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/

17/9/20: Stonks are Getting Balmier than in the Dot.Com Heat

Via Liz Ann Sonders @LizAnnSonders of Charles Schwab & Co., Inc. a neat chart summarizing the madness of the King Market these days:

Yeah, right: PE ratio is heading for dot.com madness levels, PEG ratio (price earnings to growth ratio or growth-adjusted PE ratio) is now vastly above the dot.com era peak, and EPS is closer to the Global Financial Crisis era lows. 

What can possibly go wrong, Robinhooders, when a mafia don gifts you some chips to wager at his casino?

9/1/20: Herding and Anchoring in Cryptocurrency Markets

Our new paper, with Daniel O'Loughlin, titled "Herding and Anchoring in Cryptocurrency Markets: Investor Reaction to Fear and Uncertainty" has been accepted to the Journal of Behavioral and Experimental Finance, forthcoming February 2020.

The working paper version is available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3517006.

Abstract:
Cryptocurrencies have emerged as an innovative alternative investment asset class, traded in data-rich markets by globally distributed investors. Although significant attention has been devoted to their pricing properties, to-date, academic literature on behavioral drivers remains less developed. We explore the question of how price dynamics of cryptocurrencies are influenced by the interaction between behavioral factors behind investor decisions and publicly accessible data flows. We use sentiment analysis to model the effects of public sentiment toward investment markets in general, and cryptocurrencies in particular on crypto-assets’ valuations. Our results show that investor sentiment can predict the price direction of cryptocurrencies, indicating direct impact of herding and anchoring biases. We also discuss a new direction for analyzing behavioral drivers of the crypto assets based on the use of natural language AI to extract better quality data on investor sentiment.

5/1/20: EU's Latest Financial Transactions Tax Agreement

My article on the proposed EU-10 plan for the Financial Transaction Tax via The Currency:

Link: https://www.thecurrency.news/articles/5471/a-potential-risk-growth-hormone-what-the-financial-transaction-tax-would-mean-for-ireland-irish-banks-and-irish-investors or https://bit.ly/2QnVDjN.

Key takeaways:

"Following years of EU-wide in-fighting over various FTT proposals, ten European Union member states are finally approaching a binding agreement on the subject... Ireland, The Netherlands, Luxembourg, Malta and Cyprus – the five countries known for aggressively competing for higher value-added services employers and tax optimising multinationals – are not interested."

"The rate will be set at 0.2 per cent and apply to the sales of shares in companies with market capitalisation in excess of €1 billion. This will cover also equity sales in European banks." Pension funds, trading in bonds and derivatives, and new rights issuance will be exempt.

One major fall out is that FTT "can result in higher volumes of sales at the times of markets corrections, sharper flash crashes and deeper markets sell-offs. In other words, lower short-term volatility from reduced speculation can be traded for higher longer-term volatility, and especially pronounced volatility during the crises. ... FTT is also likely to push more equities trading off-exchange, into the ‘dark pools’ and proprietary venues set up offshore, thereby further reducing pricing transparency and efficiency in the public markets."

13/7/19: Mapping the declines in jobs creation

Increasing market power concentration, falling entrepreneurship, rising concentration amongst the start ups, unicorns and billions in investment, the markets have been rewarding larger companies at the expense of the smaller and medium enterprises for years. And this has had a problematic impact on human capital and jobs creation.

Here is the data on the levels of employment in medium-large companies over the years, based on the U.S. markets data:

In simple terms, per each dollar of investors' money, today's companies are creating fewer jobs - a trend that was present since at least 2000, and consistent with the onset of the Goldilocks Economy. But the most pronounced collapse in jobs creation from investment has been since 2017. Excluding recessionary periods, in 2002-2006 average annual decline in the number of employees per $1 billion in market valuation was 3.45%. Over 2009-2013 this number rose to 4.73% and in 2014-2019 the rate of decrease averaged 8.05% per annum.

9/1/2019: Assets with Negative Returns: 1901-present [Updated]

Updating the chart for major assets performance 1901-present, based on data from http://trueeconomics.blogspot.com/2018/12/191218-assets-with-negative-returns.html:

This is epic.

19/12/18: Assets with Negative Returns: 1901-present

Highlighting the evidence presented in the earlier-linked article, here is the chart based on data from the Deutsche Bank Research team, showing historical evidence on the total percentage of all key asset classes with negative annual returns:

CHART

Source: Data from Deutsche Bank Research and author own calculations.

I have highlighted 7 occasions on which the percentage of negative returns assets exceeded 50%. Only three times since 1901 did this percentage exceed 60%, including in YTD returns for 3Q 2018.

4/6/18: Presidential Cycles and Markets Returns

Cyclicality in markets returns and political environment is an interesting and under-researched topic. Here is a great post on the subject: https://fat-pitch.blogspot.com/2018/05/trading-worst-6-months-and-presidential.html.

