7/1/20: BRIC Composite PMIs 4Q 2019

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.

7/1/20: BRIC Services PMIs 4Q 2019

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.

2/7/19: Earnings and Market Valuations: Equity PEs

While P/E ratios are gamable and informationally highly restrictive, the metric is still a useful one when considering as to how expensive/cheap equity can be. Here is the latest chart via @topdowncharts showing P/E ratios based on 10 year average earnings (smoother series, but the long average is even less informationally rich than pure P/Es):

Which makes:

1. U.S. markets overvalued in excess of 2006-2007 peaks, but less than in the blowout bubble of the dot.com era;
2. Developed markets (ex-US) and Emerging markets relatively moderately priced.

Given the fact that U.S. equities earnings are probably the most susceptible to strategic manipulation, e,.g. shares buybacks, M&As and earnings/cash management, the U.S. markets are in heading for trouble.

9/10/18: BRIC Composite PMIs 3Q 2018: A Tale of Growth Slowdown

Previous posts on 3Q 2018 PMIs have covered:

1. BRIC Manufacturing PMIs: http://trueeconomics.blogspot.com/2018/10/31018-global-pmis-tanked-in-3q-2018.html;
2. BRIC Services PMIs: http://trueeconomics.blogspot.com/2018/10/91018-bric-services-pmis-3q-2018-slower.html; and
3. Global Composite PMIs: http://trueeconomics.blogspot.com/2018/10/31018-global-pmis-tanked-in-3q-2018.html.

Now, let’s take a look at the BRIC Composite PMIs that combine Services and Manufacturing sectors growth signals. As Global Composite PMI signalled slowing growth momentum in the global economy, BRIC Composite PMIs all trailed global growth indicator.

Brazil Composite PMI fell deeper into contraction territory in 3Q 2018 (48.5) compared to 2Q 2018 (49.1), marking the fourth consecutive quarter of contraction in the economy, as signalled by the combination of PMI indices in Services and Manufacturing sectors. 3Q 2018 was the lowest Composite PMI reading for the South America’s largest economy in 6 consecutive quarters.

Russia Composite PMI slipped from 53.4 in 2Q 2018 to 52.4 in 3Q 2018, marking slowdown in the rate of economic expansion. This was the lowest reading in Russia Composite PMIs since 2Q 2016. Despite this, Russia Composite PMI was the second largest in the BRIC group (marginally below India’s 52.5 reading).

China Composite PMI posted a modest decline in the growth rate falling from 52.5 in 2Q 2018 to 52.1 in 3Q 2018, the latter reading marking the lowest rate of expansion in 3 quarters. In fact, China Composite PMIs have been singling weak growth dynamics in every quarter since 4Q 2016 - something that is yet to be reflected in the official growth figures for the country.

India Composite PMI bucked the BRIC trend and rose from 51.9 in 2Q 2018 to 52.5 in 3Q 2018, for the first statistically significant growth signal in 5 quarters. Despite this, growth momentum in India remains below global PMI levels.

Global Composite PMI declined from 54.0 in 2Q 2018 to 53.3 in 3Q 2018.

Overall, slowing global growth momentum is being matched by a slowdown in the BRIC economies. Both Manufacturing and Services sectors of the BRIC economies are underperforming their Global counterparts and the overall trend is toward declining global and BRIC growth.

9/10/18: BRIC Services PMIs 3Q 2018: Slower Growth Ahead

Having covered Global Composite PMIs for 3Q 2018 here: http://trueeconomics.blogspot.com/2018/10/31018-global-pmis-tanked-in-3q-2018.html as well as BRIC Manufacturing PMIs here: http://trueeconomics.blogspot.com/2018/10/11018-bric-manufacturing-pmi-dips-down.html, here is an update on BRIC Services PMIs for 3Q 2018.

In summary: things are getting less promising for 2H 2018 growth in world's largest emerging and middle-income economies.

Brazil Services PMI posted second consecutive quarter of contraction in 3Q 2018, falling from 48.8 in 2Q 2018 to 47.9 in 3Q 2018. Since 3Q 2014, Brazil's Services PMIs posted readings below 50.0 mark (zero growth mark) in all, but one quarter (1Q 2018 when the PMI was at 51.0). Importantly, 3Q reading was statistically significantly below 50.0 mark.

