. Second, authors assert that “there are barriers to entry, which prevent competition from driving these profits to zero.” This is consistent with the proposition that we are witnessing increased pressure of monopolistic and oligopolistic competition in the U.S. economy, as covered by me in a range of previous posts and articles.

“Third, claims to the (nonzero) pure profits of firms are traded and priced, and the ratio of the market
value of firms (which includes the rights to pure profits) to the replacement value of the productive capital stock is permanently above one; this ratio is commonly known as “empirical Tobin’s Q”.” Note that the tradability of pure profits of the firm (as opposed to rents on capital) is a distinct part of the model. Traditionally, we think of stock markets valuations as reflective of economic rents, not pure profits. That is so, because we assume that over the longer run, pure profits are driven down to zero. However, if/when pure profits are non-zero, stock market valuations are reflective of both: capital rents (low, due to extremely low cost of credit), plus pure profit (high, due to the transfers from interest rate subsidy from labor and technology logical capital to financial capital via pure profit monetisation, plus, dare I say it, the monetary policies excesses of the recent past).


Now, the authors confine their explanation for market power perpetuation to the following: “Because of the barriers to entry, the assets which hold the rights to the pure profits are non-reproducible: unlike productive capital, individuals cannot recreate these assets through investment, they must instead purchase them from others.” Personally, I would agree that barriers to entry - formal ones, e.g. via licensing and regulation - are one part of the problem. But there is a more direct problem arising in the American economy as well: concentration driven by pure monopolistic differentiation (see buy post on this here:, and here:, and here:

The authors simply ignore this consideration as if it represents an uncomfortable truth about the state of the modern American society and economy. Instead, they create a marginal wrap-around argument to explain these dynamics: “This produces an interesting result: returns to assets that receive the rights to pure profits are significantly riskier than the returns to productive capital.” Why would returns to pure profit assets be riskier? Because the authors want to explain the differential between the returns to pure profit (higher) and the returns to productive capital (lower) by something ‘organic’, related to traditional financial theory. In other words, they need to show that pure profits returns bear additional risk and are paid additional risk premium over and above the returns to productive capital.

Here’s the authors’ argument: “The reason for this result is closely connected to the non-reproducibility of the assets which hold the rights to pure profits. When the economy is shocked, the price of these assets show large fluctuations, because their supply is fixed. In comparison, there is less fluctuation in the price of productive capital, since the supply is not fixed and it can be produced through new investment; the variance of the price of productive capital is determined in our model by the level of capital adjustment costs. As the economy transforms from one in which the majority of assets by market value are productive capital into one dominated by pure economic rents, this generates an endogenous increase in risk premium.”

CHART 2: Average return on capital

I do not buy this argument AT ALL. Let me explain. Non-reproducibility of these assets is a pure, unadulterated nonsense. We used to have Microsoft (a monopoly) and then we got Google (another monopoly), then we got FAANGS (more monopolies), and so on. If anything, rising concentration of the S&P 500 at the hands of larger, monopolistic issuers strongly suggests not only that the monopolistic assets ARE reproducible, but the our financial markets are solely preoccupied with reproducing them. Behold the ‘unicorns’.

The real driver for the abnormal (pure profit-linked) returns is the very existence of that pure profit, driven by: (a) regulatory barriers to entry (think banks), (b) state subsidies (think Tesla), (c) market macrostructure (think Google and Facebook), (d) rampant rent-seeking (think all), (e) outdated anti-trust regulations (think the U.S. system dominated by only one consideration, that of the material harm to consumers, that ignores the fact that modern ICT services are NOT your typical transactions, and involve a barter-type set of transactions between consumers and, say, Google). Majority of these drivers are reinforced by the selectively ultra-low cost of funding for the monopolistic competitors, available courtesy of the rounds and rounds of global risk-mispricing, aka, QE.

Despite the above shortcomings, the paper is an important one. Its conclusions are succinct and far-reaching. “There are a number of reasons why we argue for this hypothesis (i) there is a wide variety of confirmatory evidence that concentration, profits, and markups have increased over the time period, while the natural rate of interest has decreased (ii) it is parsimonious, in the sense that we use two data series (markups and interest rates) to explain the movements of 5 separate trends (iii) our model does not generate counterfactual implications.”

“In this paper, we argue that these trends can be explained by an increase in market power and pure profits in the US economy, i.e., the emergence of a non-zero-rent economy, along with forces that have led to a persistent long term decline in real interest rates.” Whatever your views on the causal factors might be, the dangers inherent in this systemic dismantling of the competitive, open, entrepreneurial model of the American economy of the past is a major source of future risks, uncertainties and social risks.

Tuesday, March 20, 2018

19/3/18: Drivers of the low labor force participation rate: U.S. data since 2001

Why doesn't U.S. economic expansion 'feel' like an economy is at full employment? Because of the low participation rate that has effectively reduced unemployment to superficially low levels without creating sufficient amount of quality jobs to offset the rise in working age population since the end of the Great Recession.

