My latest contribution to the Manning Financial for January 2020 is out: https://issuu.com/publicationire/docs/mf_january_2020?fr=sZTk2MDI2MTg4NA.
Monday, January 27, 2020
My latest contribution to the Manning Financial for January 2020 is out: https://issuu.com/publicationire/docs/mf_january_2020?fr=sZTk2MDI2MTg4NA.
Tuesday, January 21, 2020
Via Danske Bank Research, an interesting chart showing 6-12 months forward expectations for inflation (CPI) and economic growth (GDP) for a number of countries, most notably, the BRIC economies:
Clearly suggests continued growth suppression in Russia and, at last, moderating inflationary pressures, returning the economy back toward a longer-term trend of ~2% growth and sub-3% inflation. Also shows continued problems is Brazil persisting into 2020 and only a moderate uptick in economic activity in India, where Modi 'reforms' have been largely washed out into slower growth over the recent quarters.
My article for The Currency on the effects of the U.S. fiscal profligacy on global debt and money markets is out: https://www.thecurrency.news/articles/7371/the-us-deficit-has-topped-1-trillion-and-investors-should-be-worried.
"As the Trump administration continues along the path of deficits-financed economic expansion, the question that investors must start asking is at what point will debt supply start exceeding debt demand, even with the Fed continuing to throw more cash on the fiscal policies bonfire?"
"In the seven years prior to the crisis of 2008-2012, US economic growth outpaced US budget deficits by a cumulative of $1.56 trillion. This period of time covers two major wars and associated war time spending increases, as well as the beginnings of the property markets and banking crises in 2007.
"Over the last seven years since the end of the crisis, US economic growth lagged, on a cumulated basis, fiscal deficits by $928 billion, despite much smaller overseas military commitments and a substantially improved employment outlook.
"These comparatives are even more stark if we are to look at the last three years of the Obama Administration set against the first three years of the Trump Presidency. During the 2014-2016 period, under President Barack Obama, US deficits exceeded increases in the country’s GDP by a cumulative amount of $226 billion. Over the 2017-2019 period, under Trump’s tenure in the White House, the same gap more than doubled to $525 billion.
"No matter how one spins the numbers, two things are now painfully clear for investors. One: irrespective of the stock market valuations metrics one chooses to consider, the most recent bull cycle in US equities has nothing to do with the US corporate sector being the main engine of the economic growth. Two: the official economic figures mask a dramatic shift in the US economy’s reliance on public sector deficits since the end of the crisis, and the corresponding decline in the importance of the private sector activity."
Our paper on behavioral biases in cryptocurrencies trading is now published by the Journal of Behavioral and Experimental Finance volume 25, 2020:
We cover investor sentiment effects on pricing processes of 10 largest (by market capitalization) crypto-currencies, showing direct but non-linear impact of herding and anchoring biases in investor behavior. We also show that these biases are themselves anchored to the specific trends/direction of price movements. Our results provide direct links between investors' sentiment toward:
- Overall risky assets investment markets,
- Cryptocurrencies investment markets, and
- Macroeconomic conditions,
Thursday, January 16, 2020
"Poekhali!" sad Vlad, refraining Yuri Gagarin's famous phrase. And just like, with a sweep of his hand, Mr. Putin has
- Removed the entire Russian Cabinet, including his long-serving pal, now ex-Prime Minister Medvedev;
- Outlined a hefty set of forward-promised reforms; and
- Added billions of dollars to the Global GDP by creating a tsunami of Russia-related analysis, opinion pieces, reports and updates in the vast Kremlinology Sector bridging journalism, opinnionism, and think-tankerism.
WTF happened in Moscow today?
Putin has been under some sustained pressure in the last couple of years on the domestic economy front. Russian economic growth has been anaemic, to put it mildly. Let's take a brief walk through some headline figures (to-date):
- Despite the 'recovery' from 2015 recession (GDP down 2.3%) and 2016 stagnation (GDP up 0.3%), Russian economic growth peaked at 2.3% in 2018 and slumped to 1.1% in 2019 (based on January-September stats).
- Industrial production is up 2.4% y/y in 2019 (latest data is for January-November) which is worse than 2.9% in 2018, but still miraculous, given the state of Russian Manufacturing PMIs (see: https://trueeconomics.blogspot.com/2020/01/5120-bric-manufacturing-pmis-4q-2019.html).
- Fixed capital investment is in a dire state: in Q1-Q3 2019, investment is up only 0.7%, down from the rate of growth of 4.6% in 2017 and 4.3% in 2018.
- Retail sales are up 1.6% in 2019 (January-November data), but behind 2.8% growth in 2018. Retail sales rose 1.3% in 2017. None of this enough to recover the sector from a wave of massive contractions in 2015-2016, when retail sales fell 10% and 4.8%, respectively.
