Monday, June 24, 2019

24/6/19: Markets Expect the Next QE Soon...

Adding to the previous post on the negative yielding debt, here is a recent post from @TracyAlloway showing Goldman Sachs' chart on implied probability of the U.S. Fed rate cuts over the next 12 months:

Source of chart:

The rate of increases in the probability of at least 1 rate cut is staggering (as annotated by me in the chart). These dynamics directly relate to falling sovereign debt yields (and associated declines in corporate debt yields) covered here:

Notably, as the markets are now 90% convinced a new QE is coming, their conviction about the scale of the new QE (expectations as to > 3 cuts) is off the chart and rising faster in 2Q 2019 than in the previous quarters.

24/6/19: Negative Yielding Debt: Monetary Contagion Spreads

Negative yielding Government debt (the case where investors pay the sovereign lenders for the privilege of lending them funds) has hit all-time record (based on Bloomberg database) last week, at 13 trillion.

Source of charts:

Quarter of all investment grade corporate debt is now also yielding negative payouts (note: bond returns include capital gains, so as yields fall, capital gains rise for those investors who do not hold bonds out to maturity).

In effect, negative yields are a form of a financialized tax: investors are paying a premium for risk management that the bonds provide, including the risk of future decreases in interest rates and the risk of declining value of cash due to expected future money supply increases. In other words, a eleven years after the Global Financial Crisis, the macro-experiment of monetary policies 'innovations' under the QE has been a failure: negative yields resurgence simply prices in the fact that inflationary expectations, growth expectations and financial stability expectations have all tanked, despite a gargantuan injection of funds into the financial markets and financial economies since 2008.

In 2007, total assets held by Bank of Japan, ECB and the U.S. Fed amounted to roughly $3.2 trillion. These peaked at just around $14.5 trillion in early 2018 and are currently running at $14.3 trillion as of May 2019. Counting in China's PBOC, 2008 stock of assets held by the Big 4 Central Banks amounted to $6.1 trillion. As of May 2019, this number was $19.5 trillion. Global GDP is forecast to reach $87.265 trillion by the end of this year in the latest IMF WEO update, which means that the Big-4 Central Banks currently hold assets amounting to 22.35% of the global nominal GDP.

Negative yields, and ultra-low yields on Government debt in general imply lack of incentives for Governments to efficiently allocate public spending and investment funds. This, in turn, implies lack of incentives to properly plan the use of scarce resources, such as factors of production. Given that one year investment commitments by the public sector usually involve creation of permanent or long-term subsequent and related commitments, unwinding today's excesses will be extremely painful economically, and virtually impossible politically. So while negative yields on Government debt make such projects financing feasible in the current economic environment, any exogenous or endogenous shocks to the economy in the future will be associated with these today's commitments becoming economic, social and political destabilization factors in the future.

Friday, June 21, 2019

20/6/19: Say Goodbye to the Trump Bump in Corporate Investment

Trump's investment boom... is vapour now.

And that is despite the fact that tariffs on China, threats of tariffs against Mexico, mini trade war with Canada and threats of a trade war with Europe - all supporting domestic investment all along... 

20/6/19: The 'Mental' Bits of Economic Fundamentals

My article on the statistical mishaps in the U.S. and Irish economic data for the Manning Financial:

Wednesday, June 19, 2019

19/6/19: In an Alternate Ireland, Captain Leary...

Big congratulations to my friend and co-author (on economics and finance matters), Prof. Brian M. Lucey @brianmlucey on his debut in fiction writing... unlike in our usual finance papers, suspenseful dulness of stats and econometric has been suspended by him to narrate the tale of Captain Leary (not, not the one of the Ryanair empire, who in "an alternate Ireland... battles to save the Emperor [not Bertie], save the space elevator [not in an Anglo-funded building], dodge the assassins [not the Russian variety, I am assuming], thwart English terrorists [Brexit forecasts?]" and deliver "flowers for the girl". Oh, yes... it is available right here:

18/6/19: In May, 12 month forward probability of a U.S. recession has jumped up

The NY Fed estimated risk of recession (12 months forward) has hit another business cycle high of 29.62% for May 2020, up from 27.49% for April 2020, marking seventh consecutive monthly increase.

