5/4/21: The Entrepreneurship Boom: Forced, Voluntary and Funded

 

My recent article for The Currency covering the ongoing global developments in entrepreneurship: The US is experiencing an entrepreneurship boom. So, what is going wrong in Ireland?: https://thecurrency.news/articles/40790/the-us-is-experiencing-an-entrepreneurship-boom-so-what-is-going-wrong-in-ireland/

6/2/21: Longer Trends in Economic Uncertainty

 

Quite dramatic trends in terms of rising economic uncertainty over the last 21 years:

And, not surprisingly, the rise of uncertainty in Europe, the U.S., and globally pre-dates the Covid19 pandemic. In fact, Europe has been experiencing dramatically elevated uncertainty levels since the start of the Euro area crisis, while the U.S. saw a virtually exponential rise in uncertainty from 2017 on. Global measures of uncertainty have been running high through 2016 and rose dramatically thereafter. 

While amelioration in the Covid19 pandemic dynamics is likely to lower the levels and the volatility of the uncertainty in global economic systems, it is highly unlikely to return us to the pre-Global Financial Crisis state of affairs.

12/12/20: Hungary's risk improvement in peril

 My comment for Euromoney on changes in sovereign risk profile for Hungary: https://www.euromoneycountryrisk.com/article/b1pjjpq2xr2bfy/hungarys-risk-improvement-in-peril-as-it-bites-the-hand-that-feeds-it. 

3/10/20: Eurocoin Leading Growth Indicator 3Q 2020

 

Eurocoin, a leading growth indicator for the euro area published by CEPR and Banca d'Italia posted another negative (recessionary) reading in September (-0.31) after marking peak growth contraction of COVID19 pandemic period in August (-0.64). This puts Eurocoin in negative territory for the 6th consecutive month since March 2020. 

Current forecast for 3Q 2020 growth remains at -3.5 percent q/q. Deflationary pressures are also building up. Euro area's 12 months average HICP forecast for 3Q 2020 stands at around 0.6 to 0.5.

As the chart above shows, Eurozone remains deeply in a recessionary territory based on Eurocoin forecasts and inflation dynamics. Longer term growth averages are shown in the chart below:

Overall, as noted above, one must take all leading indicators and forecasts with some serious warnings attached: we are in an environment where past models for forecasting economic aggregates become severely challenged.

17/9/20: Eurocoin Leading Growth Indicator 3Q 2020

 

Eurocoin, CEPR & Banca d'Italia leading growth indicator for Euro Area economy is pointing to renewed weaknesses in the Eurozone economy in August, falling to its lowest levels in the COVID19 pandemic period:

As the chart above shows, Eurocoin fell from -0.5 in July to -0.64 in August, its lowest reading since June 2009. The forecast September indicator is at -0.30. Through August, we now have five consecutive months of sub-zero readings. Based on July-August data and September forecast, we are looking at a GDP contraction of 3.5 percentage points in 3Q 2020. This is mapped out in the chart below:

As the chart above shows, average annual growth rate in the Eurozone for 2020 is now sitting at -6,33 percent, far worse than the previous low of -0.575 in 2009. In quarterly readings, we now have two actual and one forecast quarters of 2020 all performing worse than the peak of the Global Financial Crisis / Great Recession contraction (see green entry in the chart above).

As before the COVID19 crisis, Eeurozone economy is performing woefully. On no time horizon did Euro area manage to achieve average annual growth of 2% (chart above).

1/6/20: COVID19 and European Banking

McKinsey research note on European banks' potential losses due to COVID19 is quite on the money:

With more than 1/3rd of European executives expecting "a muted recovery that would lead to sharp drops in banks’ revenue, a squeeze on their capital, and a hit on return on equity", European banks can expect revenues to drop by 40 percent plus, and ROE drop 11 percentage points in 2021.

And the problems are strategic. COVID19 is actually accelerating changes in customers' demand for services. "McKinsey’s European customer survey shows how customer behavior and needs have changed over the past month: digital engagement levels have climbed up to 20 percent, the use of cash has halved, 30 to 40 percent of customers have expressed a greater need for advice, while 20 to 40 percent want products to help them through the crisis.4 Pension shortfalls are a particular challenge with those close to retirement facing a very immediate problem."

Alas, European banks, especially those operating in the 2008-2014 crises-hit economies, such as Ireland, Italy, Spain and Portugal, are utterly unprepared for these shifting trends. I wrote about these problems in a series of two article for The Currency here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks and https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks.