Russia Services PMI fell marginally from 54.0 in 2Q 2018 to 53.6 in 3Q 2018, signalling weaker, but statistically-speaking, still positive growth. PMIs fell in all three last quarters from the 4-quarters peak of 56.0 in 4Q 2017. Q3 2018 was the lowest growth reading in 9 consecutive quarters. Despite this, Russia Service sector growth signalled by the PMIs is the fastest of all BRIC economies.

China Services PMI also fell to 52.6 in 3Q 2018 compared to 53.2 in 1Q 2018, marking the third consecutive decline in PMIs. China posted the second highest rate of growth in Services sectors amongst the BRIC economies.

India Services PMI rose, breaking the BRIC trend, in 3Q 2018 to 52.2 (weak growth) from 51.2 in 2Q 2018, marking the second consecutive quarter of above-50 readings. This marks the strongest growth signal in 8 quarters, albeit the level of PMI is anaemic.

Overall BRIC Services PMI computed by myself based on Markit data and global economy weights for BRIC countries, has moderated from 52.5 in 2Q 2018 to 52.2 in 3Q 2018, suggesting weakening growth momentum in the Services sector of the BRIC economies. This development was in line with the Global Services PMI movements (down from 54.2 in 2Q 2018 to 53.5 in 3Q 2018). For BRICs, Services PMI is now at the lowest reading in three quarters, and for the Global Services PMI -  in 7 consecutive quarters.

All BRIC economies Services sectors are now trailing (Brazil, India and China) or barely matching (Russia at 0.1 points higher) the Global Services PMI.

9/10/18: Euromoney on 3Q 2018 Changes in the Global Risk Environment

Euromoney on global risk changes in 3Q 2018, with comments from myself:
https://www.euromoney.com/article/b1b7sx84cgkn1y/ecr-survey-results-q3-2018-analysts-caution-over-em-selloff-uschina-tensions-and-italian-saga.

9/9/18: IMF and Argentina: New Old Saga

My Twitter comments on Argentina and IMF rescue package were picked up by the folks at ZeroHedge https://www.zerohedge.com/news/2018-08-30/some-observations-argentinas-imf-sponsored-collapse

22/8/18: Emerging Markets Risks and International Reserves

Emerging markets are at the point of risk contagion these days, with a potential spillover into advanced economies. This brings us back to the memories of the past EM crises, such as the currencies crises of the late 1990s in the year (and month) that marks the 20th anniversary of Russian Sovereign Default.

Here is an interesting chart that shows just how far Russia has traveled from the past in terms of its macroeconomic management:

What the chart omits, of course, is a simple fact: of all these economies, Russia is the only one that (rightly or wrongly or both) is trading under severe financial and economic sanctions imposed by its major trading and investment partners. Which makes this performance even more impressive.

When it comes to a 'higher altitude' view of the Russian economy within historical and current geopolitical perspective, which is discussed here: http://trueeconomics.blogspot.com/2018/01/6118-spent-putins-call-means-growing.html.

18/08/18: Euromoney on Italian Banking Risks and Turkey Crisis

Euromoney article on the latent Italian crisis, relative to the ongoing Turkish one: https://www.euromoney.com/article/b19k3zjb7v811r/italian-banks-a-bigger-risk-than-turkey.

8/5/18: Germany's ifo: World Economic Climate Deteriorates

Here is the summary of the Germany's ifo Institute World Economic Climate outlook update (emphasis is mine):

"The ifo World Economic Climate has deteriorated. The indicator dropped from 26.0 points to 16.5 points in the second quarter, returning to more or less the same level as in the fourth quarter of 2017. Experts’ assessments of the current economic situation remained as favourable as last quarter, but their expectations are far less optimistic. The world economy is still experiencing an upturn, but it is losing impetus.

The economic climate deteriorated in nearly all regions. Both assessments of the current economic situation and expectations fell significantly in the USA. In the European Union, Latin America, the CIS countries, the Middle East and North Africa economic expectations also cooled down. Assessments of the current economic situation, by contrast, improved. Economic expectations also clouded over in the Asian emerging economies and developing countries. Assessments of the current economic situation, by contrast, remained more or less unchanged.

In line with rising inflation expectations, short and long-term interest rates will rise over the next six months. Experts also expect far weaker growth in world trade, partly because they are reckoning with higher trade barriers. Overall, experts expect world gross domestic product to increase by 3.9 percent this year."

