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

My article on the statistical mishaps in the U.S. and Irish economic data for the Manning Financial: https://cfc.ie/2019/06/11/economic-outlook-by-dr-constantin-gurdgiev/.

17/1/19: Gonzo: Deplatforming the Mensheviks

My contribution to Max Keiser and Stacy Herbert’s new documentary series ‘Gonzo’ https://www.youtube.com/watch?v=lyTWT7jpCyg starting at about 14:50.

17/1/19: 2019 Outlook

My post on economic outlook for 2019 is now available from the Focus Economics: https://www.focus-economics.com/blog/constantin-gurdgiev-thoughts-on-the-global-economy-for-2019

1/8/18: Household Debt and the Cycle

So far, lack of huge uplift in household debt in the U.S. has been one positive in the current business cycle. Until, that is, one looks at the underlying figures in relevant comparative. Here is the chart from FactSet on the topic:

What does this tell us? A lot:

1. Nominal levels of household debt are up above the pre-crisis peak. 
2. Leverage levels (debt to household income ratio) is at 17 years low.
3. Mortgage debt is increasing, and is approaching its pre-crisis peak: mortgage debt stood at $10.1 trillion in 1Q 2018, just 5.7% below the 2008 peak. 
4. Consumer credit has been growing steadily throughout the 'recovery' period, averaging annual growth of 5.2% since 2010, bringing total consumer debt to an all-time high of nearly $14 trillion in early 2018. 
5. While leverage has stabilized at around 95%, down from the 124% at the pre-crisis peak, current leverage ratio is still well-above the 58% average for 1946-1999 period.
6. The above conditions are set against the environment of rising cost of debt carry (end of QE and rising interest rates). In simple math terms, 1% hike in interest rates will require (using 95% leverage ratio and 25-30% upper marginal tax brackets) an uplift of 1.19-1.24% in pre-tax income for an average family to sustain existent debt carry costs. 

The notion that the U.S. households are financially non-vulnerable to the cyclical changes in debt costs, employment and asset markets conditions is a stretch, even though the current levels of risks in leverage ratios are not exactly screaming a massive blow-out. Just as the U.S. Government has low levels of slack in the system to deal with any forthcoming shocks, the U.S. households have little cushion on assets side and on income / savings balances to absorb any significant changes in the economy.

As we say in risk management, the system is tightly coupled and highly complex. Which is a prescription for a disaster. 

17/5/18: U.S. Labour Markets and the Trump Administration Record

The Global Macro Monitor have published an exhaustive study of the U.S. labour market trends over the first 15-16 months of the President Trump's tenure. The  post is long, brilliantly detailed, and empirically and intuitively flawless (yeah, I know, I don't think I ever used this descriptor of an economics research piece before). So read it in full here: https://macromon.wordpress.com/2018/05/15/deconstructing-the-u-s-jobs-market/.

Top line conclusions are:

• Comparing the "first 15 [monthly] payroll reports of the Trump administration to the last 15 of the Obama administration",  "as of the end of April 2018, the Trump economy has generated 2.7 million jobs versus 3.1 million in Obama’s economy, or 373k fewer workers added to payrolls"
• Growth in employment was of lower quality during the Trump tenure to-date too: "the private sector has also added 124k fewer jobs in the Trump economy. Net job creation in the government sector under President Trump is relatively flat." The latter metric puts a boot into the arguments that President Trump is a fiscal conservative aiming to reduce public sector weight in the economy. 
• Earnings comparatives are also wobbly: "There is relatively little difference in the growth of average hourly earnings in the Trump and Obama employment reports." Which is more striking when one recognises that the Trump Administration inherited a tightening labour market, in which, normally, one would expect more wages inflation.
• "Job creation in President Trump’s economy outperforms the Obama economy in 5 of the 13 private sector industry groups, most significantly in manufacturing and mining", but "Almost all of the relative outperformance in mining is the result of the reversal in oil prices. Coal mining and auto manufacturing employment has not recovered". In other words, even in the core industries targeted by the Administration for growth, the Administration efforts have little to do with any recovery in the mining sector./ 
• Cyclically, the authors note that "The results are surprising as GDP growth was significantly higher during the Trump payroll reports, averaging of 2.53 percent on an annual basis, versus 1.56 percent during the last five quarters of the previous administration". However, this also means that current jobs creation is coming toward the end of the expansion cycle, and can be expected to be lower due to constraints of labour supply.
• Key observation, from macroeconomic environment point of view is that "the economy continues to reward capital over labor disproportionately". There is a fundamental problem with this development. The U.S. labour markets flexibility represents a net positive for the private sector productivity in the short run. However, as capital and technological deepening of production processes progresses, the very same flexibility leads to lower degree of upskilling and re-training of the existent workforce. This is a huge source of risk and uncertainty for the U.S. economy forward in terms of longer run potential growth and productivity growth.

In short, read the original post - it is packed with highly informative and very important data and observations!

Source: https://macromon.wordpress.com/2018/05/15/deconstructing-the-u-s-jobs-market/

27/4/18: The Goldilocks Economy of State Policies

My column for the current issue of the Cayman Financial Review is out: http://www.caymanfinancialreview.com/2018/04/19/the-goldilocks-economy-of-state-policies/.

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

My article on yesterday's Fed meeting is now up on Business Post page: https://www.businesspost.ie/opinion/fed-boldly-going-going-412191.

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

My key takeaway from the Fed meeting:

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

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

14/9/17: MarketWatch Op-Ed: U.S. Economy

My op-ed on the state of the U.S. Household Incomes is available on MarketWatch: http://www.marketwatch.com/story/the-myths-of-recovery-why-american-households-arent-better-off-2017-09-13.

12/9/17: U.S. Median Household Income: The Myths of Recovery

The U.S. Census Bureau published some data on household incomes today. Off the top, the figures are encouraging:

The excitement of some analysts reporting these as a major breakthrough along the trend is understandable, notionally, 2016 U.S. median household income has finally surpassed the previous peak, recorded in 1999. Back then, median household income (adjusted for official inflation) stood at USD58,665 and at the end of 2016 it registered USD59,039. Note: italics denote points of importance, relevant to the analysis below.

As this chart from Marketwatch (http://www.marketwatch.com/story/poverty-rate-drops-as-median-income-climbs-over-3-2017-09-12) clearly illustrates, notionally, we are in the ‘new historical peak’ territory:

Alas, notional is not the same as tangible. And here are the reason why the tangible matters probably more than the notional:

1) Consider the following simple timing observation: real incomes took 17 years to recover from the 2000-2012 collapse. And the Great Recession, officially, accounted for only USD 4,031 in total decline of the total peak-to-trough drop of USD 5,334. Which puts things into a different framework altogether: the stagnation of real incomes from 1999 through today is structural, not cyclical. The ‘good news’ today are really of little consolation for people who endured almost two decades of zero growth in real incomes: their life-cycle incomes, pensions, wealth are permanently damaged and cannot be repaired within their lifetimes.