10/5/20: COVID19 Charts Update

As the U.S. and many parts of Europe are moving into the 'second stage' of COVID19 measures, relaxing some of the social distancing restrictions, here are some of the top-level stats on COVID pandemic evolution.

Global view:

• May 10, 2020 data adds 87,461 new cases globally and 4,524 new deaths.
• This was the 7th highest number of new cases additions, and 36th highest day in terms of new deaths in 122 days of record.
• Worryingly, Friday posted the second highest number of new cases increases at 94,158 on record, while Thursday posted 13th highest day in terms of deaths. 

As chart below shows, there is no consistent trend in terms of reduction in global new cases or deaths:

If this situation persists, it is highly unlikely we will see much of the relaxation in international travel, as global pandemic is appearing to be shifting geographically, rather than abating in overall severity.

U.S. vs EU27 cases and deaths:

U.S. continues to post pretty poor numbers, while EU27 is showing some significant slowdown in the pandemic progression:

As chart above shows, U.S. now vastly leads the EU27 in terms of contagion numbers and rates.

• Sunday ranks 28th in data history in terms of new cases reported, and 25th in terms of deaths reported in the U.S.
• Sunday ranks 56th in new cases and 51st in terms of new deaths reported in the EU27.
• The gap in the number of deaths reported over the entire pandemic to-date between the EU27 and the U.S. has now shrunk to 28,144 cases.
• Adjusting for the 7 days differences in the onset of the pandemic, the U.S. death rate per capita now exceeds that of the EU27 (second chart below).

Note: "The death rate from seasonal flu is typically around 0.1% in the U.S., according to news reports", per https://www.livescience.com/new-coronavirus-compare-with-flu.html. Current global running death rate (case fatality rate) for COVID19 is at 6.9% for confirmed cases. In the U.S., case fatality rate current runs at 6.02% and in the EU27 the rate is 11.1%.

Russia update: 

Russia continues to experience high rates of increases in new cases, with Sunday rate of 11,012 being the second highest on record, with the highest rate to-date of 11,231 recorded on May 8, 2020. The death rate recorded Sunday is at 88, ranked 7th in the history of the series.

BRICS update:

Key concerns forward:

Key concerns forward are now shifting toward 'phase two' risks. Shifting from complete shutdown of economic and social activities to restricted levels of activities risks potential re-igniting of the contagion, as underlying pools of disease remain high. Both, Europe and the U.S. are in the situation where daily numbers of new cases and deaths remain well above the levels witnessed at the point of restrictions imposition. If these level were concern back then, why do the higher levels today not warrant continued restrictions? 

Two links of the growing fears of re-emergence of contagion worth checking out:

• Germany: https://www.theguardian.com/world/2020/may/10/fears-rise-in-germany-over-second-wave-of-coronavirus-infections
• Asia: https://www.dw.com/en/coronavirus-latest-world-fears-second-wave-of-infections/a-53383336

4/5/20: Updated Covid19 charts

Post-weekend updated charts on COVID19:

First off, global comparatives on incidence rates and death rates:

The above chart shows lack of convincing decline in the rate of detected new cases and deaths worldwide. In the last three days, global case numbers posted another 'local peak' reading of 93.328 cases on May 2, which marks a fifth 'local peak' in the overall time series. 'Local trough' of 65,944 cases on April 28 - much touted in the media as the evidence of the pandemic moderating - has now been followed by four consecutive days of increases through May 2, and the usual declines in cases on May 3 and 4th. May 4th counts were 78,657, which ranks 18th most severe increase in overall time history of the series.

U.S. vs EU27 comparatives:

To better capture the convergence in death rates between the EU and the U.S., here is a summary chart plotting the gap in death rates per 1 million of population between the two:

In simple terms, U.S. deaths rate per 1 million of population trailed the EU27 by 31.4 points back on April 8th. This gap has now closed to 11.6 points on April 27th. Note: we have to compare U.S. and EU27 figures referencing a 7-days gap in the timing of the major pandemic dynamics on-set in the U.S. vs EU27.

Finally, an update on data for Russia and BRICS:

The pattern established in recent weeks persists: Russia continues to post higher numbers (increasing) in the new detected cases, while Russia's death rate per confirmed case remains well below the BRIICS comparatives. Russia's death rate per 1 million population is statistically within the BRIICS range.