21/12/17: Of Taxes and Whales: Bitcoin's New Headaches

I have recently mused about the tax exposures implications of Bitcoin 'investments', and in particular, my suspicion that many today's BTC enthusiasts (retail investors speculating on BTC and other cryptos) are likely to be caught out with unexpected and un-covered tax liabilities arising from trading in currencies pairs that involve cryptos and regular currencies (e.g. BTCUSD pair). Normally, every trade in BTC that involves sale of BTC for USD is subject to capital gains tax. This is a nasty side effect of the BTC trading.

And here comes a new and a worse one: the GOP tax plan will make even trades between cryptos (e.g. BTCETH pair) subject to capital gains (https://www.bloomberg.com/news/articles/2017-12-21/tax-free-bitcoin-to-ether-trading-in-u-s-to-end-under-gop-plan). The GOP plan removal of the like-kind swap tax deferral provision for everything other than real property sweeps cryptos put of the deferral cover because back in 2014, the IRS designated cryptos as non-currency property-type assets, like gold.

In addition to catching many investors off-guard and leaving them facing potentially explosive tax bills, the new change induces more liquidity risk into the system: removal of the deferral imposes a de facto transaction tax on BTC and other cryptos. This is likely to reduce frequency of trading conducted by investors. Which, in turn, reduces liquidity of the BTC and other cryptos.

This tax change, in part, likely explain why the BTC and other cryptos concentration is falling: the whales, who used to control up to 40% of the entire BTC issuance to-date, are selling, and selling at speed (https://www.bloomberg.com/gadfly/articles/2017-12-21/bitcoin-whales-are-cutting-back).  Ordinarily, this would be a good thing (lower concentration risk, increased liquidity), but cryptos are not your ordinary assets. The problem with whales selling is that one of the key arguments in favor of cryptos is that crypto-enthusiasts and pioneers are market-makers who prefer mine-and-hold strategy. In other words, to-date, the argument has been that the whales simply will never sell their holdings before BTC issuance reaches its bound of 21 million units.

That reasoning is now going, like the proverbial hot air out of a punctured balloon:

14/1/17: Country Risks survey results for 2016

+Euromoney have published their @CountryRisks survey results for 2016: available here quoting, amongst other analysts, myself.

18/7/16: Stock Markets Crashes: 1955-2015

A good summary of all stock markets crashes since 1955 through 2015 via Goldman Sachs:

The caption to the chart says it all.

16/10/15: IG Conference: Markets Outlook

My speaking points on the topic of the Markets Outlook for yesterday's IG conference:

Short themes:

Theme 1: Markets pricing in advanced economies: 

- EV/EBITDA ratios signal overvaluation; 

- EBITDA/Interest Expenses ratio is at below 2010 levels (below 14%) despite extremely cheap debt.

A handy Bloomberg chart:

- Global debt cycle has turned – sovereigns are not leveraging as fast or deleveraging, but corporates leveraged up. 

- Much of pricing today reflects migration from equity to debt

- In this environment – long only allocations are problematic.

Theme 2: Emerging markets, especially BRICS

- Idea of 3rd Wave – Goldman’s thesis – is based on two drivers: duration of the crisis (‘this can’t be going for so long…’) and firewalls (‘this can’t spill into the developed economies…’) both of which are 

- There are no fundamentals to support robust recovery view

- Again, allocations are highly problematic.

So short-term summary is poor when it comes to hard numbers:

- World economic growth for 2015-2017 forecast is down from 14.1% in 2012 to 10.9% today

- Euro area economy forecasts are flat: 5% in 2012 and 4.9% today, holding relatively steady compared to the rest of the world solely because Europe is now Japanified

- Advanced economies down from 8.1% to 6.6% - another miserably Japanese-styled performance compared to past averages

- Emerging and developing economies from 19.55 in 2012 to 14.0%.

On inflationary targets and rates: the only way we are going to get to the inflationary expectations consistent with monetary policy normalization, is by literally superficially jacking up prices through Government controlled sectors and/or via regulatory policies. Which is to say that any inflation above, say 1% or so in the Advanced Economies, today, will be consistent with stripping income out of the economy to prime up financials (in the short run) and public purse.

Longer themes:

As much as I love the good story of innovation and technological revolutions, I am afraid to say my fear is that we are heading for the twin secular stagnation scenario:

Supply side stagnation: 

- Technological returns (productivity growth and new value added) are tapering out

- Substitutability of labour is rising and with it, risks to economic systems

- Regionalisation of trade and production are gaining ground and markets fragmentation is going to play a disruptive havoc with our traditional market valuations

- So expect more volatility on flatter trend.

Demand side stagnation: 

- Demographics 

- Savings/investment imbalances, 

- Debt overhang – across both advanced economies and, increasingly also, emerging markets, so we have a Myth of Post Financial Crisis Deleveraging (via BAML)

Global Debt to GDP

2010-2015: 220 to 240%

2000-2010: 190 to 200%

1990-2010: 170 to 190%

Or a handy chart

- Wealth and income inequalities, including intergenerational effects

- Rebalancing of economic growth drivers (human capital focus pushes incomes gap wider and deeper, but also clashes with current taxation and political systems)

Key forward is to expect:

- Flatter growth trend and more volatility around that trend 

- Higher volatility / instability in higher moments 

- Financial imbalances accelerating and amplifying

- Financial imbalances / cycles leading real cycles (Excess Financial Elasticity hypothesis)

- Economic volatility spilling, increasingly, into political volatility (political economy). 