2) The Census Bureau data shows that bulk of the gains in real income in 2016 has been down to one factor: higher employment. In other words, hours worked rose, but wages did not. American median householders are working harder at more jobs to earn an increase in wages. Which would be ok, were it not down to the fact that working harder means higher expenditure on income-related necessities, such as commuting costs, childcare costs, costs for caring for the dependents, etc. In other words, to earn that extra income, households today have to spend more money than they did back in the 1990s. Now, I don’t know about you, but for my household, if we have to spend more money to earn more money, I would be looking at net increases from that spending, not gross. Census Bureau does not adjust for this. There is an added caveat to this: caring for children and dependents has become excruciatingly more expensive over the years, since 1999. Inflation figures reflect that, but real income deflator takes the average/median basket of consumers in calculating inflation adjustment. However, households gaining new additional jobs are not average/median households to begin with. And most certainly not in 2016, when labour markets were tight. In other words, median household today is more impacted by higher inflation costs pertaining to necessary non-discretionary expenditures than median household in 1999. Without adjusting for this, notional Census Bureau figures misstate (to the upside) current income gains.

3) In 1999, the Census Bureau data on household incomes used different methodology than it does today. The methodology changed in 2013, at which point in time, the Census Bureau estimated that 2013 median income was about USD1,700 higher based on new methodology than under pre-2013 methodology. Since then, we had no updates on this adjustment, so the gap could have actually increased. Today’s number show that median household income at the end of 2016 was only USD374 higher than in 1999. In other words, it was most likely around USD1,330 or so lower not higher, under pre-2013 methodology. Taking a very simplistic (most likely inaccurate, but somewhat indicative) adjustment for 2013-pre-post differences in methodologies, current 2016 reading is roughly 1.6 percent lower than 2007 local peak, and roughly 2.3 percent lower than 1999-2000 level.

4) Costs and taxes do matter, but they do not figure in the Census Bureau statistic. Quite frankly, it is idiotic to assume that gross median income matters to anyone. What matters is after-tax income net of the cost of necessities required to earn that income. Now, consider a simple fact: in 1999, majority of jobs in the U.S. were normal working hours contracts. Today, huge number are zero hours and GIG-economy jobs. The former implied regular and often subsidised demand for transport, childcare, food associated with work etc. The latter implies irregular (including peak hours) transport, childcare, food and other services demand. The former was cheaper. The latter is costlier. To earn the same dollar in traditional employment is not the same as to earn a dollar in the GIG-economy. Worse, taxes are asymmetric across two types of jobs too. GIG-economy adds to this problem yet another dimension. Many GIG-economy earners (e.g. Uber drivers, delivery & messenger services workers, or AirBnB hosts) sue income to purchase assets they use in generating income. These are not reflected in the Census Bureau earnings, as the official figures do not net out cost of employment.

5) Finally, related to the above, there is higher degree of volatility in job-related earnings today than in 1999. And there is longer duration of unemployment spells in today’s economy than in the 1990s. Which means that risk-adjusted dollar earned today requires more unadjusted dollars earned than in 1999. Guess what: Census Bureau statistic shows not-risk-adjusted earnings. You might think of this as an ‘academic’ argument, but we routinely accept (require) risk-adjusted returns in analyzing investment prospects. Why do we ignore tangible risk costs in labor income?

Key point here is that any direct comparison between 1999 and 2016 in terms of median incomes is problematic at best. It is problematic in technical terms (methodological changes and CPI deflator changes), and it is problematic in incidence terms (composition of work earnings, risks, incidences of costs and taxes). My advice: don’t ever do it without thinking about all important caveats.

Materially, U.S. households' disposable risk-adjusted incomes are lower today than they were in 1999. That explains why American households are drowning in debt: the demand for income vastly exceeds the supply of income, even as official median household size shrinks and cost of housing is being deflated by children staying in parents homes for decades after college. The rosy times are not upon us, folks.

16/8/17: Year Eight of the Great American Recovery: Household Debt

U.S. data for household debt for 2Q 2017 is out at last, and the likes of Reuters and there best of the official business media are shouting over each other about the ‘record debt levels’ warnings. As if the ‘record debt levels’ is something so refreshingly new, that no one noticed them in 1Q 2017.

So with that much hoopla in your favourite media pages, what’s the data really telling us?

Quite a bit, folks. Quite a bit.

Let’s start from the top:

Debt levels are up. Almost +4.5% y/y. All debt categories are up, save for HE Revolving debt (down 5.44% y/y). Increases are led by Auto Loans (+7.89% y/y) and Credit Cards (+7.54%). High growth is also in Student Loans (+6.75%). Mortgages debt is rising much slower, as consistent with lack of purchasing power amongst the younger generation of buyers.

As you know, I look at this debt from another perspective, slightly different from the rest of the media pack. That is, I am interested in what is happening with assets-backed debt and asset-free debt. So here it is:

Yes, debt is up again. Mortgages debt share of total household debt has shrunk (it is now at 67.7%) and unsecured debt share is up (32.3%). Unsecured debt was $3.925 trillion in 2016 Q2 and it is now $4.148 trillion. Why this matters? Because although cars can be repossessed and student loans are non-defaultable even in bankruptcy, in reality, good luck collecting many quarters on that debt. Housing debt is different, because with recent lending being a little less mad than in 2004-2007, there is more equity in the system so repossessions can at least recover meaningful amounts of loans. So here’s the thing: low recovery debt is booming. While mortgages debt is still some $600 billion odd below the pre-crisis peak levels.

On the surface, mortgages originations are improving in terms of credit scores. In practice, of course, credit scores are superficially being inflated by all the debt being taken out. Yes, that’s the perverse nature of the American credit ratings system: if you have zero debt, your credit rating is shit, if you are drowning in debt, you are rocking…

Still, here is the kicker: mortgages credit ratings at origination are getting slightly stronger. Total debt written to those with a credit score <660 2016.="" 2016="" 2017="" 2q.="" 2q="" also="" auto="" billion="" buyers="" class="Apple-converted-space" credit="" down="" fell="" from="" good="" improving:="" in="" is="" issuance="" loans="" news.="" origination="" quality="" score="" span="" sub-660="" to="" which=""> 

Bad news:

Severely Derogatory and 120+ delinquent loans are still accounting for 3% of total loans, same as in 2Q 2016 and well above the pre-crisis average of 2.1%. Total share of delinquent loans is at 4.77%, slightly below 1Q 2017 (4.83%) and on par with 4.79% a year ago. So little change in delinquencies as a result of improving credit standards at origination, thus. Which suggests that improving standards are at least in part… err… superficial.