- Exports have recovered, but are still running below 2011-2014 period averages.
- Current account surplus is still positive, but way lower than in 2018.
- Unemployment is a bright side, at 4.6% in H1 2019, down from 4.8% in 2018, currently - the lowest on record.
- After years of growth, population is set to slightly contract in 2019 compared to the post-Soviet peak of 2018. The change is estimated and is not statistically significant, but it indicates one breakaway from the prior trend: inward migration into Russia has slowed down substantially in 2018-2019, in part due to anaemic economy.
- Fiscally, Russia is doing brutally well, however. Government surplus of 2018 - at 2.6% of GDP is likely to be exceeded in 2019: January-November data puts surplus at 3.1% of GDP.
- Central Government Debt is at 13.7% of GDP as of October 2019, a slight uptick on 11.5% in 2018 and hitting the highest level since 2005, but more than benign, given it is entirely offset by the sovereign wealth funds and is being effectively shifted out of foreign currencies and into Rubles. As a reminder, in his first year in the Presidential office, Putin faced Government Debt of 79% of GDP, with External Debt being 67% of GDP. In 2019, external debt is at around 3.9% of GDP.
- Oil reserve funds are up massively in 2019. In 2018, the funds amounted to USD 58.1 billion. At the end of September 2019, this stood at USD 124 billion. Including FOREX and Gold reserves, and other sovereign wealth funds, Russian Government had USD 530.9 billion worth of reserves as of September 2019, almost back to the peak of USD537 billion in 2012.
- Inflation has ticked up in 2019. inflation hit an all time low of 2.9% in 2018 and over January-November 2019 this rose to 4.6%. Inflation has been a major historical point of pain in Russia, so return to above 3% price increases environment is a troubling matter, especially as the economy is barely ticking up any growth.
- Average monthly wages in rubles are growing: up from RB 43,431.3 in 2018 to RB 46,549.0 in 2019 (October data). And wages are up in Euro terms (from EUR587.1 in 2018 to EUR654.1 in 2019). Average wages are also rising in USDollar terms. Which is a point of improvement for the Russians.
All of which brings us back to where Mr. Putin was standing at the end of 2019: he was presiding over an anaemic economy with some marginal signs of improvement and a growing dissatisfaction amongst his electorate with the Government management of the socio-economic conditions. Here is a snapshot of Vladimir Putin's and Dmitry Medvedev's approval ratings as collected by the independent Levada Center: http://www.levada.ru/en/
Notice much? Yep. Traditionally, Russian voters have placed increasing blame for deteriorating socio-economic conditions on the Government, as opposed to the President. Recent years are no exception. The last points on these charts is November-December 2019. Putin's approval ratings have basically stagnated from 3Q 2018 on, while Mr. Medvedev's ratings continued to slip.
Here is a nice kicker: majority of Russians are increasingly not seeing an alignment between their interests and the objectives of the Government. Again via Levada:
"Probably not" and "Definitely not": 2007 = 62%, 2009 = 65%, 2011 = 68%, 2013 = 67% and ... 2019 = 72%. Other signs of pressure? Position: "The government lives off the people and isn’t concerned about how normal people live" - support = 53% in October 2019 poll.
So Putin has been facing some major dilemmas in recent months. Chief ones are:
- How to shift economy toward a faster growth path?
- How to resolve the 2024 exit strategy without triggering an internal 'civil servants war' in the corridors of power? and
- How to secure an upside to his legacy (remember, recency bias means that people remember more recent actions / legacies of their leaders, as opposed to the more distant ones)?
Step one in dealing with the three dilemmas is: replace the unpopular Cabinet. Step 2 is: announce new reforms that - by historical experience - must include things that haven't failed before (e.g. focus on longer term political reforms as opposed to the shorter term market reforms). Step 3 is: quietly unleash a host of economic development policy changes (these are not reforms per se, but a rather policy tools that cannot be deployed by the current, status quo-anchored, Cabinet).
Unless you are a tin-hat-wearing member of the Putin World-Domination Conspiracy club, so far - rational, right?
So Putin announced that he will
- gradually (a good thing, given weak institutional capital in Russia)
- rebalance the executive power away from the Presidential status quo
- toward a more co-shared power arrangement with the Duma (Russian Lower House of the Parliament).
- The only three details Putin mentioned today on the subject are:
- Letting Duma elect the Prime Minister;
- Giving Duma the power of appointing the entire Cabinet of Ministers and all Deputy Prime Ministers; and
- The President will have no veto power over the Duma on these appointments.
The whole idea is not new.