Key strategy points:

- Focus on lower debt levels on companies balance sheets

- Focus on companies actually paying attention to core basics, e.g. earnings, sales, profit margins, as opposed to subscription bases, user counts etc

- Focus on companies with strong regional reach (not only in product markets, but in logistics and production bases)

- Focus on companies with revenues linked to multi-annual contracts

- Go defensive, stay defensive in core allocation

- Go speculative with low leverage only and on a small share of total wealth

- Go speculative trades on uncertainty and long 5-10 percentile under-performers

10/10/15: What, When, If the $7 trillion SWFs Gorilla Moves?

Remember this bit about Central Banks' reserves taking a dip globally? And now consider this, about Sovereign Wealth Funds shrinking their income/assets. The alarmism is premature, as the article explain, since SWFs are (1) big, (2) likely to see return to inflows of funds once oil and broader commodities prices recover, and (3) longer-term investment vehicles with broad mandates. Which implies there is not so much panic looming from SWFs downsizing their holdings (selling assets).

But the key is in the second order effects: as long as oil prices remain low, SWFs are not going to be active buyers of assets in the near term (so demand base for assets is taking a knock down, currently being obscured by the Central Banks' demand in some areas - e.g. Euro area, and/or by leveraged plays and carry trades still available on foot of Central Banks (more limited) adventurism. Which means that any 'normalisation' in monetary policies today is likely to coincide with a period of subdued demand from the SWFs for assets. And that is pesky enough of a problem to worry anyone in the markets.

Beyond this concern, note two other problems arising from the current oil price slump:

1. SWFs, having parked their buying for now, are becoming less predictable per strategy they might take when prices do recover (the longer the period of oil prices slump, the higher is uncertainty); and
2. How the future balancing between liquidity risk and returns going to play across the SWFs strategy (again, the longer the period of low oil prices, the more likely exit from the oil price slump will entail SWFs pursuing less risk-loaded assets and opting for greater safety - a sort of precautionary savings motive for the SWFs).

8/5/15: BIS on Build Up of Financial Imbalances

There is a scary, fully frightening presentation out there. Titled "The international monetary and financial system: Its Achilles heel and what to do about it" and authored by Claudio Borio of the Bank for International Settlements, it was delivered at the Institute for New Economic Thinking (INET) “2015 Annual Conference: Liberté, Égalité, Fragilité” Paris, on 8-11 April 2015.

Per Borio, the Achilles heel of the global economy is the fact that international monetary and financial system (IMFS) "amplifies weakness of domestic monetary and financial regimes" via:

• "Excess (financial) elasticity”: inability to prevent the build-up of financial imbalances (FIs)
• FIs= unsustainable credit and asset price booms that overstretch balance sheets leading to serious financial crises and macroeconomic dislocations
• Failure to tame the procyclicality of the financial system
• Failure to tame the financial cycle (FC)

The manifestations of this are:

• Simultaneous build-up of FIs across countries, often financed across borders... watch out below - this is still happening... and
• Overly accommodative aggregate monetary conditions for global economy. Easing bias: expansionary in short term, contractionary longer-term. Now, what can possibly suggest that this might be the case today... other than all the massive QE programmes and unconventional 'lending' supports deployed everywhere with abandon...

So Borio's view (and I agree with him 100%) is that policymakers' "focus should be more on FIs than current account imbalances". Problem is, European policymakers and analysts have a strong penchant for ignoring the former and focusing exclusively on the latter.

Wonder why Borio is right? Because real imbalances (actual recessions) are much shallower than financial crises. And the latter are getting worse. Here's the US evidence:

Now, some think this is the proverbial Scary Chart because it shows how things got worse. But surely, the Real Scary Chart must reference the problem today and posit it into tomorrow, right? Well, hold on, for the imbalances responsible for the last blue line swing up in the chart above are not going away. In fact, the financial imbalance are getting stronger. Take a look at the following chart:

Note: Bank loans include cross-border and locally extended loans to non-banks outside the United States.

Get the point? Take 2008 crisis peak when USD swap lines were feeding all foreign banks operations in the U.S. and USD credit was around USD6 trillion. Since 'repairs' were completed across the European and other Western banking and financial systems, the pile of debt denominated in the USD has… increased. By mid-2014 it reached above USD9 trillion. That is 50% growth in under 6 years.

However, the above is USD stuff... the Really Really Scary Chart should up the ante on the one above and show the same happening broader, outside just the USD loans.

So behold the real Dracula popping his head from the darkness of the Monetary Stability graveyards:

Yep.  Now we have it: debt (already in an overhang) is rising, systemically, unhindered, as cost of debt falls. Like a drug addict faced with a flood of cheap crack on the market, the global economy continues to go back to the needle. Over and over and over again.

Anyone up for a reversal of the yields? Jump straight to the first chart… and hold onto your seats, for the next upswing in the blue line is already well underway. And this time it will be again different... to the upside...