And things are not getting better across majority of categories of delinquent loans:

As the above clearly shows, transition from lesser delinquency to serious delinquency is up for Credit Cards, Student Loans and Auto Loans. And confirming that the problem of reading Credit Scores as improvement in quality of borrowers are the figures for foreclosures and bankruptcies. These stood at 308,840 households in 2Q 2017, up on 294,100 in 1Q 2017 and on 307,260 in 2Q 2016. Now, give it a thought: over the crisis period, many new mortgages issued went to households with better credit ratings, against properties with lower prices that appreciated since issuance, and under the covenants involving lower LTVs. In other words, we should not be seeing rising foreclosures, because voluntary sales should have been more sufficient to cover the outstanding amounts on loans. And that would be especially true, were credit quality of borrowing households improving. In other words, how does one get better credit scores of the borrowers, rising property prices, stricter lending controls AND simultaneously rising foreclosures?

Reinforcing this is the data on third party debt collections: in 2Q 2017, 12.5% of all consumers had outstanding debt collection action against them, virtually flat on 2Q 2016 figure of 12.6%. 

In simple terms, in this Great Recovery Year Eight, one in eight Americans are so far into debt, they are getting debt collectors visits and phone calls. And as a proportion of consumers facing debt collection action stagnates, their cumulative debts subject to collection are rising. 

Things are really going MAGA all around American households, just in time for the Fed to hike cost of credit (and thus tank credit affordability) some more. 

14/6/17: Unwinding the Mess: Fed's Road Map to QunE

As promised in the previous post, a quick update on Fed’s latest guidance regarding its plans to unwind the $4.5 trillion sized balance sheet, to the Quantitative un-Easing...

First, the size and the composition of the problem:

So, as noted in the post here: http://trueeconomics.blogspot.com/2017/06/13617-unwinding-mess-ecb-vs-fed.html, the Fed is aiming to gradually unwind the size of its assets exposures on both, the U.S. Treasuries and MBS (mortgage-backed securities). This is a tricky task, because simply dumping both asset classes into the markets (aka, selling them to investors) risks pushing yields on Government debt up and value of Government bonds down, as well as the value of MBS assets down. The problem with this is that all of these assets are systemically important to… err… systemically important financial institutions (banks, pension funds, investment funds and insurance companies).

Should yields on Government debt explode due to the Fed selling, the U.S. Government will simultaneously: 1) pay more on its debt; and 2) get less of rebates from the Fed (the returned payments on debt held by the Fed). This would be ugly. Uglier yet, the value of these bonds will fall, creating pressure on the assets valuations for assets held by banks, investment funds, insurance companies and pensions funds. In other words, these institutions will have to accumulate more assets to cover their capital cushions and/or sustain their funds valuations. Or they will have to reduce lending and provision of payouts.

Should MBS assets decline in value, there will be an assets write down for private sector financial institutions holding them. The result will be the same as above: less lending, more expensive credit and lower profit margins.

With this in mind, today’s Fed announcement is an interesting one. The FOMC “currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated,” according to today’s statement. And the FOMC provides some guidance to this normalization program:

Instead of dumping assets into the market, the Fed will try to gradually shrink the balance sheet by ‘rolling off’ a fixed amount of assets every month. At the start, the Fed will ‘roll off’ $10 billion a month, split between $6 billion from Treasuries and $4 billion from MBS. Three months later, the numbers will rise to $20 billion per month: $12 billion for Treasuries and $8 billion for MBS. Subsequently, ‘roll-offs’ will rise $10 billion per month ever three months ($6 billion for Treasuries and $4 billion for MBS). The ‘roll-off’ will be capped once it reaches $30 billion for Treasuries and $20 billion for MBS.

This modestly-paced plan suggests that the ‘roll off’ will concentrate on non-replacement of maturing instruments, rather than on direct sales of existent instruments.

What we do not know: 1) when the ‘roll off’ process will begin, and 2) when will it stop (in other words, what is the target level of both assets on Fed’s balance sheet in the long run. But the rest is pretty much consistent with my view presented here: http://trueeconomics.blogspot.com/2017/06/13617-unwinding-mess-ecb-vs-fed.html.




PS: A neat summary of Fed decisions and votes here: http://fingfx.thomsonreuters.com/gfx/rngs/USA-FED/010030ZL253/

14/6/17: The Fed: Bravely Going Somewhere Amidst Rising Uncertainty

Predictably (in line with the median investors’ outlook) the Fed raised its base rate and provided more guidance on their plans to deleverage the Fed’s balance sheet (more on the latter in a subsequent post). The moves came against a revision of short term forecast for inflation (inflationary expectations moved down) and medium turn sustainable (or neutral) rate of unemployment (unemployment target moved down); both targets suggesting the Fed could have paused rate increase.

Rate hike was modest: the Federal Open Market Committee (FOMC) increased its benchmark target by a quarter point, so the new rate range will be 1 percent to 1.25 percent, against the previous 0.91 percent. This marks the third rate hike in 6 months and the Fed signalled that it is on track to hike rates again before the end of the year (with likely date for the next hike in September). The forecast for 2018 is for another 75 basis points rise in rates, unchanged on March forecast.

Interestingly, the Fed statement highlights that inflation (short term expectations) remains subdued. “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term,” the FOMC statement said. This changes the tack on previous months’ statements when the Fed described inflationary outlook as “broadly close” to target. Data released earlier today showed core consumer price inflation (ex-food and energy) slowed in May for the fourth straight month to 1.7 percent y-o-y. This is below the Fed target rate of 2 percent and suggests that monetary policy is currently running countercyclical to inflation. On expectations side, FOMC lowered its median forecast for inflation to 1.6 percent in 2017, from 1.9 percent forecast published in March. The FOMC left its forecasts for 2018 and 2019 unchanged at 2 percent.

The Fed, therefore, sees inflation slump to be temporary, which prompted U.S. 2 year yields to move sharply up:

Source: @Schuldensuehner

Which means that today’s hike was not about inflationary pressures, but rather unemployment, which dropped to a 16-year low at 4.3 percent in May.

As labour markets continue to overheat (we are now at 4.2 percent forecast 2017 unemployment and with over 1 million vacancies postings in excess of jobs seekers, suggesting a substantial and rising gap between the low quality of remaining skills on offer and the demand for higher skills), the Fed dropped its estimate of the neutral rate of unemployment (or, in common terms, the estimated minimum level of unemployment that can be sustained without a major uptick in wages inflation), from 4.7 percent in march to 4.6 percent today. At which point, it is worth noting the surreality of this number: the estimate has nothing to do with realistic balancing out of skills supply and demand, and is mechanically adjusted to match evolving balance between actual unemployment trends and inflation trends. In other words, the neutral rate of unemployment is Fed’s voodoo metric for justifying anything. How do I know this? Ok, consider the following forecasts & outlook figures from FOMC:

• 2017 GDP growth at 2.2% compared to 2.1%, unemployment rate at 4.2% compared to 4.5% prior, and core inflation at 2.0%, same as prior. So growth outlook is, basically, stable, but unemployment is dropping and inflation not budging. 
• 2018 GDP growth unchanged at 2.1%, inflation unchanged at 2.0%, and unemployment 4.2% vs 4.5% prior. So unemployment drops significantly, but GDP drops too and inflation stays put.
• 2019 GDP 1.9% vs 1.9% prior, unemployment 4.2% vs 4.5% prior and inflation 2.0% vs 2.0% prior. Same story as in 2018. 