Yeltsin dramatically reduced Parliamentary powers after the 1993 'Constitutional Crisis' - an event that saw the West applauding him for bombing the Parliament. Putin subsequently tightened the Presidential grip on power, motivated, at least at first, by the reality of the post-Yeltsin Russia spiralling into a series of smaller secessionist civil wars. Yeltsin made a deal with the devil in his last election: in exchange for the regions support for his hugely unpopular Presidency run, he gave regions more autonomy. On his timescale, Russian Federation would have been a wedge of Swiss cheese, riddled with newly independent ethnic and religious enclaves, by the mid-2000s. Under Putin, Moscow had consolidated its power, suppressing ethnic strife and nationalist extremism. By 2009, then-President Dmitry Medvedev started talking about the need for development of a functional opposition to the Kremlin-backing party, the United Russia. Chats about devolution of power back to the Parliament were mooted. In the end, Medvedev's reforms program included none of the political reforms to challenge the Kremlin. Worse, Medvedev's Police reform of 2011 was an exercise in federalization of the police force, effectively removing much of the local control over the cops. That said, the same reform significantly curtailed the imbalance between the rights and the duties of the police, giving more rights to the citizens.
Now, the idea of devolution of power is back. Why? Because today's Russia faces three important realities:
- Reality of a stagnant economy - traceable back to 2011 and post-2014 collapse of oil prices. This stagnation outlived the economic promises of the Medvedev's reforms and the endless statements from Putin about the need for diversification of the Russian economy;
- Reality of shifting voter preferences away from supporting geopolitical re-entry of Russia into the exclusive club of countries that 'matter' toward domestic agenda; and
- Reality of the Putin presidency facing the end game of transition of power - something that virtually never has been achieved in the past without a major mess.
One way or the other, the idea of giving Duma a meaningful say in the formation of the Government is a good idea for Russia. And one way or the other, it will provide new incentives for a gradual (over the longer period of time) evolution of the Russian body of politics away from the rubber-stamping 'opposition' to the ruling United Russia (the status quo) and toward genuine competition in policies and ideas. This, too, is a good thing for Russia. In fact, I can't really find anything bad in the Putin's latest idea, without forcing myself to think in conspiracy theory terms.
Therefore, to me, the main question that everyone should be asking is not whether or not Putin is proposing these reforms in order to remain in power post-2024, but whether such reforms are feasible today. My gut feeling is that they might be. If the Duma is given real powers, starting with the powers of selecting the Government Cabinet, skin-in-the-game incentives for political parties participation in legislative process beyond today's political posturing will rise. This can, over time, lead to the emergence of a genuine and more effective opposition - the one, driven by policy debates and competing world views. Will it happen? I don't know. Does Putin know? I doubt.
Frighteningly, not a single journalist I've read on the topic today asked these questions of feasibility of the reforms. Instead, all focused on scaremongering their readers into believing that the announcement is yet another dastardly Putinesque plot to [insert the humanity destroying disaster of your choice here].
CNN produced this utter garbage for analysis:
The CNBC folks decided piped in with this one"
Neither august outfit of 'world class journalism' has managed to notice the fallacy of their 'damned if he does anything, and damned if he does nothing at all' logic. But enough morons. The real test of Putin's 'reforms' will come post 2024. Until then, watch the proposals for the referendum take shape.
PS: Will we miss Medvedev? Well, he sure beats the tax collector who will replace him. At least in charisma, diplomacy and economic thinking. But not in accountancy.
Wednesday, January 15, 2020
Phase 1 of N of the "Greatest Trade Deal" that is "easiest to achieve' by the 'stablest Genius' is hitting the newsflows today. Which brings us to two posts worth reading on the subject:
Post 1 via Global Macro Monitor: https://global-macro-monitor.com/2020/01/15/phase-1-of-potemkin-trade-deal-signed-sealed-and-yet-to-deliver/ is as always (from that source) excellent. Key takeaways are:
- "We never believed for one moment that China would cave on any of the big issues, such as restructuring its economy and any deal would be just some token political salad dressing for the 2020 election."
- "Moreover, much of the deal depends on whether the Chinese will abide by Soviet-style import quotas," or in more common parlance: limits on imports of goods into the country, which is is 'command and control' economics of central planning.
- "We are thankful, however, the economic hostilities have momentarily ratcheted down but the game is hardly over," with tariffs and trade restrictions/suppression being the "new paranormal".
- "Seriously, after more than two years of negotiations, they couldn’t even agree on dog and cat food imports?"
Post 2 via Market Watch: https://www.marketwatch.com/story/phase-one-trade-deal-wont-end-the-uncertainty-in-markets-hsbc-strategist-says-2020-01-15. Key takeaways:
- "The [trade] environment remains very much in flux and a source of concern and challenge for investors".