Historically, probability of a recession 9-15mo ahead of the actual recession realisation has been at 18.45%, which is significantly below the current running 3 months average of 28.06%.

To put these levels into perspective, here is the chart of the time series:

The current levels of the index are clearly in line with the historical trends for the 9-12 months recession expectations. More so, they are actually in line with 3-6 months recession expectations. In fact, we have to go back to 1967-1968 to find the only episode in the entire history of the data series where current levels of the index were not coincident with an actual recession or with 3-6 months-lagged realisation of a recession.

May 2020 reading is the ninth highest probability estimate for the probability of a recession in history for any period outside and actual recession + 6 months prior and 3 months after.

18/6/19: OECD-led Tax Reforms: A Prescription for a Less Competitive Economy

I have just posted a draft of my paper on the OECD BEPS proposals from May-June 2019 here: Gurdgiev, Constantin, OECD-led Tax Reforms: A Prescription for a Less Competitive Economy (June 18, 2019). Available at SSRN:

18/6/19: Obama v Trump: Jobs Creation

Who had the more impressive numbers in terms of jobs creation: President Obama or President Trump? This question is non-trivial. For a number of reason.

Take first the superficially-simple comparative:

  • On a y/y basis, average monthly change in total non-farm payrolls under the last 28 months of President Obama Administration was 2,704,000 using non-seasonally-adjusted data. For the first 28 months of the Trump Administration, the same figure was 2,394,000. So by this metric, things were better under Obama Administration last 28 months in office.
  • The caveat to the above is that as jobs numbers grow, each consecutive period, new additions of jobs should be harder and harder to come up with, especially during the mature period of the expansion cycle. In other words, after some number of quarters of economic recovery, creating more new jobs gets harder, primarily because the pool of potential employees to be hired into jobs shrinks. So, adjusting Obama figures and Trump figures for this, we can use rate of change in 28 months averages. This is not easy to do, because we do not have consecutive 28 months periods of first rising, then falling jobs additions averages for any period, except for the 1990s. Back then, jobs creation first run at 483,000 monthly average in 1991-1993, 3,124,000 in 1993-1995, 2,889,000 in 1996-1998 and 3,080,000 in 1998-2000. So within upside cycle, the net decline in jobs creation was between 1.74% and 7.2%. Applying these to Obama Administration’s peak jobs creation rate over any 28 months period gives us the rate of Obama Administration cycle-adjusted jobs creation of between 2,509,150 and 2,656,775 - both of these figures are higher than the raw numbers for the Trump Administration’s first 28 months in office. 
  • In monthly average jobs creation measured on m/m basis, Obama Administration’s last 28 months in offer yielded 128,000 monthly jobs additions on average. The Trump Administration’s comparable figure is 294,000, vastly outpacing Obama Administration’s record. This means that, in total,  during the Obama Administration last 28 months in office, the U.S. economy has created net 2,527,000. In Trump’s Administration 28 months in office, the economy generated 7,206,000 jobs. 
  • The above figures, however, is heavily weighted against the last 28 Obama Administration period due to the final two months of the period coinciding with heavily seasonality-related effects (December and January effects). Controlling for seasonality effects, Obama Administration comparable net jobs creation over that period was 7,139,000 against Trump’s 7,206,000.
  • Finally, looking at the entire jobs cycle, as illustrated in the chart below:

Note, I consider the period of Obama Administration with sustained jobs creation - a sort of
‘jobs creation upside cycle’ that started in March 2011. Based on this comparative, Obama Administration did outperform Trump Administration so far into the latter tenure in office (see steeper slope in the trend line for Obama Administration, and flatter slope for Trump Administration.

Draw your own conclusions out of all of this, but there are my top level ones:

  1. Whilst it is other daft to argue whether one Administration was able to ‘create’ more jobs than the other - the comparatives are a bit too sensitive to differences in economic environments and yearly cycles, overall, Obama Administration’s last 28 months in office seem to have been creating comparable number of jobs to the Trump Administration’s first 28 months in office.
  2. Trump Administration has seen more substantial monthly increases than Obama Administration did, but annually, Obama Administration outperformed Trump Administration in this comparative.
  3. In overall terms, jobs creation remained similar across both Administrations to-date, once we adjust for skewed seasonality effects, but Obama Administration appears to have outperformed the Trump Administration over the cycle of jobs expansion.