This is in line with my recent warnings on the pressures building up in the global economy, as raised in a series of recent articles for the Sunday Business Post see http://trueeconomics.blogspot.com/2018/04/27418-global-growth-and-irelands.html and http://trueeconomics.blogspot.com/2018/02/27218-volatility-uncertainty-are-back.html, and for the Cayman Financial Review see: http://trueeconomics.blogspot.com/2018/04/27418-goldilocks-economy-of-state.html.

19/3/16: Danske’s forecasts for Russia: Mild with little chance of a surprise

Danske’s latest forecasts for Russia are out this week. In contrast to 2015 forecasts, Danske is now running a relatively moderately bearish outlook on Russia. Remember, Danske forecast - as late as of September 2015 - the Russian GDP to shrink 6.2% y/y in real terms (it ended the year with a decline of 3.7%), while projecting USDRUB exchange rate at 72-74 for 3mo-12mo horizon (it is now at around 68.1 and the bank’s new forecasts are for 62.2-66.4 over the next 3mo-12mo horizon).

Per latest, “The path of economic contraction continues to slow. GDP shrank 2.5% y/y In January 2016 versus a 3.5% y/y fall in December 2015. We expect the economy to shrink 2.1% y/y in 2016 if the crude price stays at USD31/bl on average, while we would expect expansion to happen if the oil price climbs to USD59/bl on average.”

Overall, Danske’s view is that supply side of growth equation is now close to / already in expansionary territory, while demand (and investment) sides are both still struggling.

Problem is, this imbalance should be leading to rapidly declining inflation. In part this is starting to show through. As noted by Danske team: “Inflation eased to 8.1% y/y in February, from 9.8% y/y in January, as prices already included the RUB devaluation and the high base effect is weighing on the CPI. We expect 2016 inflation to stay single digit, posting 8.1% y/y in December 2016.”

With this in mind, table below shows Danske’s forecasts summary

At -2.1% for 2016, this is a relatively moderate forecast, at the lower end of the forecast envelope for the consensus, but not low enough to raise eyebrows as with their 2015 outlook. CPI forecasts at 8.1% for 2016 is probably realistic, whilst 5.8% forecast for 2017 is quite likely to go unmet, given upside to growth penciled in and M1 expansion estimated at 9.3% and 10.2% in 2016-2017.

Overall, not that far off from my own expectations for the year, though Current Account surplus is, in my view, more likely to come in at around 3.5-3.8 percent of GDP.

The key to the above is the headline GDP figure (weak and likely to remain weak for some time into 2016) and external balances (strong and likely to remain such into 2016-2017). The economy is struggling to gain the elusive recovery footing, but it is also paying for itself.

14/3/2016: Foreign Investors, Sovereign Risks & Regulatory Clowns

Over 2012-2013, sovereign and corporate bonds markets started showing sigs of QE-related fatigue within the system, most commonly associated with periodically volatile trading spreads, term premia and risk spreads. In 2013, following the onset of the Fed-related “taper tantrum” many emerging markets spreads on their sovereign bonds widen dramatically, especially in response to rapid devaluations of their domestic currencies.

“This prompted market analysts to identify five of the worst hit economies as the “fragile five,” attributing their vulnerability to economic fundamentals, particularly to current account deficits.” Which is fine - current account is a reasonably important signal of the overall external balance in the economy, but… the but bit is that current account alone means little. Take for example Russia: back in 2013, the economy enjoyed record current account surpluses - so was a picture of rude health by the analysts criteria. Yet, within the economy there was already an apparent and fully recognised on-going structural slowdown.

Bickering over indicators validity aside, however, it would be nice to know which indicators and which risk models do investors flow when they decide to buy or sell emerging market bonds?

Traditionally, we think about two types of factors: “push” and “pull” factors, determining whether the emerging economy experiences capital inflows or outflows.

- “The push factors often relate to economic or financial developments in the global economy as a whole or in the advanced economies, notably the United States.”
- “The pull factors often relate to country-specific economic fundamentals in emerging markets”

Both push and pull factors seem to be important.

In analyzing returns on sovereign CDS contracts, the BIS paper looks at CDS returns “for 18 emerging markets and 10 advanced countries over 11 years of monthly data from January 2004 to December 2014.”