My takeaways from Phase 1/N thingy: we are in a VUCA world. The current U.S. Presidential Administration is an automated plant for production of uncertainty and ambiguity, while the world economy is mired in unresolvable (see WTO's Appellate Body trials & tribulations) complexity. Beyond the White House, political cycle in the U.S. is driving even more uncertainty and more ambiguity into the system. The Four Horse(wo)men of the Apocalypse in charge today are, in order of their power to shift the geopolitical and macroeconomic risk balance, Xi, DNC leadership, Putin and Trump. None of them are, by definition, benign.
The trade deal so far shows that Xi holds momentum over Trump. Putin's shake up of the Russian Cabinet today shows that he is positioning for some change in internal power balances into 2020, and this is likely to have some serious (unknown to-date) implications geopolitically. Putin's meeting with Angela Merkel earlier this week is a harbinger of a policy pivot to come for the EU and Russia and Lavrov's yesterday's statement about weaponization of the U.S. dollar and the need for de-dollarization of the global economy seems to be in line with the Russo-German New Alignment (both countries are interested in shifting more and more trade and investment outside the net of the U.S. sanctions raised against a number of countries, including Iran and Russia).
DNC leadership will hold the cards to 2020 Presidential Election in the U.S. My belief is that it currently has a 75:25 split on Biden vs Warren, with selection of the former yielding a 50:50 chance of a Trump 2.0 Administration, and selection of the latter yielding a 35:65 chance in favour of Warren. The electoral campaigning climate is so toxic right now, we have this take on the latest Presidential debate: https://twitter.com/TheDailyShow/status/1217431488439967744?s=20. Meanwhile, debate is being stifled already by the security agencies 'warnings' about Russian 'interference' via critical analysis of the candidates.
Mr. Trump has his Twitter Machine to rely upon in wrecking havoc, that, plus the pliant Pentagon Hawks, always ready to bomb something anywhere around the world. While that power is awesome in its destructiveness vis-a-vis smaller nations, it is tertiary to the political, geopolitical and economic powers of the other three Horse(wo)men, unless Mr. Trump gets VUCAed into a new war.
BoJo's UK as well as Japan, Canada, Australia et al, can just sit back and watch how the world will roll with the Four punchers. The only player that has a chance to dance closely with at least some of the geopolitical VUCA leaders is the EU (read: France and Germany, really).
Friday, January 10, 2020
Next week, the Office of the US Trade Representative is expected to make a determination on the potential imposition of an up to 100% tariff on imports of wine from Europe. Which is a bad thing for the overall state of the global trade, bad news for the European producers of wine, bad news for the American consumers and their European counterparts, and bad news for the U.S. wine industry. But 'bad things' do not stop there. There will be costs imposed on restaurants and bars. There will be negative spillover effects - in the long run - to the competitiveness of the U.S. wine making industry competitiveness. In other words, the new tariffs are a perfect exemplification of how poor policies in one sector can hammer the entire complex chain of value added across a much broader economy, both in the long run and the short run.
Let's start from the top.
The reason for the introduction of the tariffs on wines made in Europe - the first wave of which came in in October - has absolutely nothing to do with the wine makers or wine importers or wine consumers. Back in September this year, the WTO Arbitration Panel has ruled that Boeing (the U.S. civilian aircraft manufacturer - in addition to being also a major military-industrial complex player) and Airbus (Boeing's European counterpart) received tens of billions in illegal state supports and subsidies over the period of 15 years. These supports included tax subsidies and credits and subsidised loans. All of which was well known to anyone even remotely familiar with economics of both the EU and the U.S. well before the WTO rulings.
Given the state of the U.S. trade policy (War First, Trade Later) and the fact that Boeing is in a pile of financial problems stemming from its disgraceful handling of the 737 Max scandal, the U.S. rushed out of the stables to mount its trade offensive against the EU. imposing 25% tariff levy against European wine producers. The measure, of course, was 'designed' (if one call it thus) to hurt European economies. Wine industry is iconic for countries like France (Airbus major domicile), Italy (which hasn't much to do with Airbus and was partially spared from the hit) and Spain (another Airbus HQ domicile). Germany also got hit, especially given its well known white wine production. Now, Airbus has also major presence in Mobile, Alabama, USA (where is works on A319, A320 and A321 models) and Mirabel, Canada (A220 model), although Chateau Mobile and the fabled reds of Mirabel were spared by the U.S. trade authorities.
The new round of tariffs - the 100% ones being currently considered - also come on foot of the finding that France’s new digital services tax discriminates against US tech companies, according to USTR, even though the French tax is a de facto precursor to the OECD's Digital Services Tax initiative (covered here: https://trueeconomics.blogspot.com/2019/08/12819-oecd-tax-plans-some-bad-news.html and, in more detail, here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3406260).
European response to the same triggers was to call for a negotiated resolution of the disputes over Boeing and Airbus. Which, of course, is not how the U.S. does business these days.