Here is a chart, via @ernietyedeschi, showing that the U.S. economic expansion has only recently started reducing the sticky non-participation drivers that remain in play since 2001:

The above is a fundamental problem for a range of advanced economies, not just the U.S. as I have noted in a number of previous posts, as well as a factor related to the secular stagnation thesis on both, demographic side (demand side secular stagnation) and technology / wages side (supply side secular stagnation).

Monday, March 19, 2018

19/3/18: Trump Trade Challenge: An Opportunity for Ireland?

My article on the potential implications of the U.S. trade tariffs on Ireland's economy was published by the Sunday Business Post yesterday. Here is the link:

19/3/18: Bitcoin as a Hedge?..

The story of Bitcoin has been told, repeatedly, as a story of an asset that offers a hedge to stocks, a hedge against the fiat currencies and a hedge against the excesses of QE. That story is pure, unadulterated bullshit.

As the chart above shows, Bitcoin is more of a lead-indicator to S&P 500, than a hedge. With volatility well in excess of other comparable instruments. 

Tuesday, March 13, 2018

13/3/18: Another Brick in the Secular Stagnation Wall

Another brick in the Secular Stagnation Wall: global productivity growth has now collapsed in all major groups of economies:

And the short-lived blip to the upside over the late 2014 in the advanced economies is now... well, short-lived.

Wednesday, March 7, 2018

7/3/18: U.S. Economy: May Keynesian Economics and Fiscal Prudence R.I.P.

We've got an old problem, Roger. Deficits and their forward projections:

And the more detailed vision of the problem:

Now, keep in mind: we are accumulating these at the time of an expanding economy and continued accommodative monetary policies. In other words, the spring is being loaded on the double.

May both, Keynesian economics and Fiscal Prudence, R.I.P.

Monday, March 5, 2018

5/3/18: Rational Valuations Meet a Parody Cowboy

There is one word that explains the latest Bloomberg musings on the markets pricing in the impact of Trump's aluminium & steel tariffs: ambiguity. Here is the original article:
"The good Donald, the bad Donald and the ugly market" via @gadfly

With its cool imagery:

And here is my analysis: tariffs pricing by the markets reflects three VUCA factors. Factor 1: Ambiguity. This relates to ambiguous nature of Trump's policies, with tariffs seemingly laying waste to the idea that Trump Administration can be deemed to be 'maturing' into the office. Factor 2: Complexity. This relates to the nature of the global economy and its dependence on international cooperation agreements and frameworks, the very same institutions that Factor 1 puts into question without providing any certainty as to the exact direction of future change or, indeed, the metrics by which policy successes will be measured. Factor 3: Second Order Ambiguity. This arises from the interaction between Factors 1 and 2 above: as Trump Administration bites chunks out of international structures and treaties, ambiguity and complexity arise not only within the context of the Administration tenure itself. Trump's actions drive unpredictable, uncertain and ambiguous changes into the post-Trump era responses from the future U.S. Presidents. If you are running a business or investing in a company, you need to think beyond November 2020 (which is just over 2.5 years away) and that thinking is virtually impossible under current policy volatility and uncertainty.

In Hollywood, falling out of the second story window, while showering the town around you in bullets is a fun game. In the real world, you just might end up being killed. Companies and investments are not run like an Indiana Jones' movie set. Even when a 'Western' parody cowboy is sitting in the White House.

5/3/18: S&P upgrade and Russian markets reaction

Belatedly, on the S&P upgrade for Russian Sovereign Debt, here is a good primer from Bloomberg:

Markets repricing was quick on the news, when S&P did upgrade country bonds from BB+ to BBB: Russian dollar- and euro-denominated bonds rose across the maturity curve. Russia’s 2043 eurobond was up 1.4 cents to 115 cents in the dollar the day after the upgrade, while 2026 issue was up 0.69 cents to 105 cents, and the 2027 issue was up 0.72 cents to 101 cents. 5 year CDS fell 5 bps to 103 bps.

This was not a watershed, however, as Russian bonds been rallying (with some volatility) for quite some time prior, shaking off completely end of January extension of the U.S. sanctions.

A neat chart via BOFIT shows the improvement in the state of Russian fiscal position:

Russia spent 3 years in 'junk rating' lock up, much of it down to the U.S. and EU sanctions, rather than to any adverse dynamic in Russian sovereign default risks.

As BOFIT noted, "S&P Global Ratings noted that Russia’s macroeconomic policy has allowed the economy to adjust to lower commodity prices and international sanctions. The outlook for the Russian economy is stable. S&P’s rating for Russian sovereign foreign bonds now matches that
of Fitch, while Moody’s continues to apply a junk rating (Ba1). ... The Russian government currently faces no compelling need to borrow from abroad as the current fiscal outlook is rather good thanks to the rise of oil prices and fiscal discipline."

In 2017, Russia witnessed an 18 percent rise in Federal revenues, and an 8 percent increase in allocations to the Social Reserve Funds (spending from the funds rose 6 percent).

Russia retains the position, rather rare for any country, to be able to pay off its entire external Government debt from its sovereign reserves.

5/2/18: Italy Smacks into VUCA Wall

VUCA wins. In Italy.

Italian elections results are coming in and several key VUCA components are now clearly at play in Europe's third largest economy:

Now, what does this mean?

