14/11/15: More Evidence U.S. Capex Cycle is Still Lagging

In a recent post (link here), I covered the issue of shares buy-backs and the lack of capex at the S&P500 constituents level. A recent report by Credit Suisse titled "The Capital Deployment Challenge" takes a look at the same problem.

Per report: "Companies in the US market are currently in great health as corporate profitability is approaching historical highs. This high level of profitability has produced record levels of corporate cash, and thereby has created a challenge for managers: how to allocate all of this excess cash. Companies may choose to reinvest in their businesses – organically or through M&A – or they may return the cash to capital providers, through dividends, share buybacks or by paying down debt..."

"Historically, companies have deployed an average of 60% of cash flows in capital investment (28% in organic growth and 32% in M&A) and have returned  26% to shareholders (12% dividends and 14% share buybacks). In the past several years, the capital allocation balance has swung away from growth towards buybacks and dividends: capital invested has dropped to 53% (27% organic growth and 26% M&A), while cash returned to shareholders has increased to 36% (15% dividends and 21%
buybacks)."

A handy chart to illustrate the switching:

So Credit Suisse divide the S&P500 universe into two sets of companies: reinvestors and returners. The former represents companies which predominantly direct their cash balances to organic reinvestment and/or M&A, whilst the latter are companies that prefer, on balance, to use cash surpluses for dividends and/or shares buybacks.

The report looks at three metrics across each type of company: underperformers within each group - companies that underperformed their peers average in terms of total shareholder returns, outperformers - companies that outperform their peers average, and average across all companies.

Chart below shows the extent of differences across two types of companies and three categories in terms of cash flow return on investment (CFROI):

The chart above "shows that the initial level of returns on capital is generally lower for reinvestors than for returners, with an average of 9% and 11%, respectively. The reinvestors and returners who outperformed their peers both improved their CFROI. However, the outperforming reinvestors generated a greater operating improvement (180bps vs 150bps for returners)."

Which is all pretty much in line with what I said on numerous occasions before: no matter how you twist the data, average returns to not re-investing outpace returns from investing. Meaning that: either companies are getting worse at identifying and capturing investment opportunities or investment opportunities are thin on the ground. Or both...

13/11/15: Dublin: Overpriced Office Space is Back... Any Wonder?

A neat set of charts from Knight Frank report showing commercial real estate mapping of Dublin relative to other European cities

To start with: returns over 10 years to December 2014:

Here are some more charts

The key point from the above is that historical valuations for Dublin property have been distorted to the upside by the pre-2008 boom, whilst subsequent collapse has driven prices back to below their fundamentals-determined valuations. However, forward expectations by the markets participants are now pricing in a significant medium- to long-term rebound in commercial property rents and values that are implying fundamentals well ahead of anything consistent with the ‘normal’ 4.5-5 percent yields. In other words, we are heading toward 2-2.5 percent yields, assuming current trends persist, or into another correction downward.

Absent robust supply increases, the former is more likely than the latter. With rates normalisation still some time away, the former is also more likely than the latter. And the longer the former goes on, the bigger will be the latter, eventually.

These dynamics, in return, underpin also residential markets, where credit supply tightness in house purchasing sector is pushing rents up to stratospheric levels, with rents currently in excess of October 2008 levels.

Welcome to the economy where largest land-owner - Nama - thinks developers are only good to attend horse races.

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

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

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

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

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

12/11/15: Can't Get That Tax Haven Genie Back Into the Bottle

For the massive industry of Irish analysts, economists and experts working hard on denying that there is a problem with our corporation tax regime, behold this view: "Ireland ... is one of the world’s most important tax havens or offshore financial centres."

And as I noted on numerous occasions, our beggar-thy-neighbours policy or strategy for economic development is no longer a matter of esoteric academic considerations: "It is true that the tax offering did help attract large amounts of investment, ...and European membership helped keep Ireland off tax haven blacklists that apply to classic tax havens such as Cayman and Bermuda... ...What is more, Ireland has triggered ‘beggar my neighbour’ competition from other nations, meaning it has to constantly offer new and larger subsidies to mobile capital, just to keep up. ... [Ireland's] corporate tax haven strategy (and the financial centre strategy, below) have transmitted harmful spillover effects onto other countries, notably the U.S. which has seen Ireland help facilitate a massive transfer of wealth from ordinary taxpayers to mostly wealthy shareholders."

Read the full report here: http://www.taxjustice.net/2015/11/11/how-ireland-became-an-offshore-financial-centre/. And prepare for a choir of deniers to start their song again tomorrow, aided and funded by the lobby groups and, in some cases, by the state.

11/11/15: The Gig Economy: A Challenge

Last week, I spoke at CXC Corporate event “Globalization & The Future of Work Summit” in Dublin covering the topic of major economic disruption coming on foot of the evolving Gig Economy. I covered some of the background aspects of my presentation in an earlier blogpost here.

Here are my slides from the presentation (I will be posting a video link once it becomes available).

11/11/15: New Cost Estimates of European Refugees Crisis: Ifo

Back in September, German think tank, CESIfo estimated the cost of European refugees crisis to be at around EUR10 billion (Germany costs alone). Yesterday (with update today), the Institute released updated estimates:

Crucially, per above release, the Ifo pours some serious cold water on the commonly repeated in the media claims that refugees can provide a substantial boost to the German economy due to their alleged employability.

