19/12/15: Oil Prices: One Chart, Two Years

A neat summary / timeline of oil price changes in two years:

Source: @allmarkets 

19/12/15: Another Un-glamour Moment for Economics

Much of the current fascination with behavioural economics is well deserved - the field is a tremendously important merger of psychology and economics, bringing economic research and analysis down to the granular level of human behaviour. However, much of it is also a fad - behavioural economics provide a convenient avenue for advertising companies, digital marketing agencies, digital platforms providers and aggregators, as well as congestion-pricing and Gig-Economy firms to milk strategies for revenue raising that are anchored in common sense. In other words, much of behavioural economics use in real business (and in Government) is about convenient plucking out of strategy-confirming results. It is marketing, not analysis.

A lot of this plucking relies on empirically-derived insights from behavioural economics, which, in turn, often rely on experimental evidence. Now, experimental evidence in economics is very often dodgy by design: you can’t compel people to act, so you have to incentivise them; you can quite select a representative group, so you assemble a ‘proximate’ group, and so on. Imagine you want to study intervention effects on a group of C-level executives. Good luck getting actual executives to participate in your study and good luck getting selection biases sorted out in analysing the results. Still, experimental economics continues to gain prominence, as a backing for behavioural economics. A still, companies and governments spend millions on funding such research.

Now, not all experiments are poorly structured and not all evidence derived from is dodgy. So to alleviate nagging suspicion as to how much error is carried in experiments, a recent paper by Alwyn Young of London School of Economics, titled “Channelling Fisher: Randomization Tests and the Statistical Insignificance of Seemingly Significant Experimental Results” (http://personal.lse.ac.uk/YoungA/ChannellingFisher.pdf) used  “randomization statistical inference to test the null hypothesis of no treatment effect in a comprehensive sample of 2003 regressions in 53 experimental papers drawn from the journals of the American Economic Association.”

The attempt is pretty darn good. The study uses robust methodology to test a statistically valid hypothesis: has there been a statically significant result derived in the studies arising from experimental treatment or not? The paper tests a large sample of studies published (having gone through peer and editorial reviews) in perhaps the most reputable economics journals. This is creme-de-la-creme of economics studies.

The findings, to put this scientifically: “Randomization tests reduce the number of regression specifications with statistically significant treatment effects by 30 to 40 percent. An omnibus randomization test of overall experimental significance that incorporates all of the regressions in each paper finds that only 25 to 50 percent of experimental papers, depending upon the significance level and test, are able to reject the null of no treatment effect whatsoever. Bootstrap methods support and confirm these results. “

In other words, in majority of studies claiming to have achieved statistically significant results from experimental evidence, such results were not really statistically significantly attributable to experiments.

Now, the author is cautious in his conclusions. “Notwithstanding its results, this paper confirms the value of randomized experiments. The methods used by authors of experimental papers are standard in the profession and present throughout its journals. Randomized statistical inference provides a solution to the problems and biases identified in this paper. While, to date, it rarely appears in experimental papers, which generally rely upon traditional econometric methods, it can easily be incorporated into their analysis. Thus, randomized experiments can solve both the problem of identification and the problem of accurate statistical inference, making them doubly reliable as an investigative tool. “

But this is hogwash. The results of the study effectively tell us that large (huge) proportion of papers on experimental economics published in the most reputable journals have claimed significant results attributable to experiments where no such significance really was present. Worse, the methods that delivered these false significance results “are standard in the profession”. 

Now, consider the even more obvious: these are academic papers, written by highly skilled (in econometrics, data collection and experiment design) authors. Imagine what drivel passes for experimental analysis coming out of marketing and surveying companies? Imagine what passes for policy analysis coming out of public sector outfits? Without peer reviews and without cross-checks like those performed by Young?

18/12/15: Ukraine Inches Even Closer to a Default

So, we have this:

Which means that Ukraine and Russia - so far - have failed to agree terms of debt restructuring. As a reminder, over the last few days, Ukraine and Russia were involved in a 'last minute' dialogue (via Germany) to resolve the issue.

Does this mean that Ukraine is now in a sovereign debt default? Technically - no. Ukraine will only be in a default after 10 days grace period expires, which means the parties to the talks still have 12 days to reach an agreement and avoid default.

Does this mean that Ukraine is now in breach of IMF lending criteria? Technically - no. IMF amended its own rules allowing lending to continue for countries in official sector default, as long as these countries continue to engage in debt restructuring negotiations with the lenders.

Can the two countries reach a deal in time to avoid official default? Unlikely: any deal between Russia and Ukraine (except for a deal that treats Russia under the same terms extended to private lenders - a deal that is simply unacceptable to Russia) will require approval of other (commercial) lenders under the agreement between commercial lenders and Ukraine struck earlier. There is simply not enough time to achieve such an approval, even assuming, there is a deal and the deal can be approved (both assumptions are quite a stretch).