Italian Parliament:
234 seats for M5S
122 seats for Lega
105 seats for PDs
96 seats for FI

Italian Senate:
115 seats for M5S
55 seats for Lega
53 seats for FI
50 seats for PD

M5S - the 'Five Star Movement' has consolidated and expanded its launching position of 2013, despite virtually all analysts declaring the party to be 'falling' in support, especially after 2017 local elections. Welcome to the world of VUCA, where the more 'accomplished' the analyst, the less accurate are her/his predictions, because our traditional analytical tools miss the C & A bits of VUCA (complexity & ambiguity).

Renzi & mainstream politics have lost. His PDs are decimated. They have only themselves to blame: centre-left ideology is of nil distinction from centre and centre-right these days. Not only in Italy, but elsewhere too: just observe the U.S. Democrats sparing with the U.S. Republicans on virtually everything, save actual policies. The squabbling that the lack of ideological core implies is intense within the centre-left in Italy. Just as it is intense elsewhere (e.g. the U.S., where the centre-left's only differentiation from the centre-right is who to blame for the country problems, save blaming themselves).

Centre-right (Berlusconi) failed to capture anyone's hearts and minds, so the Lega Nord has taken its votes. Which makes Lega a major winner in the election: the party went from its cyclical low of 4 percent in 2013 election to its historical peak of around 18 percent in this election. The change of leadership in 2013 (to Salvini) has paid off.

Key takeaway from all of this is that in the modern, highly volatile, uncertain, complex and ambiguous political environment, writing off populist parties at the extreme o political spectrum is a dangerous game. We think of these parties as being driven to successes and subsequent failures by individual personalities of their leaders. That does not appear to be the case. Complexity overrides trends.

Meanwhile, in Brussels, power-fixing mode was on. As reported in the Guardian: "The [EU] commission’s chief spokesman, Margaritis Schinas, told reporters its president, Jean-Claude Juncker, wanted to see a “stable government in Italy” and “regarding the potential impact and so on and so forth... ‘Keep calm and carry on’”. In other words, get Renzi back by all possible means and do not challenge centrism. That is just another manifestation of VUCA for you: the ossified elites dependent on status quo ante will only recognise VUCA effects after they drive the system to a point of no return.

Thursday, March 1, 2018

28/2/18: San Francisco Fed Research: Secular Stagnation Confirmed

This blog has been consistently warning about the continued pressures on the U.S. (and global) economy. In fact, bringing together two strands of research my a range of economists, I defined the term 'twin secular stagnations' to describe a trend of structural long term decline in the potential growth rates on

  • The supply side of the U.S. economy (productivity growth and technological progress slowdowns, along with monopolization trends in the economy, or the supply side secular stagnation), and 
  • The demand side  (excessive leverage, growing asymmetry in distribution of productive capital ownership, and ageing-induced changes in savings, consumption and investment, or the demand side secular stagnation).
The topic has not gone away, even though media commentariate in the U.S. and elsewhere have been fully consumed by the waves of optimism stemming from the tale of a 'robust growth' cycle.

Well, guess what: the 'spectacular' or 'tremendous' (using White House terminology) growth is largely a cyclical phenomena, as the latest research from the U.S. Federal Reserve Bank of San Francisco indicates.  You can read the full note here: The core is in this chart:

You can see the flattening out and the decline in the cyclically-adjusted growth rate (the blue line).  This line shows us the rates of growth smoothing out the effects of growth-and-recessions cycles. Secular stagnation is still here: "As expected, the cyclical adjustment removes the sharp drop in actual output associated with the recession. But since then, the trajectory of the blue line is nowhere close to a straight line projection from the 2007 peak. Rather, cyclically adjusted output per person rose slowly after 2007 and then plateaued in recent years."

The authors link this worrying development to supply-side slowdown in productivity growth, and they clearly state that this slowdown in productivity growth pre-dates the Great Recession. In other words, the collapse in productivity growth is structural, not cyclical.

"The seeds of the disappointing growth in output were sown before the recession in the form of slow productivity growth and a declining labor force participation rate. Quantitatively, relative to the recoveries of the 1980s, 1990s, and early 2000s, cyclically adjusted output per person has grown about 1¾ percentage points per year more slowly since 2009. According to our analysis, about a percentage point of this is explained by the shortfall in productivity growth and about ¾ percentage

point is explained by the shortfall in labor force participation."

The latter is shocking!

So no, folks, the U.S. economy has not been doing 'ugely' well since 2009. It has not been doing better, either, than in the pre-crisis period. In fact, the U.S. economy has lost a lot of its long run economic growth potential. And so far, there is absolutely nothing anyone in Washington is willing to do about changing that long-term decline, because doing so will require deep reforms and rebalancing of the economy away from oligopolistic and monopolistic competition, away from rent seeking, away from rewarding physical capital at the expense of human capital, as well as reducing massive drags on demand side, including healthcare and education costs, debt overhang in households (especially younger cohorts), abating skyrocketing rents & property inflation in key urban locations, and so on. 

Care to suggest any party in Washington willing to tackle these?..