11/11/15: Take a Buyback Pill: U.S. Corporates Shy Away from Capex

As buy-backs of shares inch down as the drivers of U.S. stocks valuations (chart below), things are not going much smoother for the hopes of a capex cycle restart in the U.S. corporate sector.

As the following chart from Goldman Sachs research shows, 2015 has been shaping up as yet another year of decline in investment pipeline for U.S. companies. Capex and R&D investment share of aggregate cash holdings by S&P 500 companies is expected to hit 41% this year, down from 47% in 2014 and 2013 and marking the lowest reading since 2007. Worse, Goldman expects 2016 figure to be even lower at 40%.

Goldman figures relating to ‘Investment for Growth’ indicator include M&As, which in my opinion should not be considered in this context, as success rate of M&As is extremely low (historically at around 30%) and current M&A valuations are frankly bonkers. 

H/T to @prchovanec

Take a look at stripped out mix of real investment against buybacks in ratio terms, per Goldman’s reported data:

As shown above, relative weight of shares buybacks in terms of cash allocations by U.S. carpets has been on the rising trend now in comparison to Capes & R&D spending since 2009 and it has been flat since 2010 on for the ratio of buybacks to dividends. In fact, combined weight of M&As and buybacks ratio to Capex & R&D is now at 0.98, the highest since 2007.

In simple terms, there is little indication in the Goldman (and other) numbers of any restart of Capex cycle and all indication, major U.S. corporates are living in a world of surplus liquidity and shortages of investable strategies and opportunities. 

10/11/15: Keiser Report from Kilkenomics 2016

My interview with Max Keiser and Stacy Herbert in Kilkenny :

http://www.disclose.tv/action/viewvideo/216140/kilkenomics_where_comedy_meets_economics_constantin_gurdgiev__keiser_report/

Enjoy. (from 3:26 on).

10/11/15: The Miracle Pill of Rent Controls: San Fran

Rent controls are all the rage in Dublin kommentariate classes. But here is some evidence on their effectiveness in that centre of ‘egalitarianism’/‘tech elitism’ of San Fran:

Source: h/t to @ninjaeconomics 

You can see details https://www.sftu.org/rentcontrol/

Controls in San Fran have been a long running feature of the market, so one could have expected for these to at least induce lower volatility in rents. As the chart above shows, that is not the case and volatility - poor-cyclical - remains in place. As per levels of rents, why, San Fran rents are just plain insane.

So, Dublin's rationale for introducing rent controls is: we need more moderate rents to sustain growth of younger, innovation-focused enterprises. In San Fran, of course, rent controls have covered property market that sees younger, innovation-focused enterprises forced to pay 25-33% premia in wages terms to sustain hiring.

Over to the kimmentariate.

10/11/15: Debt and Deleveraging: European Corporates

Debt crises are long running things. Reinhart and Rogoff have said so before and continue to remind us about it often enough to think that by now, everyone would be cognitively aware of this aspect of the modern day economy. But, given the hopping and stomping associated with Europe's latest bout of 'fakecovery', some of our media do still require a reminder: debt crisis are long running things.

Want a picture to go with that? Why, here is a chart from BAML research note on the subject of European corporate deleveraging:

The above, really, says three things:

1. Deleveraging is still the rage: 2015 percentage of European companies continuing to deleverage is 57% - second highest over the entire time span between 2008 and today; 
2. Last time the rate of deleveraging fell was in 2011 and ever since, it continued to rise or stay put;
3. Taken 1 and 2 above, the entire narrative of 'credit-starved' companies in the European space is a bit questionable. As far as demand goes, only 43% of European firms are interested in increasing debt levels today, the second lowest since the start of the Global Financial Crisis.

10/11/15: First Anniversary of Ruble's Free Float

1 year old 'free-float' Ruble to USD and EUR:

It has been pretty breathtaking ride to revaluations and a baptismal by fire. And amazingly non-exciting world of CBR interventions:

9/11/15: Lessons from German reunification for a European Fiscal Union: Sinn

CESIfo's Hans-Werner Sinn has just torn a massive hole in the parasail of European 'federalistas' of French 'harmonise-everything' variety. His summarised view is presented here: http://www.voxeu.org/article/german-reunification-lessons-european-fiscal-union. A longer version is published by CESIfo on November 9th.

Key point in both is that "The fiscal union demanded by Hollande now is an understandable attempt to compensate for the lack of competitiveness of the southern EU countries by resorting to international transfers, but these transfers would cement their lack of competitiveness and drive Europe into permanent stagnation. The travails of German reunification should be a warning against pursuing this course."

In other words, East German experience, per Sinn, suggests that fiscal (tax and transfers) union even with debt mutualisation (aka replacing national debts with federal debt) is not a road to achieving economic convergence across the EU Member States, but a road to human capital and investment transfers from uncompetitive 'South' to competitive 'North'. In effect, dressed up as a social ills salvation, it bears a prospect of sealing tight existent competitive differentials and making 'South' a permanent dependency sub-Union.

Pretty darn tough stance.