In other words, it no longer matters what the Fed forecasts for growth and unemployment, inflation stays put; and it doesn’t matter what it forecast for growth and inflation, unemployment drops, and you can stop worrying about joint forecast for inflation and unemployment, growth remains remarkably stable. It’s the New Normal of Alan Greenspan Redux.


The FOMC next meets in six weeks, on July 25-26. Here is the dots chart of Fed’s expectations on benchmark rate compared to previous:

Source: https://www.bloomberg.com/graphics/fomc-dot-plot/

The key takeaway from all of this is that the Fed is currently at a crossroads: the uncertainty about key economic indicators remains elevated, as the Fed is compressing 2017-2018 guidance on rates. In other words, more certainty signalled by the Fed runs against more uncertainty signalled by the economy. Go figure…

6/6/17: Trump, Paris, Climate: The Problem is Bigger than COP21

U.S. withdrawal from Paris Climate Accord has been described by various policymakers, analysts and journalists around the world as a travesty, betrayal of the environment, and the surrender of the U.S. leadership (from undefinable 'global leadership' to historically incorrect 'environmental leadership'). In reality, it is none of the above, despite the fact that it does not bode well for the future of environmental policies worldwide and for the environment in general.

Paris Agreement: Taking an Unnecessary 'Exit' Route

The reasons for why the U.S. 'exit' from Paris deal is more rhetorical than tangible are numerous, but here are some major ones.

1) Paris COP21 Agreement was never ratified by the U.S. so, technically-speaking, the Trump Administration has managed to 'exit' what the U.S. has not 'entered' into in the first place. Let me explain, briefly: the Paris climate agreement (the Paris COP21 Agreement) was "adopted" via a Presidential executive order on September 2016. This raised a range of questions - at the time barely-covered by the media - as to the validity of such an order. Unlike normal executive orders, the Treaty adoption was committing the U.S. to an agreement with a four-year breaking clause period, thus de facto binding the one-over Presidential Administration to Obama Administration order. In contrast to the U.S., all other signatories to the agreement required ratification by their legislatures or via other constitutionally-stipulated procedures. The U.S. was unique, to-date, in not seeking domestic ratification. 

A constitutional position - that the Paris treaty should not be treated as an ordinary 'executive order' agreement was expressed by some legal scholars who view the Paris agreement as more than a simple executive agreement. Bodansky (2016) points to the fact that COP21 adoption via an executive order belongs to a category of commitments that "have a long, heretofore undiscovered [constitutional] pedigree." In other words, the actual act of 'adoption' of the Paris agreement by the U.S. can be legally shaky and it is shaky especially given that there is clearly not a chance that the COP21 can be ratified by the current Congress. 

As the result, Trump Administration did not claw back on U.S. international commitment, but it did renege on President Obama's international commitment. The U.S. is not equivalent to President Obama, unless we get comfortable with an idea of Presidents residing above the Constitution. Which, given the current White House resident, might be the case of 'watch what you wish for'.

2) President Trump has committed to withdrawing from the agreement some time in late 2020, and potentially, given the questionable constitutionality of the agreement validity in the first place, some time after that or never. The Paris Agreement allows withdrawal only following a four year delay period, after the agreement coming into power. If the U.S. adoption of the agreement requires approval by the Congress, the actual date of the treaty coming into power can be set as the date of such an approval. And the four year delay period will have to start from that date. I am not a legal scholar, so I am speculating on this, but it might just be the case that the U.S. might technically remain within Paris agreement past 2020 election and into the next Administration. 

3) Now, consider the gargantuan misrepresentation of the nature of the Paris agreement by the Trump Administration. The President made repeated statements that Paris agreement imposes severe burdens on the U.S. economy, with potential for costing some 2.7 million American jobs. In reality, the agreement is a non-binding and non-enforceable commitment. If the U.S. faced with severe damages to its economy from Paris commitments, instead of withdrawing from the accord, the Washington could simply reduce promised deliverables and let its emissions reduction targets lapse. There would have been no repercussions for the U.S., beyond bad PR (the same bad PR that is already forthcoming). In fact, one of the reasons that Nicaragua (one of only two non-signatories, alongside Syria) refused to join the agreement was that the SOP21 lacked meaningful enforcement and had no commitment obligations with respect to targets. 

In other words, Trump Administration 'exited' an accord that had, materially, no legally binding power to change anything. Which also flies in the face of the President claiming he can re-negotiate U.S. position in the Paris agreement. Why would you need to renegotiate that which can be changed unilaterally at will?

As the Paris Agreement is a non-binding and non-enforceable, calling the U.S. participation in it an example of U.S. 'leadership' is nonsense. Calling the U.S. withdrawal from it a 'tragedy' is a case of hysterical overreaction. And, equally, calling it 'draconian' in terms of its potential impact on the U.S. is pure demagoguery. 

Policies, not Non-binding Treaties, Matter

What really is of concern here is not the U.S. participation or non-participation in the Paris COP21 Agreement, but the Administration's policies on the environment, including matters relating to President Trump's desire to 'resurrect' the U.S. coal industry, and his push for more oil and gas production, as well as his attitudes to the EPA, the plans to open up commercial and mining / extraction development on protected Federal lands, etc, etc, etc. 

These policies are worth criticising and fretting about. COP21 is only tangentially material to them. 

In fact, President Trump's obsession with making 'coal great again' is worrying not only from environmental perspective, but also from economic development perspective, and it exemplifies the Administration's bizarre view of the U.S. economy. For a number of reasons, which I don't have room to discuss here at length, but are worth mentioning in passing. 

Much of the decline in coal's fortunes from 2012 on is accounted for by non-environmental policy factors. As the report shows, growth in energy supply from natural gas accounted for 49 percent of the total market share loss accruing to coal. Further 26 percent of coal's decline was down to a drop in overall demand, and 18 percent was accounted for by renewables. Only 3-5 percent of coal's market share decline was down to Obama Administration's environmental regulations.

Someone has told President Trump a porky: clawing back on Obama's environmental regulations would have saved, at most, only 2,900 coal miners jobs out of 58,000 lost during the 2012-2016 period. Though even that figure is highly questionable, as research linked above suggests that the true number of jobs saved would be closer to 1,700. 