17/4/20: COVID19 Updated Charts and Outliers

Updating two charts for #COVID19 pandemic today:

First: US vs EU chart:

Second: Russia chart:

Since I included no commentary on Russian data in the chart itself, it is worth noting that data so far indicates no data suppression or mis-reporting. This is confirmed by analysis of 'outliers' in the data. I have looked at all countries with > 1,000 cases reported and considered observations on cases reported that fall out of trend line from the time when the country cumulated cases counts reached > 50 cases. For example, if a country reported 127 cases in day T, followed by 139 cases in day T+1, and suddenly showed 0 cases in T+2, followed by 99 cases in T+3, the date of T+2 was marked as an 'outlier'. I ignored all cases where 'outlier' suspect dates were above 20 cases, even if the number was still outside the range of the trend-defined 'norm'.

Note: these outliers can be a function of tests arrivals dates, availability of tests, hospitals reporting dates and other differences that have nothing to do with 'Government manipulation'. All in, 43 countries out of 77 with more than 1,000 cases have reported at least one outlier.

Russia had 3.45% of days reporting appearing as extreme outliers. 30 out of the total 77 countries on the list had higher percentage of outliers days than Russia. Median for 77 countries was 2.9%, mean was 5.9% and STDEV was 8.6%.

Only two of these countries, namely Russia (3.45% of observations countable as outliers) and China (13.3% of observations being outliers), has been accused in the Western media of releasing politically manipulated data. China, of course, has a very high percentage of observations that can be identified as outliers, while Russia is, basically, middle-of-the-road.

9/4/20: Ifo Eurozone Forecast Q1-Q3 2020: Covid19 Impacts

Germany's ifo Institute joint forecasts for Eurozone growth are out today. Bleak reading. The forecasts below assume that Covid-19 restrictions will be gradually lifted over the summer 2020.

Seasonally and working-day adjusted GDP growth:

From ifo forecast: "The economy in the euro area is expected to slide into a deep recession in the first half of 2020:

• GDP growth is forecast to be -2% in Q1 and -10% in Q2, followed by a recovery in Q3 with +8%. 
• Due to the lack of comparable events in the last decades and the unpredictable course of the pandemic, these estimates are subject to substantial uncertainty."
• "Gross fixed capital formation is also certain to decline, with -2% in Q1 and -10% in Q2, due to supply disruptions, planning uncertainty and a preference for liquidity."
• "Foreign demand is likely to contribute negatively to growth, as a result of the euro area’s exposure to recessive international trade and a struggling global economy."

Inflation environment:

Headwinds and risks: 

• "A more unfavorable course of the pandemic would require longer and possibly stricter containment measures...
• "Despite massive liquidity provision by governments and central banks, a prolonged downturn would then lead to liquidity strains in the economy. 
• Increased debt levels associated with low income flows and asset devaluations are likely to lead to solvency issues for thinly capitalized corporations and private households.
• An ensuing rise in loan defaults could in turn lead to problems in the banking sector." 
• "A resurgence of the European debt crisis on a large scale thus constitutes a non-negligible risk to the forecast."

8/4/20: Ifo Institute Germany Forecast for 2020

A surprisingly 'positive' forecast for Germany from ifo Institute this morning:

While GDP contraction for 2020 looks sharp at -4.2 percent y/y, unemployment figures appear rather robust and employment levels seem to be only weakly impacted. Forecast for current account implies subdued global demand shocks. The swing in the fiscal position is roughly 6.5 percent of GDP, reflecting emergency supports measures. This is significant, and underpins shallower expected effects on employment and unemployment, as well as no deflationary dynamics in labour costs.

My view: Germany entered the pandemic crisis with already weak economy. 2019 growth at 0.6 percent was shockingly weak, with the economy skirting recession. Massive strength in the current account was reflective of weak domestic demand and the economy dependent on growth momentum globally. This momentum is now severely disrupted, and I do not expect robust global recovery outside domestic demand. In other words, my view is that worldwide exports are unlikely to rebound robustly in H2 2020, putting severe pressure on net exporting economies, like Germany and Italy.

So, whilst 4+ percent drop in full year GDP might be fine, I would expect closer to 5-5.5 percent decline (reflective of weaker prices), and much more pronounced impact on unemployment and employment levels.

23/4/19: Income per Capita and Middle Class

New research reported by the Deutsche Bank Research shows that, on average, there is a positive (albeit non-linear) relationship between the per capita income and the share of middle class in total population:

Source: https://pbs.twimg.com/media/D42GiWNXkAMpID2.png:large

There is an exception, however, although DB's data does not test formally for it being an outlier, and that exception is the U.S. Note, ignore daft comparative reported in chart, referencing 'levels' in the U.S. compared to Russia, Turkey and China: all three countries are much closer to the regression line than the U.S., which makes them 'normal', once the levels of income per capita are controlled for. In other words, it is the distance to the regression line that matters.