First round impact
The first round of sanctions had little impact on the wine makers, hammering instead U.S. supply chain - distributors, warehousing, wholesalers and retail - and U.S. consumers (just in time for the Holidays season). The reason for this is that European producers have a massive latent excess demand for their wines in Asia-Pacific and Eastern and Central Europe, where consumers prefer European wines - by taste, brands and cost points - to the U.S. wines. U.S. distributors and wholesalers took a direct hit: most of the 25% tariff has been absorbed into lower profit margins by the importers.
One of the reasons this worked is that the U.S. demand for wine is growing, which means that for relatively benign tax hikes, suppliers can lower unit margins in hope of compensating with continued growth in demand.
Demand has grown from the recent plateau of 2 gallons pa per person in 1999-2002, to just under 3 gallons in 2018. This margins logic breaks down when tariffs rise above 35-40% mark, making cost pass-through to the consumers virtually unavoidable.
A message from the small wine importing firm, specialising on ESG impact-driven natural wines, makes another case: http://www.jennyandfrancois.com/2019/12/17/wine-tariffs-threaten-our-very-existence/. "These [proposed 100%] tariffs are really without precedent, but to glimpse a window on the possible disastrous consequences, we could examine the 1930 Smoot Hawley Act. History teaches us that this act hastened the arrival of the Great Depression, extended its length, led to a 65% downturn in global trade, and made imported goods a luxury item only affordable to the top 1% of the American population. What’s more, those tariffs were only between 40-48%, not the 100% tariffs currently in discussion. Smoot Hawley is the reason most of the world’s leaders today favor unregulated free trade." And "I spent 20 years of my life building a successful business, and in one signature the Trump administration could make it all crumble."
Killing wine wasn't a great policy back in the 1930s. For everyone involved. Hammering European wine today won't be either.
A wider impact can be seen in the restaurant and catering sector. Here is how disastrous tariffs on wine can be for restaurants business: https://www.postandcourier.com/blog/raskin_around/proposed-wine-tariffs-could-spur-widespread-charleston-restaurant-closures-opponents/article_3a07ee26-2e44-11ea-a9e1-b3eafe8429c4.html. "One downtown Charleston restaurant owner estimates the loss of Prosecco alone would amount to a $57,167 annual revenue loss... Just those drinks hypothetically work out to more than $1,000 a month in server tips, on average. Assuming that loss is equally shared by a 12-person front-of-house crew, each employee would be out approximately $94, or about two-thirds of the average monthly household utility bill in Charleston."
The impact is not lagged: "when the 25 percent tariff was implemented, Root says, “it became part of our working capital immediately. We had to come up with $40,000 unexpectedly” in order to free up wine which had already shipped. But he characterizes a 100 percent tariff as “impossible.”"
Even in the time-sensitive, so less tariff-elastic cases, it is the U.S. businesses that have been absorbing the lion's share of the cost increases, as illustrated by the 2019 vintage of Beaujolais Nouveau release last year that came after the 25% tariff hike of October 2. This is covered well here: https://www.winemag.com/2019/10/29/tariffs-on-european-union-goods-impact-u-s-wine-industry/. In theory, producers should be absorbing more of the tax increase cost in lower elasticity supply cases. But due to supply chain complexity and the fact that producers face global demand, with lots of substitution options, while the U.S. wholesalers, retailer and consumers have inelastic demand (due to timing-sensitive nature of the market for Nouveau releases) this is not the case.
Bad news for the U.S. producers
So higher tariffs on European wines should be a good thing to the American producers of wine, right? After all, as prices of their competitors rise, their products should experience increased demand due to consumer substitution in favor of cheaper alternatives.
This is a fallacious argument, given complexity of the wine business.
Firstly, price-sensitive consumers who have a greater incentive to switch away from European wines toward other alternatives are likely to go for cheaper Chilean and Australian wines instead of the already higher-priced Californian, Oregonian and other U.S. offerings.
Secondly, demand for all wine is likely to decline due to higher prices, but also due to the reduced range of wines that consumers might consider affordable to them. Consumers do not simply buy the wine by the price. Instead, consumers buy, say, California wine because they want something different from the Italian wine, and they buy Italian wine to diversify their consumption (broaden the range of taste options) from French offerings, and they buy French offerings because they have been consuming Spanish ones, and so on, until they reach back to California wines. It is exactly the same with food: making Thai cuisine more expensive does not necessarily mean Italian restaurants will gain more customers. Instead, it might mean that consumers will reduce demand for eating out in all restaurants and switch to fast food instead.