Here's a chart from the above-linked study estimating jobs impact of the President Trump's policies favouring coal:

The U.S. leadership on the environment comes through with all its shoddy 'glory' in coal's fortunes history. High coal prices in the first decade of the century were driven by the demand for energy from China and, arguably, by sky high global price of oil. As Chinese demand fell, starting, in 2011, the U.S. environmental leadership turned out to have little to do with globally collapsing demand for coal and coal prices or with an ongoing substitution away from more CO2-intensive fossil fuels in the global energy production mix. Active Chinese shift away from coal to other sources of energy plus decline in the rate of growth on Chinese energy demand drove down global prices, accounting for almost half of the entire decline in the U.S. (and global) coal's fortunes.

In simple terms, coal hardly makes any sense as a target for either investment, or jobs creation, or economic value added creation. Not because the U.S. is leading the world on the environmental policies, but because China is shifting its energy mix toward cleaner alternatives. Worse, improving coal demand outlook makes even less sense for an Administration that actively promotes more gas production and exports. President Trump is missing the main point of changing global economy: no one wants coal anymore. Nor do many want more supplies of oil and gas, as clearly evidenced by collapse in worldwide prices of these sources of energy. 

Another point shows that the alleged U.S. leadership on environmental policies has been bogus at best, even during the 'environmentally conscious' Obama era. The very reason why the COP21 Agreement was left without an enforceable commitment mechanism and with a unilaterally adjustable targets is... the U.S. push for these features of the agreement. During the treaty negotiations, it was the U.S. that insisted on undermining the treaty strengths in order to increase the number of signatories. And although the U.S. was one of the countries that insisted on public monitoring of the Paris Agreement progress, such insistence was little more than rhetorical, given the fact that global research into CO2 emissions would have provided de facto public disclosure of countries' progress.

COP21: A Problem Was Always Bigger than the Solution

Confused, yet? You shouldn't be. The problem with the Paris agreement is the same as the problem with the U.S. 'leadership' on the environment and is identical to the broader problem of so-called global 'leadership' on the environment: there is no material will on behalf of core countries (including the U.S., but excluding Europe) to do anything serious about setting, achieving and enforcing robust and meaningful environmental targets. 

Paris agreement in and by itself is a fig leaf of decorum. Being a part of it or being outside of it are rhetorical positions, more designed to shore up symbolism of 'something being done', than actually doing what would be needed to address a wide-ranging case of environmental degradation and depletion of the natural capital. Note: environmental problems vastly exceed carbon emissions, alone, despite the fact that media and politicians are hell-bent on talking primarily about carbon.

Which brings us to another mystery, worth mentioning in passim, again due to space constraints. What constituency does President Trump serve in withdrawing from the agreement? Not getting drawn into speculating about the right- v left- wing opportunism, here are the simple facts: the Paris Agreement is more popular than the President himself. November 2016 survey by the Yale University showed broad-based support for the treaty and the U.S. participation in it. Some snapshots from the survey:

• 69% of registered voters said "the U.S. should participate in the international agreement to limit climate change (the Paris COP21 agreement), compared with only 13% who say the U.S. should not";

• 66% of registered voters "say the U.S. should reduce its greenhouse gas emissions, regardless of what other countries do", aka independent of the COP21; 

• "A majority of registered voters want President-elect Trump (62%) and Congress (63%) to do more to address global warming";

• "A majority of registered voters say corporations and industry should do more to address global warming (72% of all registered voters; 87% of Democrats, 66% of Independents, and 53% of Republicans)". Which means that, based on party affiliation, in each party, including the Republican party, majority of voters support greater action on global warming;

• When it comes to 'making coal great again', 70% of U.S. registered voters "support setting strict carbon dioxide emission limits on existing coal-fired power plants to reduce global warming and improve public health, even if the cost of electricity to consumers and companies would likely increase – a core component of the EPA’s Clean Power Plan. Democrats (85%), Independents (62%) and Republicans (52%) all support setting strict limits on these emissions". Again, we have majority support even amongst the Republicans;

• "A large majority of registered voters say the Federal government should prepare for the impacts of global warming, prioritizing impacts on public water supplies (76%), agriculture (75%), people’s health (74%), and the electricity system (71%)".

1. Carbon intensity of the global economy will continue to fall, irrespective of whether the U.S. presidential administration likes it or not. The reasons for this go beyond simple carbon accounting, and deeper into the issues of public health, quality of life and changing energy intensities of production. The transfer is happening not from the U.S. to foreign destinations, but from the U.S. carbon-intensive economy to the U.S. carbon-reducing economy. The same transfer is happening in other economies. Here's an OECD report on the trend and potential for such transfers. More partisan on the issue NDRC had this report on jobs generation in the alternative energy sector.

1. Reductions in carbon intensity of production are not a zero sum game, but rather create opportunities for innovation, increasing value added, deepening the customer base and improving efficiencies in production and investment. Environmental market worldwide is estimated at USD 1.4 trillion in just 'advanced energy' segment, of which the U.S. domestic market accounts for just 1/7th. Cleantech market size is USD 6.4 trillion, and so on. An example of the opportunity space open for business investment and development in the environmental services, energy and manufacturing sectors is so significant that days after President Trump's decision to exit COP21, the State of California signed a long-term agreement with China to engage in joint development of "climate-positive" technologies and emissions trading. Ironically, few years back, Chinese carbon permits system drove the global carbon markets off the cliff. Today, Beijing is trying to position itself as a positive player in rebooting these markets.

1. Environmental protection (and policies aimed at alleviating the adverse impact of global warming) is more than a market for new goods and services. From both economic and (more importantly) social perspectives, it is also about improving quality of air, quality of water (e.g. here and here), public health (for example, here) and food security (e.g. here and here). In the end, treating environment as part of our productive, long-term investable, tangible capital, is more about preventing future social suffering and unrest than about earning profits. But, even for those politicians solely concerned with jobs and financial or economic bottomline, the case for environmental protection-led economic development is very strong.

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So the really puzzling matter for the Trump Administration and the U.S. political elites (namely the Republicans' dominated Congress) is: what on Earth are they doing in dismantling the environmental policies in a wholesale fashion? 

President Trump, and a range of his advisers, appear to believe that environmental policies are zero-sum game, transferring income, wealth and jobs from 'traditional' (carbon-intensive) sectors of the U.S. economy to foreign competitors. Which is simply false. For a number of reasons, again worth touching here:

Incidentally, China's commitments (or pledges) prior to the COP21 clearly show that its leadership sees all three of the above points as salient for the country future. Back in 2014, the Chinese government has promised to peak its emission by or before 2030, first time ever setting a deadline for peak emissions. It also promised to increase the renewables share in its energy mix to 20% by the same date. Doing this will require China to instal some 800-1000 gigawatts of carbon-free energy generation capacity, or more than its current coal capacity and close to the total current market size for electricity generation in the U.S. The Obama Administration claimed credit for 'bringing China' to agree on these environmental targets, but reality is quite different: Beijing is desperate to clean up its urban environment, claw back on severe pollution of its water sources and secure some sort of sustainable agriculture and food production. Of course, not is well on the Chinese front either. As a side note, those who are worried about China taking the leadership jersey from the U.S. on environment, should read this report: like the U.S., China is producing more rhetoric than action.