Findings in a nutshell:

• “Statistical tests for breaks in the movements of CDS returns suggest a break at the time of the eruption of the global subprime crisis in October 2008. This leads us to consider two subperiods separately, an “old normal” before the outbreak of the crisis and a “new normal” afterwards.”
• “In both the old normal and new normal, we seek to explain the variation of these [principal factors] loadings [onto risk premia] in terms of such fundamentals as debt-to-GDP ratios, fiscal balances, current account balances, sovereign credit ratings, trade openness, GDP growth and depth of the domestic bond market.”
• “In the old normal, the first risk factor alone explains about half of the variation in CDS returns…” 
• “This factor becomes more dominant in the new normal, in which it explains over three-fifths of the variation in returns.”
• “When it comes to how the different countries load on this factor, we find that that the commonly cited economic fundamentals have little influence on the country-specific loadings on the factor. Instead the single most important explanatory variable for the differences in loadings is a dummy variable that identifies whether or not a country is an emerging market.”

To summarise the BIS findings: “In the end, we find that CDS returns in the new normal move over time largely to reflect the movements of a single global risk factor, with the variation across sovereigns for the most part reflecting the designation of “emerging market”. There seems to be no “fragile five”; there are only emerging markets. While the emerging markets designation may serve to summarize many relevant features of sovereign borrowers, it is a designation that lacks the kind of granularity that we would have expected for a fundamental on which investors’ risk assessments are based. The importance of the emerging markets designation in the new normal suggests that index tracking behaviour by investors has become a powerful force in global bond markets.”

And the cherry on top of the proverbial pie? Why, here it goes: “Haldane (2014) has argued that in the world of international finance, the global subprime crisis and the regulations that followed made asset managers more important than banks. Miyajima and Shim (2014) show that even actively managed emerging market bond funds follow their benchmarks portfolios  quite closely. For the most part, when global investors invest in emerging markets, instead of picking and choosing based on country-specific fundamentals, they appear to simply replicate their benchmark portfolios, the constituents of which hardly change over time.”

Wait, what? All regulators are running around the world chasing the bad bankers (for their pre-2008 shenanigans), all the while the new threat has already migrated to asset management. The regulators and enforcers are busy bee-buzzing around courts and regulatory hearings chasing the elusive ‘signalling value’ of enforcing old rules onto the heads of the bankers. With little real outcome to show, I must add. … But the future culprits are not to be found amongst those who care to watch the fate of bankers unfolding in front of them.

In short, having exposed the farce of bond / CDS markets pricing risks based on a vague and vacuous designation of a country, the BIS paper inadvertently also exposed the massive futility of the financial regulators chasing their own tails trying to get past crises culprits to prevent new crises from happening, even though the future culprits don;t give a toss about the past culprits.

Dogs, tails, everything wagging everyone, and vice versa…


Full paper here: Amstad, Marlene and Remolona, Eli M. and Shek, Jimmy, “How Do Global Investors Differentiate between Sovereign Risks? The New Normal versus the Old” (January 2016). BIS Working Paper No. 541: http://ssrn.com/abstract=2722580

10/2/16: Was Resource Boom a Boom for Commodities Exporters?

While everyone is running around with the collapsed oil prices, economists with an eye for cycles and history are starting to digest the aftermath of the passed commodities price boom that started around the beginning of the century and lasted until 2011-2012.

The issues relating to that boom are non-trivial. Commodities prices are cyclical and just as the boom turns to bust, so will the bust turn to boom. Therefore, one should really try to understand what exactly happens in both.

Andrew Warner of the IMF has a very interesting, actually fascinating, paper on the effects of the past commodities booms (the 1970s and the more recent one) on countries that are large-scale exporters of commodities. The paper relates naturally to so-called Resource Curse thesis.


A Quick Summary

So this is my summary of the main conclusions, relating to the most recent commodities boom.

Per Warner, “The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge economic rents - rents which, once invested, were widely expected to promote productivity growth in other parts of the booming economies, creating a lasting legacy of the boom years. This paper asks whether this has happened.”

Warner strips out growth in the commodities sectors in these countries and focuses on other sectors, trying to identify whether there was more rapid growth in these sectors during the boom compared to the periods before the boom.

Broadly-Speaking, he finds that “despite having vast sums to invest, GDP growth per-capita outside of the booming sectors appears on average to have been no faster during the boom years than before. The paper finds no country in which (non-resource) growth per-person has been statistically significantly higher during the boom years. In some Gulf states, oil rents have financed a migration-facilitated economic expansion with small or negative productivity gains. Overall, there is little evidence the booms have left behind the anticipated productivity transformation in the domestic economies. It appears that current policies are, overall, proving insufficient to spur lasting development outside resource intensive sectors.”