Thirdly, wine business is also complex. U.S. producers innovate and collaborate with European producers. Adversarial trade is not good for technology and intellectual property transfers between them. And U.S. producers are also worried about inevitable EU counter-measures. Worse, if tariffs were to trigger significant drop off in the number of wholesale, retail and restaurant businesses and trading volumes, smaller U.S. producers (who tend to be more innovative and have greater intellectual property investments in the industry) will have fewer channels to sell and market their own offerings. Here is one California wine producer views on the effect of potential decrease in the number of wholesale / distribution partners under the 100% tariffs proposal: https://tablascreek.typepad.com/tablas/2019/12/no-100-tariffs-on-european-wines-wont-be-good-for-california-wineries.html. To quote them on restaurants part of the chain impact alone: "Restaurants are famously low-margin businesses anyway. Increasing the costs of their wine programs will push some out of business, further reducing outlets for our wines."
Lastly, no U.S. producer of wine would want to face a prospect of their brand capital worldwide being associated with state-imposed tariff 'protection'. Majority of the American winemakers compete on their own creativity, experience, and marketing. In a highly product-differentiated world, hammer-all tax measures do little to help indigenous producers to succeed. They dilute quality of signalling that successful brands develop with their sweat and capital.
To quote, again, the excellent Tablas Creek folks (link above): "Why wouldn’t the wine community just switch its sources to other, non-tariff countries? Wine is not a commodity, where a customer can simply swap in a wine, even one made from the same grape, from one part of the world for another and expect them to be comparable. Wines are products inextricably tied to the place in which they are produced. And the disruption of 100% tariffs on wines from the world’s oldest wine regions would have cascading impacts that would reach deep into a whole network of American businesses, investors, and consumers."
There is a smashingly good paper out from the Bank of England, titled "Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018", Staff Working Paper No. 845, by Paul Schmelzing.
Using "archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time."
- "... across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and...
- "... since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed."
- "A gradual increase in real negative‑yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis."
The present 'abnormality' in declining interest rates is not, in fact 'abnormal'. Instead, as the author points out: "Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory."
Two things worth commenting on:
- Secular stagnation: in my opinion, interest rates trend is not in itself a unique identifier of the secular stagnation. While interest rates did decline on a super-long trend, as the paper correctly shows, the broader drivers of this decline can be distinct from the 'secular stagnation'-linked declines in productivity and growth. In other words, at different periods of time, different factors could have been driving the interest rates declines, including higher (not lower) productivity of the financial system, e.g. development of modern markets and banking, broadening of capital funding sources (such as increase in merchant classes wealth, emergence of the middle class, etc), and decoupling of capital supply from the gold standard (which did not happen in 1973 abandonment of formal gold standard, but predates this development by a good part of 60-70 years).
- "Permanently negative territory" for interest rates forward: this is a major hypothesis from the perspective of the future markets. And it is consistent with the secular stagnation, as availability of capital is now being linked to the monetary expansion, not to supply of 'organic' - economy-generated - capital.
More hypotheses from the author worth looking at: "I also posit that the return data here reflects a substantial share of ‘non‑human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record."
There is a lot in the paper that is worth pondering. One key question is whether, as measured by the 'safe' (aka Government) cost of capital, the real interest rates even matter in terms of the productive economy capital? Does R vs G debate reflect the productivity growth or economic growth and do the two types of growth actually align as closely as we theoretically postulate to the financial assets returns?
The macroeconomics folks will call my musings on the topic a heresy. But... when one watches endlessly massive skews in financial returns to the upside, amidst relatively slow economic growth and even slower real increases in the economic well-being experienced in the last few decades, one starts to wonder: do G (GDP growth) and R (real interest rates determined by the Government cost of funding) matter? Heresy has its way of signaling unacknowledged reality.
Our new paper, with Daniel O'Loughlin, titled "Herding and Anchoring in Cryptocurrency Markets: Investor Reaction to Fear and Uncertainty" has been accepted to the Journal of Behavioral and Experimental Finance, forthcoming February 2020.
The working paper version is available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3517006.
Cryptocurrencies have emerged as an innovative alternative investment asset class, traded in data-rich markets by globally distributed investors. Although significant attention has been devoted to their pricing properties, to-date, academic literature on behavioral drivers remains less developed. We explore the question of how price dynamics of cryptocurrencies are influenced by the interaction between behavioral factors behind investor decisions and publicly accessible data flows. We use sentiment analysis to model the effects of public sentiment toward investment markets in general, and cryptocurrencies in particular on crypto-assets’ valuations. Our results show that investor sentiment can predict the price direction of cryptocurrencies, indicating direct impact of herding and anchoring biases. We also discuss a new direction for analyzing behavioral drivers of the crypto assets based on the use of natural language AI to extract better quality data on investor sentiment.
Wednesday, January 8, 2020
My new article for @TheCurrency_, titled "Creative destruction and consumer credit: A Fintech song for the Irish banks" is out. Link: https://www.thecurrency.news/articles/6150/creative-destruction-and-consumer-credit-fintech-song-for-the-irish-banks.