Another interesting aspect of the chart is the cluster of countries that appear to be statistically indistinguishable from Russia, aka Latvia, Estonia and Lithuania. All three are commonly presented as more viable success stories for economic development, contrasting, in popular media coverage, the 'underperforming' Russia. And yet, only Latvia (completely counter-intuitively to its relative standing to Estonia and Lithuania in popular perceptions) appears to be somewhat (weakly) better off than Russia in income per capita terms. None of the Baltic states compare favourably to Russia in size of the middle class (Latvia - statistically indifferent, Lithuania and Estonia - somewhat less favourably than Russia).

16/12/17: Dancing towards the end of QE

My article on the Super Thursday: monetary policy decisions by ECB, the Fed, PBOC, Norges Bank, SNB et al for Sunday Business Post:
https://www.businesspost.ie/opinion/dancing-towards-end-qe-405054.

7/6/17: European Policy Uncertainty: Still Above Pre-Crisis Averages

As noted in the previous post, covering the topic of continued mis-pricing by equity markets of policy uncertainties, much of the decline in the Global Economic Policy Uncertainty Index has been accounted for by a drop in European countries’ EPUIs. Here are some details:

In May 2017, EPU indices for France, Germany, Spain and the UK have dropped significantly, primarily on the news relating to French elections and the moderation in Brexit discussions (displaced, temporarily, by the domestic election). Further moderation was probably due to elevated level of news traffic relating to President Trump’s NATO visit. Italy’s index rose marginally.

Overall, European Index was down at 161.6 at the end of May, showing a significant drop from April 252.9 reading and down on cycle high of 393.0 recorded in November 2016. The index is now well below longer-term cycle trend line (chart below). 

However, latest drop is confirming overall extreme degree of uncertainty volatility over the last 18 months, and thus remains insufficient to reverse the upward trend in the ‘fourth’ regime period (chart below).

Despite post-election moderation, France continues to lead EPUI to the upside, while Germany and Italy remain two drivers of policy uncertainty moderation. This is confirmed by the period averages chart below:

Overall, levels of European policy uncertainty remain well-above pre-2009 averages, even following the latest index moderation.

6/9/16: The Pain in Spain: Growth vs Structural Deficits

FocusEconomics have published an interesting research note on Spanish economy. 

The country has been muddling through 

1. An ongoing political crisis - with already two elections failing to produce a Government and the latest failed efforts at forming one last week suggesting there is a third round of voting ahead - and 
2. The long-running fiscal crisis - with the EU Commission initiating series of warnings about Spain's failure to comply with the Fiscal Compact criteria and warning that the country is falling behind on deficit targets

Yet, despite these apparent macro risks, the economy of Spain has been expanding for some time now at the rates that are ahead of its other EURO 4 peers (Germany, France and Italy). 

In a guest post below, FocusEconomics shared their research with Trueeconomics readers:

The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit

Spain’s robust GDP growth despite the ongoing political impasse has made the headlines time and time again. The panel of 35 analysts we surveyed for this month’s Consensus Forecast expect GDP to expand 2.8% in 2016, one of the fastest rates in the Eurozone this year, before decelerating to 2.1% in 2017. 

And yet both Spain’s Independent Authority for Fiscal Responsibility (Airef) and the European Commission have warned in recent months that Spain is relying too heavily on GDP growth to reduce its deficit while neglecting much-needed progress with structural reforms to reduce its sizeable structural deficit (the part of the overall deficit which is adjusted for temporary measures and cyclical variations). This leaves it vulnerable to its deficit increasing in the future should economic conditions become unfavorable again. 

According to the Airef, without further reforms, a structural deficit of approximately 2.5% will still persist in Spain in 2018. 

Meanwhile, the European Commission predicted in its updated spring forecast that the structural deficit will reach 3.2% that year—well beyond the new 2.1% revised structural deficit target for 2018 (as part of an overall 2.2% deficit target) that it recently announced in July. Spain’s general government deficit is the sum of the deficits of the central government, the regional governments, the local authorities and the social security system, and most of the overshoot is expected to come from the underperformance of the regional governments and social security. Spain has gradually been reducing its overall general government deficit in recent years, albeit not at the speed stipulated by the European Commission, but it is the persistence of the structural part of the deficit that is the main cause for concern.