Monday, June 17, 2019

17/6/19: Lose-Lose-and-Lose-Some-More Trade War: Trumpism in Action

Recently, I have posted on the latest Fed research covering the impact of the President Trump's trade war with China, showing that the tariffs collected by the U.S. Federal Government are not being paid for by the Chinese producers, but are fully covered out of the American consumers' and firms' pockets.

Here is an interesting note via CFR on the balance of tariffs and farms subsidies dolled out as a compensation for the Trump trade wars:

via @CFR_org

The point is that tariff revenues are a tax on American economy (households and firms), and these tax revenues collected by the U.S. Federal Government are not enough to cover compensation to the U.S. farmers for their losses due to China's retaliatory tariffs. Agrifood commodities are a buyers market: soybeans are sourced globally, traded globally and their prices are set globally. When China imposes tariffs on imports of soybeans from the U.S., the Chinese consumers do not pay the tax on their purchases of these, instead they substitute by purchasing readily available soybeans from other parts of the world. On this, see: Brazilian farmers win, American farmer lose. Uncle Sam subsidises U.S. farmers to compensate, using tax revenues it collected from the American consumers of Chinese goods.

But farming lobby is strong in the U.S. Thus, total quantity of compensation awarded to the farmers in now in excess of total tax revenues collected from the American consumers. It's a lose-lose-and-lose-some-more proposition of economics of trade.

Friday, June 14, 2019

14/6/19: Rising Concentration Risk in S&P500 Earnings and Revenues

S&P 500 companies earnings and revenues are heading for another round of de-diversification (increasing concentration of earnings and revenues toward the U.S. markets), per Factset latest data:

14/6/19: The Real U.S. Migration Crisis is Not at the Border, but at Home

I recently wrote about the new data from the U.S. Customs and Border Patrol on crime amongst the illegal and legal immigrants in the U.S. here: The key conclusion from this earlier post is that there is no evidence (based on arrests) of a large scale crime wave perpetrated by the legal and illegal aliens in the U.S.

New research from the Pew Research published this week shows that, just as with the migrant crime rates, there is no new migration crisis at the U.S. borders. However, there is a crisis in the U.S. migration, a crisis of different nature.

Take the headline figure:
Number of unauthorised immigrants in the U.S. has fallen 14 percent from the peak in 2007. While the overall numbers remain elevated at close to, but below, 2004 levels, the numbers are not consistent with the claim of a 'crisis on the border'.

However, the real crisis in the U.S. immigration system is the one related to policy and legislation:
Over the years, there has been a steady increase in illegal immigrants with long term U.S. residence. In fact, the increase has been shockingly unchecked. Currently, estimated 66 percent of all illegal aliens in the U.S. have been resident here for more than 10 years. Which exposes the simple fact of life: the U.S. system does not have functional avenues for long term illegal aliens - people who have higher chances of being assimilated into the American society, establishing family roots in the country and forming families in their place of residence - to legalise their status. In fact, Pew Research data shows that the median years of U.S. residence for the unauthorised adult immigrants has risen from 7.2 in 2000 to 15.1 today.

The very purpose of a well-functioning migration system is to encourage and support integration of migrants into the host society. By failing to create a functioning, effective and efficient pathways for illegal migrants with long term tenure in the country to legalise their status, the U.S. immigration system is actively preventing millions of well-integrated residents from securing their future in the place they called home for 15 years or more.

Full Pew Research note is available here:

Thursday, June 13, 2019

13/6/19: Russian International Reserves and Government Debt

Earlier today, an esteemed colleague of mine tweeted out the following concerning Russian foreign reserves:

Which is hardly surprising, as Russia has been beefing up its reserves for some time now, following the crisis of 2014-2016 and in response to the continued pressures of Western sanctions. I wrote about this before here:

It is interesting in the light of the above news to look at Russian Government 'net worth' or 'net debt' (note: this is not the total external debt of Russia, nor Government external debt, but the total Russian Government debt comparative). Here is the chart based on the OECD data, with added estimate for Russia for 1Q 2019 based on IMF data and the latest data from CBR:

Based on my estimates and on OECD data itself, Russian Government has the largest positive net worth (lowest net debt) of any country in top 10 countries in the world (measured using nominal GDP adjusted for Purchasing Power Parity), and it is in this position by a wide margin.