A bit more specifics

In general, across all commodities boom-impacted economies (identified by Warner as 18 countries) “…estimates of the change in growth during the boom period, [show] that the majority of countries, 11 of the 18, have seen lower growth during the boom period than before. One of these is statistically significant (Bolivia). The remaining 7 countries have seen higher growth during the boom but none of these are statistically significant. Therefore the [results show] that there is little compelling evidence to reject the null of no change during the boom period. …If the presumption was that the Natural Resource bonanza would spark an economic boom in the rest of the economy, this expectation has been disappointed, as there is no statistically significant case of higher per-capita growth during the boom years than before.”

This is quite interesting. Investment should have boomed on foot of rising revenues from commodities extraction and this should have at least trickled down to non-commodities sectors. It turns out investment did not produce growth. Why? Maybe timing is an issue? Lags in time to invest and build new capital?

Warner goes on to check.

“An alternative way to summarize this result is to aggregate across countries. The data for all countries were synchronized not by calendar years but by years since the start of the boom. … [Data] shows that although total GDP rose strongly during the boom period, GDP for the rest of the economy has been essentially flat over the boom period. …Furthermore, it is apparent …that there has been no tendency for growth in non-resource GDP to accelerate during the later years of the boom, as would be expected had there been a lagged impact of investments made during the boom period. If overcoming the curse hinges on raising productivity in the rest of the economy, the data suggest that countries are not, as a rule, successfully overcoming the curse.”

Ok, may be slower growth in non-commodities economy was simply down to that - a period of slower growth overall? Warner tests for this and finds that actually data does not support the thesis that slower growth in non-commodities sectors was caused by a general slowdown in the rate of growth.

“The data suggest that …it is simply rare to find a case of fast growth in the non-resource economy. …It emerges that only 5 of the 18 countries show growth over 2 percent per year. Hence slow growth in the rest of the economy continues to be the norm in resource-intensive economies, even during boom periods.”

Again, a paradox: greater revenues from commodities sectors should translate into greater savings rates, which should still trigger greater investment.

Warner “…examines the extent to which the previous findings can be attributed to a lack of saving, a lack of public or private domestic investment
effort out of the saving or a lack of economic return from the investment effort.”

Savings rose. “The evidence on saving rates shows that, for the 16 countries with available data, mean saving rates rose strongly in the boom period compared with the counterfactual period, from 16 percent of non-resource GDP to 27 percent. Furthermore, the current account shifted towards surplus by approximately 5 percentage points of GDP, so a significant part of the boom was saved in foreign assets.”

Investment rose (somewhat) too, in quantity: “Nevertheless, despite the rise in saving and particularly saving in foreign assets, domestic investment effort remained constant or even rose during the boom period. Focusing on the 16 countries with booms in the 2000’s, mean investment rates rose during the boom periods compared to the counterfactual periods from 22 to 27 percent of GDP. …Further, available evidence suggests that a large fraction of the investment effort during the booms in the 2000’s was domestic public investment. This is the investment that the state controls directly, and the evidence is that public investment rates remained roughly constant, rising slightly from a mean of 9 percent of GDP during the [pre boom] periods to 10 percent during the boom periods. Private investment also rose - from 14 to 18 percent of GDP. Since total GDP rose during the booms, this data suggests that, overall across the 16 economies, there remained a strong and significant effort to invest in the domestic economy.”

Conclusion? “Although investment data are not broken out [between commodities producing sectors and rest of the economy] it would be a rare occurrence if none of the extra investment fell on the non-resource economy. Therefore, although it is theoretically possible that the low impact on non-resource GDP growth is down to low investment rates, the available data do not support this view. They appear instead to point to low returns from the investment that was made.”

In other words: commodities boom revenues were wasted on poor quality investment projects that failed to boost non-commodities sectors productivity. And this includes public and private sectors investments.


Russia et al

As an aside, there is a fascinating discussion in Warner’s article about the specific group of commodities exporters - countries of the former USSR.