Key takeaways: Irish banks need to embrace the trend toward higher degree of automation in management of clients' services and accounts, opening up the sector to fintech solutions rather than waiting for them to eat the banks' lunch. Currently, no Irish bank is on-track to deploy meaningful fintech solutions. The impetus for change is more than the traditional competitive pressures from the technology curve. One of the key drivers for fintech solutions is also a threat to the banks' traditional model of business: reliance on short-term household credit as a driver of profit margins.
"Irish banks are simply unprepared to face these challenges. Looking across the IT infrastructure landscape for the banking sector in Ireland, one encounters a series of large-scale IT systems failures across virtually all major banking institutions here. These failures are linked to the legacy of the banks’ operating systems."
"In terms of technological services innovation frontier, Irish banks are still trading in a world where basic on-line and mobile banking is barely functioning and requires a push against consumers’ will by the cost-cutting banks and supportive regulators. To expect Irish banking behemoths to outcompete international fintech solutions providers is equivalent to betting on a tortoise getting to the Olympic podium in a 10K race."
Tuesday, January 7, 2020
My article on U.S. economy and the implied risks to investors for Manning Financial and Cathedral:
#USEconomy #Economics #Markets #USgrowth #GlobalGrowth #GlobalEconomy #SecularStagnation @cathedrlfinance @sheehymanning
Euromoney on Eurozone risks into 2020, with some comments from me: https://www.euromoney.com/article/b1js9nd289vtm9/country-risk-2020-vision-brings-the-eurozones-risks-into-focus.
Composite Global economic activity, as measured by Composite PMI has slowed down markedly in 2019 compared to 2018. In 2018, average Composite Global PMI (using quarterly averages) stood at 53.6. This fell back to 51.7 in 2019. In 4Q 2019, average Global Composite activity index stood at 51.3, virtually unchanged on 51.4 in 3Q 2019. Overall, Global Composite PMI has now declined in 7 consecutive quarters.
This weakness in the Global economic activity is traceable also to BRIC economies.
Brazil’s Composite PMI has fallen from 52.0 in 3Q 2019 to 51.5 in 4Q 2019. Things did improve, however, on the annual average basis, 2018 Composite PMI was at 49.6, and in 2019 the same index averaged 51.4.
Russia Composite PMI has moved up markedly in 4Q 2019, thanks to booming reading for Services PMI. Russia Composite index rose to 52.7 in 4Q 2019 from 51.0 in 3Q 2019. reaching its highest level in 3 quarters. However, even this robust reading was not enough to move the annual average for 2019 (52.3) to the levels seen in 2018 (54.1). In other words, overall economic activity, as signaled by PMIs, has been slowing in 2019 compared to 2018.
China Composite PMI stood at 52.6 in 4Q 2019, up on 51.5 in 3Q 2019, rising to the highest level in 7 consecutive quarters. However, 2019 average reading was only 51.7 compared to 2018 reading of 52.2, indicating that a pick up in the Chinese economy growth indicators in 4Q 2019 was contrasted by weaker growth over 2019 overall.
India Composite PMI remained statistically unchanged in 3Q 2019 (52.1) and 4Q 2019 (52.0). On the annual average basis, 2018 reading of 52.5 was marginally higher than 2019 reading o 52.2.
In 4Q 2019, all BRIC economies have outperformed Global Composite PMI indicator, although Brazil was basically only a notch above the Global Composite PMI average. In 2019 as a whole, China, Russia and India all outperformed Global Composite index activity, with Brazil trailing behind.
BRIC Services PMIs have been a mixed bag in 4Q 2019, beating overall Global Services PMI, but showing similar weaknesses and renewed volatility.
Brazil Services PMI slipped in 4Q 2019, falling from 51.8 in 3Q 2019 to 51.0. Statistically, this level of activity is consistent with zero growth conditions. In the last four quarters, Brazil's services sector activity ranged between a high of 52.3 and a low of 48.6, showing lack of sustained growth momentum in the sector.
Russia Services sector posted a surprising, and contrary to Manufacturing, robust rise from 52.0 in 3Q 2019 to 54.8 in 4Q 2019, reaching the highest level in three quarters. Statistically, the index has been in an expansion territory in every quarter starting with 2Q 2016. 4Q 2019 almost tied for the highest reading in 2019 overall, with 1Q 2019 marginally higher at 54.9. For 2019 overall, Services PMI averaged 53.3, which is below 2018 average of 54.6 with the difference being statistically significant.
China Services PMI ended 4Q 2019 at 52.4 quarter average, up on 51.7 in 3Q 2019. Nonetheless, 4Q 2019 reading was the second weakest in 8 consecutive quarters. The level of 4Q 2019 activity, however, was statistically above the 50.0 zero growth line. In 2019, China Services PMI averaged 52.5 - a slight deterioration on 53.1 average for 2018, signalling slower growth in the sector last year compared to 2018.