In short, the problem of addressing huge gaps between political rhetoric and the reality of our deteriorating global environment remains insurmountable to our political leaders. President Trump's extreme position on COP21 is just an outlier to the cluster of politicians worldwide who are strong on promises and media soundbites, yet unable and unwilling to develop a global policy framework that can deliver measurable, enforceable and transparent commitments on the environment. The problem of finding a solution to continued depletion of our natural capital around the world remains larger than COP21. With the U.S. 'leadership' in it, or without.

10/1/17: Losing Trust and Social Capital: U.S. and Europe

The U.S. National Intelligence Council January 9, 2017 report on future global trends titled “Paradox of Progress” cites income inequality as one of the reasons for emergence of anti-free-trade sentiments in the West (see page 12 here: https://www.dni.gov/files/images/globalTrends/documents/GT-Full-Report.pdf) and links income inequality to declining public trust in U.S. institutions (page 32, above).

These risk assessments are supported by recent research from the IMF.

A recent IMF research paper by Gould, Eric D. and Hijzen, Alexander, titled “Growing Apart, Losing Trust? The Impact of Inequality on Social Capital” (from August 2016, IMF Working Paper No. 16/176: https://ssrn.com/abstract=2882614) observes that “There has been a sharp decline in the extent to which individuals trust one another, and other social capital indicators, over the past forty years in the United States”

So, observe the first fact: trust and social capital have declined in the U.S. over time.

Next, the IMF paper notes that “income inequality has tended to increase” in the U.S. over the same period of time. The paper then goes on to examine “whether the downward trend in social capital is responding to the increasing gaps in income.” The authors use U.S. data to test this possible relationship and contrasts the dynamics against the data from the EU. Beyond this, the analysis also “exploits variation across [U.S.] states and over time (1980-2010), while our analysis of the [european data] utilizes variation across European countries and over time (2002-2012).”

Per authors, “The results provide robust evidence that overall inequality lowers an individual's sense of trust in others in the United States as well as in other advanced economies. These effects mainly stem from residual inequality, which may be more closely associated with the notion of fairness, as well as inequality in the bottom of the [income] distribution.”

Some more on the findings:

1. “The results suggest that inequality at the bottom of the distribution lowers an individual’s sense of trust in others – in the United States and in Europe,” and per IMF, the relationship is causal: greater inequality at the bottom of income distribution causes loss of trust.
2. “For the United States, it appears that inequality at the bottom of the distribution is the main component of inequality that reduces trust, and this phenomenon is mainly confined to those that are negatively impacted by that component of inequality – individuals who are less educated and those at the lower third of the income distribution.” Were these ‘negatively impacted’ not at least a subset of the voters that Hillary Clinton described as ‘deplorables’?
3. “The trust levels of Europeans are also negatively affected by increasing inequality levels. However, in contrast to the United States, the impact of inequality on trust in Europe is more general. Inequality at the top and bottom of the distribution seem to have a negative impact, and the negative effect is shared across education groups.” Again, any wonder that Europe nowadays has emerging Left and Right wing populist political movements, that are more sustained over time than either Bernie Sanders’ and Donald Trump’s campaigns in the U.S.?
4. 4) Interestingly, in the context of ‘1%-er’ arguments: “For both the United States and Europe, the results do not provide any support for the idea that increases in inequality at the very top of the distribution, such as the top 1 percent or top 5 percent shares, have led to a decline in overall trust levels. The significant negative effect of inequality on trust is apparently not driven by inequalities at these extreme ends of the distribution.”

So, perhaps it is the structure of the U.S. and European institutions and the ways in which these institutions function on the ground that are causing the deterioration of trust and social capital? And, perhaps, looking at broader income and jobs outcomes, rather than focusing on '1%' arguments, can be a more productive approach to starting reshaping U.S. and European systems to address the ongoing loss of public trust and social capital?

4/9/16: Earnings per Share

You know the meme: corporate sector is healthy world over and the only reason there is no investment anywhere in sight on foot of the wonderfully robust earnings is that… err… political uncertainty around the U.S. elections. Because, of course, political uncertainty is everything…

Except when you look at EPS

H/T @zerohedge 

Now, what the above is showing?

1) EPS is down in the politically ‘uncertain’ U.S.

2) EPS is even more down in the politically less ‘uncertain’ Europe (though you can read on that subject here: http://trueeconomics.blogspot.com/2016/09/4916-some-points-on-russian-european.html

3) EPS has been falling off the cliff since the ‘political uncertainty’ (apparently) set in 4Q 2012 in the U.S. One guess is the markets expected, correctly, the epic battle between The Joker and the Corporate Godzilla back then. And in Europe, since mid 2013, apparently, markets had foresight of who knows what back then.

But never mind, there is no secular stagnation anywhere, because earnings are, apparently very very healthy… very robust… very encouraging… All of which means just one thing: the markets are not overpriced or overbought. Pass de Kool-Aid, lads!

21/4/16: Economic Outlook: Advanced Economies

My article on economic outlook forward for the Advanced Economies is now out at the Manning Financial quarterly: https://issuu.com/publicationire/docs/mf_magazine_april_2016_web_19042016?e=16572344/35062140.

12/4/16: IMF (RIP) Growth Update: Risks Realism, Policy Idiocy

IMF WORLD ECONOMIC OUTLOOK update out today (we don’t yet have full data set update).

Top line forecasts published confirm what we already knew: global economic growth is going nowhere, fast.  Actually, faster than 3 months ago.