The caveat is that India, China and Indonesia are not reported in the OECD data. China's Government net worth is virtually impossible to assess, because the country debt statistics are incomplete and measuring the gross wealth of the Chinese Government is also impossible. India and Indonesia are easier to gauge - both have positive net debt (negative net worth). IMF WEO database shows estimated General Government Net Debt for Indonesia at 25.5 percent of GDP in 2018. India has substantial gross Government debt of ca 70% of GDP (2018 figures), and the Government holds minor level resources, with country's sovereign wealth fund totalling at around 5 billion USD.

Another caveat is where the debt is held (Central Banks holdings of debt are arguably low risk) and whether or not assets held by the Governments are liquid enough to matter in these calculations (for example, Russian gold reserves are liquid, while some of the Russian funds investments in local enterprises are not). These caveats apply to all of the above economies.

On the net, this means that Russian Government is financially in a strongest leveraging position of all major economies in the world.

12/6/19: Irish Self-Employment Data: What It Says About the Entrepreneurial Nation

Official Ireland is quick to promote Irish indigenous entrepreneurship as evidence of a diversified economy, with domestic risk-takers bent on capturing international markets with new, innovation-intensive and modern goods and services. The reality, of course, is somewhat different. In 2017, based on the IMF estimate, sales of iPhones (not physically manufactured in Ireland at all) accounted for 25% of the state's GDP growth. And, on the other side, domestic self-employment, the cradle of entrepreneurship, has been on a decline.

Here are the latest statistics and trends:

Share of Irish labour force participants in employment that were engaged in self-employment has declined, on trend, from the late 1990, as did the share of those in self-employment with employees has been down-trending since around 2000-2001.  Some might think that the trend is driven by the self-employed construction workers, but that is not the case, since they bump in share of all self-employed run below the trend line in 2003-2006, and many of these workers exited employment in the crisis.

What about self-employed as the share of overall relevant (age 15 and older) population? Similar trends:

Current total self-employment share in overall population is on-trend, and that trend is down, not up. Self employment with employees trend is similar.

So about that entrepreneurship, and about the claims that the younger generations are becoming even more entrepreneurial, and about all those universities and ITs offering vast arrays of entrepreneurship programs, and about the preaching of entrepreneurial ethos and values... ahem...

Wednesday, June 12, 2019

12/6/19: Credit Markets vs Banks Loans: Europe vs US

Related to the earlier post on investment markets composition by intermediary (see:, here is more evidence, via @jerrycap of the massive share of intermediated debt / banks dependency in European markets:

A caveat worth noting: European data includes the UK, where equity markets and hybrid financing are both more advanced than in the Continental Europe, which suggests that the share on non-bank share of debt markets is even smaller than the 25% currently estimated.

12/6/19: Japanifying the World

Heard on the sidelines of the QE: "Honey, we've Japanified the World..."

Chart via Wells Fargo Research team.

12/6/19: All's Well in the Euro Paradise

All is well in the Euro [economy] Paradise...

Via @FT, Germany's latest 10 year bunds auction got off a great start as "the country auctioned 10-year Bunds at a yield of minus 0.24 per cent, according to Germany’s finance agency. The yield was well below the minus 0.07 per cent at the previous 10-year auction in late May. The previous trough of minus 0.11 per cent was recorded in 2016. Notably, demand in Wednesday’s auction was the weakest since late January, with investors placing bids for 1.6-times more than the €22bn that was issued."

Because while the "Euro is forever", economic growth (and the possibility of monetary normalisation) is for never... 

12/6/19: Investment Intermediaries: Europe vs U.S.

Investment markets intermediaries by type and origin (via @schuldensuehner):

Caveat: In the case of Ireland and Switzerland, the data is not representative of the domestic markets.