India Services PMI averaged 51.7 in 4Q 2019, statistically identical to 51.6 in 3Q 2019. Over the last 4 quarters, the index averaged 51.5, which is effectively identical to 51.6 average for 2018 as a whole. Both readings are barely above the statistical upper bound for 50.0 line, suggesting weak growth conditions, overall.
As the chart above indicates, BRIC Services PMI - based on global GDP weightings for BRIC countries - was indistinguishable from the Global Services PMI. Both averaged 52.2 in 2019, with BRIC services index slipping from 52.6 in 2018 and Global services index falling from 53.8 in 2018. On a quarterly basis, BRIC services PMI averaged 52.3 in 4Q 2019, compared to 51.7 in 3Q 2019 - both statistically significantly above 50.0; for Global Services PMI, comparable figures were 52.0 in 3Q and 51.6 in 4Q 2019, again showing statistically significant growth.
Sunday, January 5, 2020
As global manufacturing sector activity barely stayed above the recession line in 4Q 2019, BRICs manufacturing PMIs indicated a cautious upswing in activity, with exception for Russia and India. Here are the core details:
- Brazil's 4Q 2019 Manufacturing PMIs averaged 51.8, statistically unchanged on 3Q 2019 figure of 51.9. Both 3Q and 4Q readings were statistically above 50.0, indicating modest growth, and above historical average of 50.3. Nonetheless, 4Q 2019 reading was the second lowest in six consecutive quarters.
- Russia posted its second consecutive quarter of recessionary growth readings for manufacturing sector, with quarterly average PMI slipping to 46.8 in 4Q 2019, down from 48.2 in 3Q 2019, making 4Q contraction the sharpest since 2Q 2009. All in, the last time Russian manufacturing sector posted statistically above 50.0 reading was in 1Q 2019. The signal here is severely negative to overall growth prospects for the Russian economy for the entire 2019 and a major concern for the 1H 2020 dynamics.
- China manufacturing PMI surprised to the upside in the last quarter of 2019, rising from 50.6 in 3Q 2019 (a reading statistically indistinguishable from zero growth 50.0 mark) to 51.7 in 4Q 2019 (a reading indicating moderate expansion, compared to the historical average of 50.8). Statistically, Chinese manufacturing has not been in an expansion mode over 3Q 2018 - 3Q 2019 period, which makes 4Q 2019 reading an important signal of a potential turnaround.
- India manufacturing PMI averaged 51.5 in 4Q 2019, slightly down on 51.8 in 3Q 2019. This is the weakest level since 3Q 2017, but statistically it is still indicative of expansion in the sector.
Overall, BRIC Manufacturing PMI (based on each country share in global GDP) has improved from 50.7 in 3Q 2019 to 51.2 in 4Q 2019, marking the fastest rate of the group's manufacturing sector expansion 1Q 2018 and the second consecutive quarter of the index being statistically above the 50.0 zero growth line.
Globally, manufacturing sector growth conditions improved from 49.5 in 3Q 2019 to 50.1 in 4Q 2019, although statistically, no reading from 2Q 2019 onwards was significantly above or below the zero growth 50.0 line.
As the chart above clearly shows, Global Manufacturing sector activity remains extremely weak. On-trend, more recent BRICs Manufacturing sector growth is above that of the Global PMI signal, but both show weaknesses.
My article on the proposed EU-10 plan for the Financial Transaction Tax via The Currency:
Link: https://www.thecurrency.news/articles/5471/a-potential-risk-growth-hormone-what-the-financial-transaction-tax-would-mean-for-ireland-irish-banks-and-irish-investors or https://bit.ly/2QnVDjN.
"Following years of EU-wide in-fighting over various FTT proposals, ten European Union member states are finally approaching a binding agreement on the subject... Ireland, The Netherlands, Luxembourg, Malta and Cyprus – the five countries known for aggressively competing for higher value-added services employers and tax optimising multinationals – are not interested."
"The rate will be set at 0.2 per cent and apply to the sales of shares in companies with market capitalisation in excess of €1 billion. This will cover also equity sales in European banks." Pension funds, trading in bonds and derivatives, and new rights issuance will be exempt.
One major fall out is that FTT "can result in higher volumes of sales at the times of markets corrections, sharper flash crashes and deeper markets sell-offs. In other words, lower short-term volatility from reduced speculation can be traded for higher longer-term volatility, and especially pronounced volatility during the crises. ... FTT is also likely to push more equities trading off-exchange, into the ‘dark pools’ and proprietary venues set up offshore, thereby further reducing pricing transparency and efficiency in the public markets."