Run through top figures:

• Global growth: In October 2015 (last full data update we had), the forecast for 2016-2017 was 3.6 percent and 3.8 percent. Now, it is 3.2 percent and 3.5 percent. Cumulated loss (over 2016-2017) of 0.725 percentage points in world GDP within a span 6 months.
• Advanced Economies growth: October 2015 forecast was for 2.2% in 2016 and 2.2% in 2017. Now: 1.9% and 2.0%. Cumulated loss of 0.51 percentage points in 6 months
• U.S.: October 2015 outlook estimated 2016-2017 annual rate of growth at 2.8 percent. April 2016 forecast is 2.4% and 2.5% respectively, for a cumulative two-years loss in growth terms of 0.72 percentage points
• Euro area: the comatose of growth were supposed to eek out GDP expansion of 1.6 and 1.7 percent in 2016-2017 under October 2015 forecast. April 2016 forecast suggests growth is expected to be 1.5% and 1.6%. The region remains the weakest advanced economy after Japan
• Japan is now completely, officially dead-zone for growth. In October 2015, IMF was forecasting growth of 1% in 2016 and 0.4% in 2017. That was bad? Now the forecast is for 0.5% and -0.1% respectively. Cumulated loss in Japan’s real GDP over 2016-2017 is 1.005 percentage points.
• Brazil: Following 3.8 contraction in 2015 is now expected to produce another 3.8 contraction in real GDP in 2016 before returning to 0.00 percent growth in 2017. Contrast this with October WEO forecast for 2016 growth at -1% and 2017 forecast for growth of +2.3% and you have two-years cumulated loss in real GDP of a whooping 5.08 percentage points.
• Russia: projections for 2016-2017 growth published in October 2015 were at -0.6% and 1% respectively. New projections are -1.8% and +0.8%, implying a cumulative loss in real GDP outlook for 2016-2017 of 1.41 percentage points.
• India: The only country covered by today’s update with no revisions to October 2015 forecasts. IMF still expects the country economy to expand 7.5% per annum in both 2016 and 2017
• China: China is the only country with an upgrade for forecasts for both 2016 and 2017 compared to both January 2016 and October 2016 IMF releases. Chinese economy is now forecast to grow 6.5% and 6.2% in 2016 and 2017, compared to October 2015 forecast of 6.3% and 6.0%.

Beyond growth forecasts, IMF also revised its forecasts for World Trade Volumes. In October 2015, the Fund projected World Growth to expand at 4.1% and 4.6% y/y in 2016 and 2017. April 2016 update sees this growth falling to 3.1% and 3.8%, respectively. And this is without accounting for poor prices performance.

In short, World economy’s trip through the Deadville (that started around 2011) is running swimmingly:

Meanwhile, as IMF notes, “financial risks prominent, together with geopolitical shocks, political discord”. In other words,we are one shock away from a disaster.

IMF response to this is: "The current diminished outlook calls for an immediate, proactive response… To support global growth, …there is a need for a more potent policy mix—a three-pronged policy approach based on structural, fiscal, and monetary policies.” In other words, what IMF thinks the world needs is:

1. More private & financial debt shoved into the system via Central Banks
2. More deficit spending to boost Government debt levels for the sake of ‘jobs creation’, and
3. More tax ‘rebalancing’ to make sure you don’t feel too wealthy from (1) and (2) above, whilst those who do get wealthy from (1) and (2) - aka banks, institutional investors, crony state-connected contractors - can continue to enjoy tax holidays.

In addition, of course, the fabled IMF ‘structural reforms’ are supposed to benefit the World Economy by making sure that labour income does not get any growth any time soon. Because, you know, someone (labour earners) has to suffer if someone (banks & investment markets) were to party a bit harder… for sustainability sake.

IMF grafts this idiocy of an advice onto partially realistic analysis of underlying risks to global growth:

• “The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth. In the United States, ..domestic demand will be supported by strengthening balance sheets, no further fiscal drag, and an improving housing market. These forces are expected to offset the drag to net exports coming from a strong dollar and weaker manufacturing.” One wonders if the IMF noticed rising debt levels in households (car loans, student loans) or U.S. corporates, or indeed the U.S. Government debt dynamics
• “In the euro area, low investment, high unemployment, and weak balance sheets weigh on growth…” You can’t but wonder if the IMF actually is capable of seeing households of Europe as still being somewhat economically alive.

But the Fund does see incoming risks rising: “In the current environment of weak growth, risks to the outlook are now more pronounced. These include:

• A return of financial turmoil, impairing confidence. For instance, an additional bout of exchange rate depreciations in emerging economies could further worsen corporate balance sheets, and a sharp decline in capital inflows could force a rapid compression of domestic demand. [Note: nothing about Western Banks being effectively zombified by capital requirements uncertainty, corporate over-leveraging, still weighted down by poor quality assets, etc]
• A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalized slowdown in the global economy. 
• Shocks of a noneconomic origin—related to geopolitical conflicts, political discord, terrorism, refugee flows, or global epidemics—loom over some countries and regions and, if left unchecked, could have significant spillovers on global economic activity.”

The key point, however, is that with currently excessively leveraged Central Banks’ balance sheets and with interest rates being effectively at zero, any of the above (and other, unmentioned by the IMF) shocks can derail the entire wedding of the ugly groom with an unsightly bride that politicians around the world call ‘the ongoing recovery’. And that point is only a sub-text to the IMF latest update. It should have been the front page of it.

So before anyone noticed, almost a 1,000 rate cuts around the world later, and roughly USD20 trillion in various asset purchasing programmes around the globe, trillions in bad assets work-outs and tens of trillions in Government and corporate debt uplifts, we are still where we were: at a point of system fragility being so acute, even the half-blind moles of IMF spotting the shine of the incoming train.

18/2/16: Is the U.S. About to Slip into a Recession?

This is an unedited version of my article for Manning Financial. Final version is available here: https://issuu.com/publicationire/docs/mf_magazine_spring_2016_17022016_ne?e=16572344/33514016

In almost every sharp downshift in economic activity, and more frequently than that, in almost every economic recession, there are several regular predictors or leading indicators of tougher times ahead. These include sharp drops in corporate profits, and acceleration in yields on lower rated corporate bonds, usually followed by significant declines in industrial production indices and subsequent downward corrections in stock markets and services activities indices.

While these sequences of events repeat with regularity, in many cases, forward signals of recessions can involve a slight variation in timing and permutations of these shocks.

Another regularity that happens when it comes to business cycles is that, traditionally, the U.S. leads Europe into the downturn.

Trouble is, judging by all factors mentioned above, the U.S. is currently heading into a recession. Fast. And with some vengeance.

The Bad News

Let’s start with corporate profits. The latest data from the U.S. Federal Reserve shows that year-on-year 3Q 2015 growth in corporate profits for non-financial corporations was sharply negative - at -4.26 percent. Furthermore, corporate profits growth slowed down from 7.72 percent in 1Q 2015 to 1.83 percent in 2Q 2015. The rate of decline in corporate profits growth in the U.S. is now sharper than during the last GDP wobble in 1Q 2014 and sharper than in 3Q 2008. The latest growth figure also marks the fastest rate of decline in profits since 3Q 2009.

CHART 1: Non-Financial Corporate Profits and Nominal GDP

Growth Rates, Percent per annum

Source: Author own calculations based on data from the Federal Reserve Bank

Chart above shows clear pattern of correlation between corporate profits growth rates and subsequent growth rate in nominal GDP. It also shows that U.S. corporate profits growth rates have been on a declining trend since 3Q 2010.