The reason this discussion warrants a separate treatment is the fact that “the resource-rich countries of the ex-Soviet Union require a method for testing for a curse that incorporates the special u-shaped pattern of GDP over time during the transition period. The u-shaped profile of total GDP is a natural outcome of a two-sector model in which one sector declines sharply (the state sector) while another rises gradually from a small base (the new private sector), as happened in all European post-socialist-planned economies.”

So Warner looks at Azerbaijan, Kazakhstan, Russia, and Turkmenistan. And finds that “against expectations, the results indicate that the five resource intensive countries experienced slower growth during their resource boom. Growth was statistically significantly slower than resource poor countries for all except Azerbaijan. This shows little evidence that the resource booms served to accelerate GDP growth above the levels experienced by other post-soviet economies. Based on this evidence it is difficult to claim that the resource booms served to raise the path of GDP above what it would have been without the booms.”

Wait a second. Common narrative, especially in the West, as it pertains to Russian and Kazakhstan, is that both countries have *only* grown because of higher commodities prices. This is what is normally used to explain the ‘Putin effect’ - rapid growth attained by Russia during the first two terms of the Putin Presidency. Alas, data, it seems speaks the opposite: rapid growth during the first two terms of the Putin Presidency is not consistent with the causality linked to the boom in commodities prices. And the actual boom period in commodities prices for Russia seems to be associated with slower, not faster growth, compared to non-commodities boom period (controlling for effects of economic transition) and to non-commodities exporting ex-Soviet counterparts.


You can read the whole paper here: Warner, Andrew, Natural Resource Booms in the Modern Era: Is the Curse Still Alive? (November 2015). IMF Working Paper No. 15/237: http://ssrn.com/abstract=2727182.

14/1/16: Two Charts to Sum Up Global Growth Environment

SocGen recently produced some interesting charts looking into 2016 trends. Two caught my eye, as both relate to long running themes covered on this blog throughout 2015.

The first one is that of a decline in global trade flows as the driver for growth. Per SocGen: "Global trade growth has been anchored below its historical average since the Great Recession, offering further evidence of tepid world economic recovery. Decreasing global demand, especially due to slowing emerging markets, weighs on the outlook for world trade."

http://uk.businessinsider.com/societe-generales-charts-of-the-global-economy-in-2016-2016-1


Another relates to the second drag on global economic progress - debt overhang. SocGen focuses on Emerging Markets’ debt, saying: "Zero interest policies in the developed world have bolstered debt issuance from EM corporates. Only a fraction of EM countries are immune to the current adverse conditions requiring a cautious approach to these markets."

Both do not offer much optimism when it comes to both cyclical (interest rates forward) and structural (capex and demand capacities) drivers for global growth. And both suggest that 2016 is unlikely to be more robust year for the world’s economy than 2015.

10/1/16: Crisis Contagion from Advanced Economies into BRIC

New paper available: Gurdgiev, Constantin and Trueick, Barry, Crisis Contagion from Advanced Economies into Bric: Not as Simple as in the Old Days (January 10, 2016). 

Forthcoming as Chapter 11 in Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery, edited by Constantin Gurdgiev, Liam Leonard & Alejandra Maria Gonzalez-Perez, Emerald, ASEJ, vol 18; ISBN: 978-1-78560-743-1. Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2713335.

Abstract:      

At the onset of the Global Financial Crisis in 2007-2008, majority of the analysts and policymakers have anticipated contagion from the markets volatility in the advanced economies (AEs) to the emerging markets (EMs). This chapter examines the volatility spillovers from the AEs’ equity markets (Japan, the U.S and Europe) to four key EMs, the BRIC (Brazil, Russia, India and China). The period under study, from 2000 through mid-2014, reflects a time of varying regimes in markets volatility, including the periods of dot.com bubble, the Global Financial Crisis and the European Sovereign Debt Crisis, the Great Recession and the start of the Russian-Ukrainian crisis. To estimate volatility cross-linkages between the advanced economies and BRIC, we use multivariate GARCH BEKK model across a number of specifications. We find that, the developed economies weighted return volatility did have a significant impact on volatility across all four of the BRIC economies returns. However, contrary to the consensus view, there was no evidence of volatility spillover from the individual AEs onto BRIC economies with the exception of a spillover from Europe to Brazil. The implied forward-looking expectations for markets volatility had a strong and significant spillover effect onto Brazil, Russia and China, and a weaker effect on India. The evidence on volatility spillovers from the advanced economies markets to emerging markets puts into question the traditional view of financial and economic systems sustainability in the presence of higher orders of integration of the global monetary and financial systems. Overall, data suggests that we are witnessing less than perfect integration between BRIC economies and advanced economies markets to-date.