After deciding last month to waive the budgetary fine on Spain for missing its targets, the European Commission set a new series of targets up until 2018 in order finally to bring Spain’s overall deficit below the long-targeted 3% that year. In 2016 it expects Spain to meet an overall general government deficit target of 4.6%, not more than 3.1% of which is expected to be a structural deficit. This is in line with the European Commission’s updated spring forecast for the country, since it has decided not to impose additional adjustment requirements on Spain this year (attributing this in part to the fact that lower-than-expected inflation, which is out of the government’s control, has hindered deficit reduction efforts this year). In 2017 and 2018, however, the Spanish government will have to implement structural reforms to make savings equivalent to 0.5% of GDP each year to bring its structural deficit down to 2.6% in 2017 (as part of an overall deficit target of 3.1% that year) and 2.1% in 2018 (as part of an overall deficit target of 2.2%). Achieving this will require a strong government able to press ahead with a reform program—something which currently looks rather a panacea. Spain’s ongoing failure to form a new government since the first inconclusive elections in December last year may not have impacted the current resilience of its GDP growth, but it certainly puts its fiscal compliance in jeopardy and prolongs the structural problems of its economy.

The agenda ahead is tight. Under the Spanish Constitution, 1 October is the deadline for the government to present its proposed 2017 budget to the Spanish Parliament. And under the EU’s rules, the European Commission must receive the budget (which must, of course, indicate how Spain will meet the required 2017 targets) by 15 October, or Spain faces a fine. Spain is still struggling to form a government after two elections in the last nine months and looks highly unlikely to have a new government in place by October that is able to push through a budget with the requisite reforms. Mariano Rajoy, who heads the current caretaker Popular Party (PP) government and is seeking to be sworn in as prime minister again, failed to garner sufficient support at both his first investiture attempt on 31 August (for which he would have needed an absolute majority in his favor) and his second attempt on 2 September (at which a simple majority would have sufficed). He might have another attempt at being appointed after the regional elections in the Basque Country and Galicia at the end of September if by chance the circumstances look more favorable by then, but otherwise Spain will probably be going to the polls again on 25 December, in what would be an unprecedented event. Even if a new government is formed by some miracle, it looks highly likely to be a weak one that might not manage to last long, let alone implement a convincing reform program.

Click on the image to enlarge

A closer look at the political turmoil

Spanish parties are simply not used to formal coalition politics at central government level, and don’t seem to be willing to adapt to the times in a hurry. Since 1982, either one or other of the two main parties, the conservative PP and the Socialist Party (PSOE), had always managed to form either a majority government or alternatively a strong minority government, in the latter case achieving working majorities by striking mutually beneficial deals with regionally-based nationalist parties—especially in the Basque Country and Catalonia—to secure their support in the Spanish Parliament (a classic case of “I’ll scratch your back if you scratch mine”). Neither party was prepared for two quite successful newcomers—the populist left-wing Podemos (“We Can”) and the centre-right Citizens party (C’s)—coming along to break up their longstanding dominance, at the same time as the pro-independence wave in Catalonia makes reviving the traditional mutual support arrangements with the Catalan nationalist parties impossible. 

The re-run elections held on 26 June have so far simply resulted in another stalemate. The PP won again and this time managed to increase its seats from 123 to 137, but it still fell far short of an absolute majority of seats (176) in Spain’s Parliament. The only plausible option for Rajoy in the circumstances is to form a minority government, since both the PSOE and C’s ruled out the possibility Rajoy had initially advocated of a “grand coalition” comprising the PP, the PSOE and potentially C’s too—an option which market participants had considered the most likely to deliver the structural reforms Spain needs, but which would not have provided the “government of change” that so many Spanish citizens voting for new parties seek. Rajoy had managed to reach an agreement with C’s (32 seats) for it to support his investiture attempts on 31 August and 2 September, as well as the commitment of the one MP from the Canary Coalition (CC) to do the same, but he failed to secure the 11 abstentions he would also have needed to be voted in on the second attempt with a simple majority. This would have required some of the PP’s arch rival the PSOE to abstain, and PSOE leader Pedro Sánchez remains absolutely adamant that his party will continue to vote against Rajoy instead. Sánchez is in a weak position since the PSOE declined at the re-run elections and is under pressure from Unidos Podemos (an electoral coalition between Podemos, the United Left party and some other smaller left-wing forces), so he is not in a strong position to try and form a government himself, but he does not want to lose yet more voters to Unidos Podemos by being seen to allow or to prop up a conservative government either. It looks like only an internal crisis within the PSOE could possibly change the circumstances.