Loads of interesting insights, but one macro-level important is the role of the non-banking investment players, especially domestic ones, in the economies of the U.S. and Germany, Italy, Spain and France. This highlights the huge role of direct investment channels (equity, debt, hybrids) in the U.S. market and the corresponding weight of intermediated bank debt in Europe. We highlight this anomaly and the failures of the EU to diversify capital funding channels

  • In our paper here: Gurdgiev, Constantin and Lyon, Tracy Lee and Cohen, Alexandra and Poda, Margaret and Salyer, Matthew, Capital Markets Union: An Action Plan of Unfinished Reforms (March 21, 2019). with Tracy Lee Lyon, Alexandra Cohen, Margaret Poda and Matthew Salyer (Middlebury Institute of International Studies at Monterey (MIIS); GUE/NGL Group, European Parliament, Policy Analysis Paper, March 2019. Available at SSRN: and 
  • In a recent article for the LSE Business Review here:

Monday, June 3, 2019

3/6/19: Average Duration of Unemployment in the U.S.: Still High by Historical Comparatives

Remember my 'scary chart' from the day back? The one plotting the persistently high - relative to the business cycle - duration of unemployment in the U.S.?

I have not updated this chart for some years now. So here is a new version based on the latest data:

Two things worth noting:

  1. Declines in unemployment and rises in employment in recent years have been accompanied by a rather dramatic decline in the average duration of unemployment claims in the U.S. This is reflect in the drop in the cyclically-adjusted average duration of claims evidenced in the chart.
  2. However, by all historical comparatives, the current business expansion cycle continues to be associated with significantly higher average duration of unemployment, compared to the pre-recession average.
In other words, not all is rosy in the labor markets.

3/6/19: Three Periods in labor Force Participation Rate Evolution and Secular Stagnations

The state of the global labor markets is reflected not only in the record lows in official unemployment statistics, but also in the low labor force participation rates:

In fact, chart above shows three distinct periods of evolution of the labor force participation rates in the advanced economies, three regimes: the 1970s into 1989 period that is marked by high participation rates, the period of 1990-2004 that is marked by the steadily declining participation rates, and the period since 2005 that is associated with low and steady participation rates.

This is hardly consistent with the story of the labor markets spectacular recovery that is presented by the official unemployment rates. In fact, the evidence in the above chart points to the continued importance of the twin secular stagnations hypothesis that I have been documenting on this blog.

3/6/19: What Customs and Border Protection Data Says About Illegal Migration and Crime

The Customs and Border Protection, a U.S. agency responsible for border protection, publishes handy stats on its enforcement actions "related to arrests of criminal aliens for Fiscal Years 2016 - 2018, and FY 2019 TD (to date) (October 1, 2018 - April 30, 2019)". Here is a link to the reported data: A summary of all annual reports available so far is provided in the table below:

Here are some takeaways from the data (subject to many caveats):

  1. There is no 'criminals at the border' crisis anywhere in sight. In fact, total number of recorded crimes committed by illegal aliens has dropped from an average 20,047 in 2015-2016 to 7,208 in 2018-2019 (using annualized figure for 2019 to-date). That is a decline of 64 percent. 
  2. The reductions in crimes are broadly-based. Homicides and manslaughter crimes dropped 85 percent, although the numbers were extremely small to begin with. The second largest drop between 2015-2016 average and 2018-2019 average was recorded in Burglary, robbery, larceny, theft, fraud category, where the decline was 76 percent. The smallest decline of 57 percent was recorded in illegal entry and re-entry category, numbers of which have declined from 9.614 in 2015 to 3,175 in 2019 (annualized).
  3. The reductions did not increase during the Trump Administration crackdown on migration. As the table above shows, largest (in percentage terms) declines took place under the Obama administration in five out of nine categories of crimes, and three largest drops took place during the transitionary period (when Obama policies continued to apply over the longer part of the year). Trump administration can claim the top rate of reductions at most in only one category reductions 'Other' category. In six out of nine categories of crime, Trump administration efforts to reduce migrants-related crime have been responsible for the lowest rates of reductions for any year between 2015 and 2019. 
  4. In terms of overall crimes recorded, Obama's 2015-2016 and 'largely Obama's' 2016-2017 fiscal years recorded crime reductions of 33 percent and 32.9 percent respectively. Trump Administration years (2018 and 2019) generated reductions of 22.9 percent and 26.9 percent, respectively - both significantly lower than Obama administration period records.
In summary, no, there is no emergency of crime at the border (at least not in the CBP data), and no, Trump administration's policies and executive orders are not effective at reducing crime beyond the past historical trends. In fact, they are not even sustaining past trends.