30/12/15: Blink by 25bps, chew through billions: U.S. rates 'normalization'

In a post yesterday, I mentioned USD3 trillion hole in global bonds markets looming on the horizon as the U.S. Fed embarks on its cautious tightening cycle. Now, couple more victims of that fabled 'normalization' that few in the markets expected.

First up, U.S. own bonds:

Source: @Schuldensuehner 

As noted, US 2-year yields are now at 1.09%, their highest level since April 2010 and roughly double January 2015 average. Now, estimated interest on U.S. federal debt in 2015 stood at around USD251 billion for publicly held debt of USD13,124 billion. Now, suppose we slap on another 0.55%-odd on that. That pushes interest payments on publicly held portion of U.S. debt pile to over USD323 billion. Not exactly chop change...

And another casualty of 'normalization' - global profit margins per BCA Research:
"Over the past two decades, the G7 yield curve has been an excellent leading indicator of global margins. Currently, not only are short-term borrowing costs becoming prohibitive, at the margin, but the incentive to raise debt and retire equity to boost EPS is diminishing. This suggests that profit margins have likely peaked for the cycle."

Here's a chart showing both:

Source: BCA Research

Now, absence of margins = absence of capex. And absence of margins = profits growth on scale alone. Both of which mean things are a not likely to be getting easier for global growth.

Now, take BCA conclusion: "Finally, global junk bonds are pointing to a drop in equities in the coming months, if the historical correlation holds. Indeed, we are heeding the bond market’s message, and are concerned about margin trouble and the potential for an EM non-financial corporate sector accident: remain defensively positioned."

In other words, given the leverage take on since the crisis, and given the prospects for organic growth, as well as the simple fact that advanced economies' corporates have been reliant for a good part of decade and a half on emerging markets to find growth opportunities, all this rates 'normalizing' ain't hitting the EMs alone but is bound to under the skin of the U.S. and European corporates too.

Good luck trading on current equity markets valuations for long...

8/12/15: Commodities Rot Runs Ahead

Commodities rot continues unabated, as Bloomberg Commodities Index fell to its lowest reading since June 1999:

Source: @Schuldensuehner

Which, of course prompted another repricing of the commodities-linked currencies:

 Source: @Schuldensuehner

As I noted few days ago (post here) for the Russian Ruble, there is some room to the downside from here on.

Here is an interesting discussion of the historical trend/cycles in commodities busts via Carmen Reinhart: https://www.project-syndicate.org/commentary/commodity-price-decline-will-continue-by-carmen-reinhart-2015-11. And long-view chart of same:

Trend-wise, that is 160 years of deflation...

30/11/15: WarningSignals on Secular Stagnation Threats

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

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

My own view summarised most recently here: http://trueeconomics.blogspot.ie/2015/10/41015-secular-stagnation-and-promise-of.html.

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

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

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

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

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

9/10/15: Quantitative Scaring & Secular Stagnation

One very important point being raised in this article from the Economist: "Controlling for the range of things that influence interest rates, from growth to demography, economists have attempted to gauge the impact of reserve accumulation. Francis and Veronica Warnock of the University of Virginia concluded that foreign-bond purchases lowered yields on ten-year Treasuries by around 0.8 percentage points in 2005. A recent working paper by researchers at the European Central Bank found a similar effect: increased foreign holdings of euro-area bonds reduced long-term interest rates by about 1.5 percentage points during the mid-2000s."

Which brings us to the idea of the 'savings glut' over the 2000s. I covered this in this article concerning the twin threats of supply and demand side-driven secular stagnation.

The Economist give us one side of that equation: Sovereign Reserves

All of which has two implications:

1. The commodities bubble bursting will have a second order effect on longer-term expected cost of Government borrowing in the advanced economies by removing the surplus of savings accumulated in the official accounts in the Emerging Markets. Which makes unwinding monetary policy excesses (from the balancesheets of the Central Banks in the advanced economies) so much harder. The knock on effect of this will be lower solvency of the Western pensions funds in the longer run; and
2. Depletion of savings on the sovereign side will require increased savings on the private sector side. Which will have compounding effect on demand.

Both points reinforce the adverse impact on global growth prospects.