There is an outside chance that Rajoy could attempt an investiture vote again after the Basque regional elections on 25 September, if it looks like he might be more likely to get the Basque Nationalist Party (PNV)—which has 5 seats in the Spanish Parliament—on board then, to continue to boost his numbers and up the pressure on the PSOE to deliver the final few abstentions. The only plausible circumstance in which the PP might stand any chance of getting the PNV on side is if, after the Basque regional elections, the PNV itself finds it needs the PP’s support to be able to govern in the Basque region. This is not totally beyond the realm of possibility, since the PNV is likely to win the Basque elections with a minority of votes and could struggle to form a working majority, especially if its traditional ally, the Basque Socialist party (PSE)—the Basque federation of the PSOE—declines as expected amid the rise of Podemos, which could potentially build alliances with other left-wing forces including the Basque anticapitalist and secessionist EH Bildu coalition of parties. Podemos is proving particularly attractive in the Basque Country (and Catalonia too) given that it is the first Spanish party to support the idea of self-determination for Spain’s constituent territories. Indeed, the PNV itself, a traditionally centre-right party which is struggling to attract the younger generations of Basque voters, is far from immune to the risk of losing some of its voters to the populist party: at the Spanish general election re-run in June, it was significant that Unidos Podemos beat the PNV not only in terms of votes but also seats in the PNV’s traditional Basque stronghold of the province of Vizcaya (one of the three provinces making up the Basque region). In these changing circumstances, the PNV could possibly end up needing the support of the PP in the Basque Parliament in order to govern, which would inevitably require it to return the favour in the Spanish Parliament, but this is only one of various possible outcomes at this stage and the PNV certainly looks highly unlikely to contemplate this option as anything but a very last resort.  

Summing up

Overall, the political impasse thus looks set to continue for the foreseeable future—though if we’re looking for silver linings, at least Spain’s nearly nine-month hiatus is still nowhere near Belgium’s 2011 record of 19 months without a government. Spain faces unprecedented challenges as it undergoes a fundamental political transformation stemming from the widespread disillusionment with existing political institutions and actors and the emergence of new players, not to mention the territorial crisis due to the Catalan challenge to the integrity of the Spanish state. While Spain’s GDP growth has remained remarkably resilient in recent quarters, there is no room for complacency. The country’s persistent structural deficit—which cannot be effectively addressed during the current political deadlock—still renders its economy particularly vulnerable to future changes in economic climate and puts the country on a collision path with Brussels over the required fiscal consolidation trajectory. 

Author: Caroline Gray, Senior Economics Editor, FocusEconomics

4/9/16: Some Points on Russian & European Policy Uncertainty Trends

With some positive (albeit very weak still) changes in the Russian macroeconomic news in recent months, it is worth looking at the evolution of trends in Russian policy uncertainty, as measured by the http://www.policyuncertainty.com/ data.

Here is an updated (through August 2016) chart comparing news-based indices of policy uncertainty in Russia and the EU

Note, series above are rebased to the same starting point for the EU and Russia (to 1994 annual average) to make them compatible.

Things of note:

• Russian policy uncertainty continues to trend below that of the EU
• The above conclusion is also confirmed in raw data 3mo averages and 3mo exponential moving averages
• This is nothing new, as general policy uncertainty has been systemically lower in Russia than in Europe since the peak of the Russian Default crisis of the late 1990s, with exception for two episodes: brief period in 2006-2007 - the starting point of Russian-Georgian trade and migration pressures; and 2014-2015 period - marked by first economic slowdown in the early 2014, followed by the Russian-Ukrainian conflict and the Ruble crisis
• Generally, the EU continues to show growing trend divergence with Russia when it comes to policy uncertainty, despite the more moderation in the underlying series since the end of the latest spike caused by the Greek crisis earlier this year (IMF participation and Tranche 2 disbursement)

It is worth noting that, despite a rise in the U.S. uncertainty index due to the ongoing election cycle, the U.S. comparatives are similar to those of Russia, as opposed to the EU. 

18/7/16: Euromoney on Brexit

My comment for Euromoney on the topic of Brexit impact on UK sovereign credit risks: http://www.euromoney.com/Article/3563119/Country-risk-Experts-say-UK-economy-will-quickly-recover-from-Brexit-shock.html.

18/6/16: Brexit, U.S. Elections & State of Discontent

My interview with ItalVideoNews’ Concetto La Malfa about Brexit and the US Elections:
https://alternativeeconomics.co/tubeline/#/view/PuaUax7A1sc.