Meanwhile, corporate debt yields are shooting straight up. Added to this dynamic is another troublesome sign: yields volatility is also on the rise. In other words, the markets are not only nervous about individual issuers, but are appearing to be scared of the entire asset class. I wrote about this phenomena in previous newsletter, here. Behaviourally, international and U.S. investors have been running for the hills for some time now, despite the extremely risk-supportive monetary policies not just by the Fed, but also by major carry trade-sustaining central banks (Bank of Japan and ECB). In normal conditions, carry trade drivers should moderate risk aversion effects. Except they are not doing so today.

As noted in a recent research note by J.P. Morgan Cazenove in general, credit spreads lead equities and the former “are not giving a positive signal” to the latter (see: http://trueeconomics.blogspot.com/2016/01/24116-high-yield-bonds-flash-red-for.html).

So that puts two recession-beaconing stars into a perfect alignment.

What about the U.S. Industrial Production? From over 2015, U.S. industrial output posted declines, based on monthly growth rates, in ten months out of twelve, with December 2015 production levels down almost 2 percent on December 2014 peak. In annual growth terms, output growth rate started at a brisk 4.48 percent pace in January 2015 and ended the year with a contraction of 1.75 percent - the sharpest rate of decline since December 2009. That’s a swing of some 6.23 percentage points in 12 months.

CHART 2: U.S. Industrial Production Index

Monthly growth rates, percent

Source: Author own calculations based on data from the Federal Reserve Bank

Like with corporate bonds and profits, some of this is down to a combination of commodities recession and Emerging Markets woes.

The former is pretty apparent to all concerned. Between the start of 2014 and the end of 2015, the weighted average price of oil across three key grades (Brent, WTI and Fateh) fell 51.1 percent. Non-fuel commodities went down 21 percent.

The latter also was subject to my earlier contributions to this newsletter. To update you with the latest news, while Emerging Markets continued to contribute some 70 percent of overall global growth in 2015, the rate of growth in key BRICS economies (including Brazil, Russia, India, China and South Africa) has been tanking.Per latest IMF forecasts, released earlier this month, Emerging Markets are still expected to grow by 4.3 and 4.7 percent in 2016 and 2017. However, this puts their growth rates below the 2011-2014 average of 5.3 percent and the 2000-2007 average of 6.5 percent. Amongst the BRICS, all but China and India are either already in a recession or one quarter away from a recession. China is expected to post official growth of 6.9 percent in 2015, with forecast for 2016-2017 for 6.3 percent and 6.0 percent, respectively. Even if trust Chinese official statistics, this represents a big drop. For example, 2015 has been the slowest year in terms of GDP growth in 25 years, and the fourth slowest in 36 years.

But beyond these two factors, U.S. output growth is also being pushed down by stronger Dollar and collapsing global trade. Global trade has been tracking the declining fortunes of global demand since 2012. Over the last four years, global trade volumes growth underperformed post-crisis average and historical average, pushing growth rates to their lowest readings for any decade on record. In line with this, Baltic Dry Index – the cost indicator for hiring cargo vessels to ship goods around the world – has been hitting historical lows almost on a daily basis since the second part of December 2015.

All of the above factors, from falling profits, to falling production growth rates, to underlying commodities recession, global demand weaknesses and international currencies re-valuations, have undoubtedly contributed to falling equity prices. Since the start of 2016, some forty major equity markets around the world have entered bear territory. While on the corporate side of the U.S. economy, oil and commodities prices recession has been a dominant driver for aggregate equities indices movements, underlying equity price swings are much broader currents. For example, equities sell-offs around the world did not concentrate on commodities producing sectors and companies, or on highly leveraged corporates alone. Instead, the bear markets have been broad.

The Good News

Which brings us to last piece of a puzzle, yet to fall into its place: consumer demand. Or put into the above context – the good news bit.

Falling equity and bond prices, as well as rising retail interest rates are capable of triggering - if sustained over time - drops in consumer confidence, followed by households’ pulling back from consumption and investment. So far, stronger dollar (improving U.S. consumers’ purchasing power), lower energy prices (improving their disposable incomes) and falling unemployment (improving household pre-tax incomes) have sustained consumer confidence at healthy levels.

CHART 3: Index of the U.S. Consumer Sentiment

Source: University of Michigan

However, current levels of consumer confidence are barely touching pre-crisis averages and have declined since local peak in January 2015 through 3Q 2015. There is no crisis at the moment, but given the strength of household finances, 2015 index performance was hardly spectacular.

Whatever resilience we do see in consumer surveys, it is most likely underpinned by the positive jobs prints. Based on historical figures, over each recessionary episode in the U.S. history since the end of the World War II, employment was one of the key casualties, declining with every recession by at least 1 percentage point. U.S. added 2.597 million new private sector jobs over the course of 2015 and average weekly earnings are rising in both goods-producing and services-providing sectors.

The Latest Official Forecasts

This is precisely why despite the leading indicators flashing bright warning signs of the potential incoming recession, the IMF continues to forecast rather robust – by comparatives to the Euro area, UK and Japan – for the U.S. in 2016 and 2017. Per January update to its forecasts, the IMF now expects U.S. economy to grow at 2.6 percent in both 2016 and 2017. This comes against the Fund forecast for 2.2 percent growth in 2016 and 2017 in the UK, 1.7 percent real growth in the Euro area over the same period, and 1 percent and 0.3 percent growth in Japan in 2016 and 2017, respectively. However, IMF’s latest forecast represents a sizable downgrade for the U.S. compared to previous forecasts. Thus, compared to October 2015 outlook, IMF expectations for U.S. economic expansion are now 0.2 percentages lower for both 2016 and 2017.

Still, IMF references the U.S. as one of the four core risks to its global outlook for 2016. Specifically, the IMF cites the risk arising from “tighter global financing conditions as the United States exits from extraordinarily accommodative monetary policy”.

This risk, along side growing uncertainty about overall health of the U.S. economy, are material factors for Irish and European markets and investors. Ireland benefited significantly from the U.S. recovery and subsequent devaluation of the Euro vis-à-vis the U.S. dollar. These factors underpinned our exports of goods to the U.S. and Canada rising by EUR6.85 billion for the first eleven months of 2015 compared to the same period in 2012. This growth is more than double the rate of expansion in our trade in goods with the EU (including the UK). From Irish investors perspective, our domestic assets performance – across both equities and bonds – owes a lot to the resilience of the U.S. economy. Likewise, our investors’ access to diversified portfolios of internationally-listed and traded assets cannot be imagined absent the U.S. equity and debt markets.

All of this is currently at risk when it comes to the U.S. economic and markets performance forward. And more ominously, our own European economic and investment fortunes are tied closely to the North American economies. Whenever you hear any political leader – be it Enda Kenny or Jean-Claude Juncker – extoling the virtues of Ireland’s or Europe’s firewalls against international shocks, remember the old adage: when America sneezes, Europe catches the cold.