Do both parties show will to negotiate in good faith? So far - no. Russian offer (see here) has been to restructure debt by extending repayment period (a real haircut absent nominal haircut, as far as I read this). The offer shifted Russian position in negotiations in the direction of Ukraine's position: from the opening position that the debt is official sector debt and thus should be repaid in full and in time. Ukraine's position has been to treat Russian debt equivalent to private sector debt and Ukraine (as far as public record goes) did not alter its position to move closer to Russian offer. Ukraine also deployed consistent rhetoric of "Our way or the highway" variety. In other words (I am willing to be corrected on this), Russia made insufficient step toward Ukraine, while Ukraine made no step toward Russian position whatsoever.

Note: my view has been (consistently over time) that Russia should restructure loans to Ukraine to a longer term, say 10-year, bond extended at original interest rate and allow for 2-3 years interest payments moratorium. Financially optimal solution would have been to impose a haircut on principal and extend maturity of the remaining balance. But, given Ukraine's failure to secure stronger restructuring with private sector lenders, this option is not available and is politically infeasible.

17/12/15: Re-aligning Ruble with Oil: Fed Hiccup...

Two casualties of the Fed's rate jitter: Oil & Ruble

Source: @Schuldensuehner 

Ruble is now nearing August 2015 lows on a continued trend that realigned with oil prices.

And while we are at it, another pairing:

Source: @Schuldensuehner 

Note: as of yesterday's closing Russian CDS 5 year spread was at 308.91 with implied probability of default of 19.15%. A week ago, same stood at 291.64 with implied probability of default at 18.26% and at the end of Tuesday, at 305.91 with implied probability of default at 18.99%.

But as a reminder, watch not only Brent, but also Urals-Brent spread. Hawkish dove of the Fed has less to say on that than Russian energy substitution ongoing in Europe and Turkey via Saudi's and Iranian contracts.

16/12/15: 36 years of interest rates across major advanced economies

As we inch closer to the U.S. Fed rates decision today, here is a useful chart summing up evolution of interest rates in key advanced economies over the last 36 years:

Happy lifting... 

16/12/15: Only 2/5 Global Ranking Methodologies Show an Irish Uni in Top 100

Universities rankings are a hazardous undertaking. Too many moving metrics, too many subjective inputs, too many egos fighting each other and too many euros and dollars and rupees and pounds etc at stake from funding sources. So one really should take them with a grain of salt and in comparatives look at a number of rankings across the board.

So here's a set of simple facts:

• By ARWU methodology, there are no Irish Universities in top 100 world wide: http://trueeconomics.blogspot.ie/2015/08/15815-irish-universities-none-in-top.html;
• By Times Higher Education methodology, there are no Irish Universities in top 100 world wide: http://trueeconomics.blogspot.ie/2015/11/51115-times-higher-education-rankings.html
• By US News & World Report (NWR) methodology, there are no Irish Universities in top 100 world wide: http://www.usnews.com/education/best-global-universities/search?region=&country=ireland&subject=&name= and see chart below;
• By QS rankings methodology there is only one Irish university in top 100 world wide http://www.topuniversities.com/university-rankings/world-university-rankings/2015#sorting=rank+region=140+country=+faculty=+stars=false+search= (see second snapshot below)
• By Wikipedia rankings, there is only one Irish university in top 100: https://www.timeshighereducation.com/carousels/wikipedia-ranking-world-universities-top-100 (see third snapshot below)

US NWR rankings:

QS rankings:

Wikipedia rankings:

Note: although QS and Wikipedia rankings for Trinity are relatively close, two methodologies are quite different. In terms of perceived robustness, ARWU and THE, are seen as top quality rankings, with QS and USNWR methodologies being usually seen as 'intermediate' quality and Wikipedia rankings being, err... a bit off-the-wall. 

Still, net effect is: 3/5 global universities rankings give Ireland zero places in top 100. No matter how you spin this, it ain't great...

15/12/15: There will be more blood: Global commodities markets

My Article for Sunday Business Post on commodities markets outlook: http://www.businesspost.ie/constantin-gurdgiev-there-will-be-blood/.

15/12/15: Europe’s Refugees Crisis: Some Economic Perspectives

In recent months, we have observed an ever-increasing cost estimates for Germany (and by a corollary Europe) of absorbing the 2015 inflows of refugees.

Central to these estimates have been numbers released by the Ifo Institute. These estimates started with the assumed inflows of 800,000 refugees in 2015 and were first pegged at EUR10 billion, “just to cover accommodation and food”. I covered these estimates earlier here: http://trueeconomics.blogspot.ie/2015/09/22915-germanys-ifo-refugees-to-cost-ten.html.

Subsequent estimates raised both the number of refugees (to 1,100,000) and the cost per refugee, raising the estimate to EUR21.1 billion (covered here: http://trueeconomics.blogspot.ie/2015/11/111115-new-cost-estimates-of-european.html) and per Ifo including “accommodation, food, creches, schools, German courses, training and administration” over 12 months.