17/6/16: Forget Brexit. Think EUrisis

Swedish research institute, Timbro, published their report covering the rise of political populism in Europe. And it makes for a sobering reading.

Quoting from the report:

“Never before have populist parties had as strong support throughout Europe as they do today. On average a fifth of all European voters now vote for a left-wing or right-wing populist party. The voter demand for populism has increased steadily since the millennium shift all across Europe.”

Personally, I don’t think this is reflective of the voter demand for populism, but rather lack of supply of pragmatic voter-representing leadership anywhere near the statist political Centre. After decades of devolution of ethics and decision-making to narrow groups or sub-strata of technocrats - a process embodied by the EU systems, but also present at the national levels - European voters no longer see a tangible connection between themselves (the governed) and those who lead them (the governors). The Global Financial Crisis and subsequent Great Recession, accompanied by the Sovereign Debt Crisis and culminating (to-date) in the Refugees Crisis, all have exposed the cartel-like nature of the corporatist systems in Europe (and increasingly also outside Europe, including the U.S.). Modern media spread the information like forest fire spreads ambers, resulting in amplified rend toward discontent.

Again, per Timbro:
“No single country is clearly going against the stream. 2015 was the most successful year so far for populist parties and consistent polls show that right-wing populist parties have grown significantly as a result of the 2015 refugee crisis. So far this year left-wing or right-wing populist parties have been successful in parliamentary elections in Slovakia, Ireland, Serbia, and Cyprus, in a presidential election in Austria and in regional elections in Germany. A growing number of populist parties are also succeeding in translating voter demand into political influence. Today, populist parties are represented in the governments of nine European countries and act as parliamentary support in another two.”

Net: “…one third of the governments of Europe are constituted by or dependent on populist parties.”

And the direction of this trend toward greater populism in European politics is quite astonishing. Per Timbro, “discussions on populism too often focus only on rightwing populism. Practically everything written on populism, at least outside Southern Europe, is almost entirely concerned with right-wing populism. Within the political sciences the study of right-wing populist parties has even become its own field of study, while studies on leftwing populism are rare.”

This skew in reporting and analysis, however, is false: while “…it is the right-wing populism that has grown most notably, particularly in Scandinavia and Northern Europe. However, in Southern Europe the situation is the opposite. If the goal is to safeguard the core values and institutions of liberal democracy we need a parallel focus on those who challenge it, regardless of whether they come from the right or the left. It is seriously worrying that seven per cent of the population in Greece vote for
a Nazi party, but it is also worrying that five per cent vote for a Stalinist one. The second aim of this report is therefore to present an overview of the threat of populism, both right-wing and left-wing, against liberal democracy.”

Here are some trends:

The chart above shows that authoritarian left politics are showing a strong trend up from 2010 through 2014, with some moderation in 2015, which might be driven more by the electoral cycle, rather than by a potential change in the trend. The moderation in 2015, however, is not present in data for right wing authoritarianism:

So total support for authoritarian parties is up, a trend present since 2000 and reflective of the timing that is more consistent with the introduction of the euro and subsequent EU enlargements. An entirely new stage of increase in authoritarianism tendencies was recorded in 2015 compared to 2014.

Save for the correction downward in 2007-2009 period, authoritarian parties have been on an increasing power trend since roughly 1990, with renewed upward momentum from 1999.

You can read the full study and reference the study definitions and methodologies here: http://timbro.se/sites/timbro.se/files/files/reports/4_rapport_populismindex_eng_0.pdf.


What we are witnessing in the above trends is continuation of a long-running theme: the backlash by the voters, increasingly of younger demographics, against the status quo regime of narrow elites. Yes, this reality does coincide with economic inequality debates and with economic disruptions that made life of tens of millions of Europeans less palatable than before. But no, this is not a reaction to the economic crisis. Rather, it is a reaction to the social, ideological and ethical vacuum that is fully consistent with the technocratic system of governance, where values are being displaced by legal and regulatory rules, and where engineered socio-economic system become more stressed and more fragile as risks mount due to the technocratic obsession with… well… technocracy as a solution for every ill.

While the EU has been navel gazing about the need for addressing the democratic deficit, the disease of corporatism has spread so extensively that simply re-jigging existent institutions (giving more power to the EU Parliament and/or increasing member states’ voice in decision making and/or imposing robust checks and balances on the Commission, the Eurogroup and the Council) at this stage will amount to nothing more than applying plasters to the through-the-abdomen gunshot wound. Brexit or not, the EU is rapidly heading for the point of no return, where any reforms, no matter how structurally sound they might be, will not be enough to reverse the electoral momentum.

For those of us, who do think united Europe can be, at least in theory, a good thing, time is to wake up. Now. And not to oppose Brexit and similar movements, but to design a mechanism to prevent them by re-enfranchising real people into political decision making institutions.

23/1/16: Financial Globalisation and Tradeoffs Under Common Currency

A paper I recently cited in a research project for the European Parliament that is worth reading: "Trilemmas and Tradeoffs: Living with Financial Globalization" by Maurice Obstfeld. Some of my research on the matter, yet to be published (once the EU Parliament group clears it) is covered here: http://trueeconomics.blogspot.com/2016/01/19116-after-crisis-is-there-light-at.html and see slides 5-8 here: http://trueeconomics.blogspot.com/2015/09/17915-predict-conference-data-analytics.html.

This is one of the core papers one simply must be acquainted with if you are to begin understanding the web of contradictions inherent in the structure of modern financial flows (in the case of Obstfeld's paper, these are linked to the Emerging Markets, but much of it also applies to the euro).


The paper "evaluates the capacity of emerging market economies (EMEs) to moderate the domestic impact of global financial and monetary forces through their own monetary policies. Those EMEs able to exploit a flexible exchange rate are far better positioned than those that devote monetary policy to fixing the rate – a reflection of the classical monetary policy trilemma.” The problem, as Obstfeld correctly notes, is that in modern environment, “exchange rate changes alone do not insulate economies from foreign financial and monetary shocks. While potentially a potent source of economic benefits, financial globalization does have a downside for economic management. It worsens the tradeoffs monetary policy faces in navigating among multiple domestic objectives.”

Per Obstfeld, the knock on effect is that “This drawback of globalization raises the marginal value of additional tools of macroeconomic and financial policy. Unfortunately, the availability of such tools is constrained by a financial policy trilemma, [which] posits the incompatibility of national responsibility for financial policy, international financial integration, and financial stability.”

This, of course, is quite interesting. Value of own (independent) tools beyond flexible exchange rates rises with globalisation, which normally incentivises more (not less) activism and interference from domestic (or regional - in the case of monetary integration) regulators, supervisors and enforcers. In other words, Central Banks and Fin Regs grow in size (swelling to design, fulfil and enforce new ‘functions’). And all of this expensive activity take place amidst the environment where none of can lead to effective and tangible outcomes, because of the presence of the second trilemma: in a globalised world, national regulators are a waste of space (ok, we can put it more politically correctly: they are highly ineffective).

Give this another view from this argument: ‘national’ above is not the same as sovereign. Instead, it is ‘national’ per currency definition. So ECB is ‘national’ in these terms. Now, recall, that in recent years we have been assured that we’ve learned lessons of the recent crisis, and having learned them, we created a new, very big, very expensive and very intrusive tier of supervision and regulation - the tier of ECB and centralised European Banking regulatory framework of European Banking Union (EBU). But, wait, per Obstfeld - that means preciously little, folks, as long as Europe remains integrated into globalised financial markets.

Obstfeld’s paper actually is a middle ground, believe it or not, in the wider debate. As noted by Obstfeld: “My argument that independent monetary policy is feasible for financially open EMEs, but limited in what it can achieve, takes a middle ground between more extreme positions in the debate about monetary independence in open economies. On one side, Woodford (2010, p. 14) concludes: “I find it difficult to construct scenarios under which globalization would interfere in any substantial way with the ability of domestic monetary policy to maintain control over the dynamics of inflation.” His pre-GFC analysis, however, leaves aside financial-market imperfections and views inflation targeting as the only objective of monetary control. On the other side, Rey (2013) argues that the monetary trilemma really is a dilemma, because EMEs can exercise no monetary autonomy from United States policy (or the global financial cycle) unless they impose capital controls.”

Now, set aside again the whole malarky about Emerging Markets there… and think back to ECB… If Rey is correct, ECB can only assure functioning of EBU by either abandoning rate policy independence or by abandoning global integration (imposing de facto or de sure capital controls).

Of course, in a way, bondholders’ bail-ins rules and depositors bail-ins rules and practices - the very sort of things the EBU and ECB’s leadership rest so far - are a form of capital controls. Extreme form. So may be we are on that road to ‘resolving trilemmas’ already?..

Have a nice day... and happy banking...