In part, very high costs estimates are premised on the assumed ability of refugees to integrate into German labour markets (http://www.cesifo-group.de/ifoHome/presse/Pressemitteilungen/Pressemitteilungen-Archiv/2015/Q4/pm-20151204_Bildung_Fluechtlinge.html) due to lack of language skills, work skills and education. These assumptions - based on population averages and aggregate scores for key countries of origin for refugees - appear to be in line with German employers’ perception of refugees as generally lacking in key basic skills as noted here: http://www.cesifo-group.de/ifoHome/presse/Pressemitteilungen/Pressemitteilungen-Archiv/2015/Q4/press_20151126_sd22_fluechtlinge.html.

Taking Ifo Institute’s estimate of EUR19,000 in annual costs per refugee, and based on the EU Commission estimate that some 4 million Syrian refugees currently are in Turkey, Lebanon and Jordan, with some also in Egypt, Iraq and Libya, what are the chances that EU’s latest ‘aid’ to Turkey of a miserly EUR3 billion is going to be enough to address the problem?

If research also attempts to quantify cost/benefit assessment of the refugees inflows. In a more recent note (http://www.cesifo-group.de/cesifo/newsletter/1115/From_the_Editor_November_2015.html) the Institute states that “…Europe, with its ageing societies, needs new workers. Germany alone theoretically needs more than 30 million young immigrants until 2035 to keep the old-age dependency ratio constant at the current pensionable age, and maintain both the pension and contribution rates in its pay-as-you-go system unchanged. So, could the newcomers be the solution?”

The answer depends on which model one uses to estimate costs/benefits of inflows. “There have been different calculations about the benefit that refugees bring to the recipient countries. While a Keynesian model using a multiplier analysis until 2035 (!) comes to the conclusion that there are positive net benefits for the incumbent population, generational accounting models come up with frighteningly large loss estimates for the state, reaching between 79,000 and 450,000 euros per person in present value terms. This burden might well prove unsustainable if the number of immigrants continues unabated.” In other words, if you believe in a world where Government spending on anything (be it digging of ditches or building refugees shelter or hospitals) is a positive contributor to growth in the long run, things are just fine. If you believe that there can be misallocation of resources in investment and there can be inefficient transfers across generations as a result of multi annual policy commitments, things are pretty costly.

As usual, there is no agreement amongst the economists on the subject of economic impact of refugees. Which is not to warrant any statement about ethical and human dimension of how Europe should be addressing the crisis (economics, of course, is by far not the only consideration on this matter). But it is a good starting point (albeit a bit late for the current crisis) to have a debate as to the merits of different models for selecting refugees based on specific characteristics, such as prior work experiences, basic skills and education. It is also a good point to start thinking about how the balance between humanitarian assistance and development supports (in countries of origin) as well as social supports and workplace integration incentives in the host countries should/could be structured.

Ifo Institute position on the subject of host countries labour market and social supports structures is to stress the need for reducing minimum wage (Hartz IV) barriers to labour market entry. Without endorsing this view, here is an interesting link to a study that covered impacts of social welfare nets on entrepreneurship amongst migrants in the US, Canada and the UK (with Canadian experience being very interesting as Canadian model of highly selective migration filters is being advocated for Europe): http://trueeconomics.blogspot.ie/2010/02/economics-07022010-human-capital.html.

The refugees crisis of 2015 (and possibly 2016 and on) is testing European systems (labour markets, social welfare, capital structures etc) along the economic dimension. The debates and policy responses so badly needed today should have taken place years ago. Absent these, we are now staring at the possibility that this crisis will alter our political systems, while stressing our economic and social systems. A right response would, in my opinion, involve recognising first and foremost the humanitarian dimension of the crisis, while accelerating the process for developing long term economic responses.


Note: this post is a follow up on my appearance on Bloomberg Radio last morning discussing the topic of economic impact of the refugees crisis.

15/12/15: Russian Outlook for 2016: Slon & Rain

My first column for Russian current affairs magazine Slon is out covering outlook for Russian economy for 2016: https://slon.ru/posts/61120.

I spoke about the topic on Russian TV Channel Dozhd' (Rain): https://tvrain.ru/teleshow/slon_na_dozhde/dollar_71-400099/.

14/12/15: ECB Rates & Policy Room

My comment on monetary policy space remaining for ECB post-December decision: Expresso (December 12, 2015, page 09):

14/12/15: U.S. Rates Impact on Euro: Expresso, December 12

My comments on potential impact on Euro and Euro area economy from the Fed rate hike for Portuguese Expresso (December, 12 page 03):

13/12/15: Strelka Institute: Interview

Recently, I gave an interview (in Russian) to Strelka Institute in Moscow. The interview covered the importance of linking economic development and urban design to sustain a C.A.R.E system of supports for human capital-intensive economy. Here is the interview link: http://www.strelka.com/ru/magazine/2015/12/01/gurgiev.