19/3/16: Awaiting Tax Holidays

In an amazing chart from Credit Suisse, the U.S. companies retained earnings parked in foreign (ex-U.S.) tax havens has hit record levels in 2015, with four out of six key sectors recording highest retained earnings of all times.

Happy times: as companies rationally see rising probability of a tax holiday post-2016 elections, and as global demand sluggishness restricts their willingness and ability roll these retained arraigns into actual new capex, cash held abroad rises, taxes paid in the U.S. fall and countries like Ireland, Luxembourg, and other tax havens, get happy.

19/3/16: QE Corpses in One chart

A neat chart from @JPMorgan summarising the dynamics and relative levels of global QE efforts by the activist central banks:

Yes, Swiss National Bank is off the charts (alongside BOJ), and yes, ECB is now running ahead of the Fed. But no, all of this activism ain’t doing any miracles for anyone when it comes to unlocking the growth momentum.

19/3/16: Danske’s forecasts for Russia: Mild with little chance of a surprise

Danske’s latest forecasts for Russia are out this week. In contrast to 2015 forecasts, Danske is now running a relatively moderately bearish outlook on Russia. Remember, Danske forecast - as late as of September 2015 - the Russian GDP to shrink 6.2% y/y in real terms (it ended the year with a decline of 3.7%), while projecting USDRUB exchange rate at 72-74 for 3mo-12mo horizon (it is now at around 68.1 and the bank’s new forecasts are for 62.2-66.4 over the next 3mo-12mo horizon).

Per latest, “The path of economic contraction continues to slow. GDP shrank 2.5% y/y In January 2016 versus a 3.5% y/y fall in December 2015. We expect the economy to shrink 2.1% y/y in 2016 if the crude price stays at USD31/bl on average, while we would expect expansion to happen if the oil price climbs to USD59/bl on average.”

Overall, Danske’s view is that supply side of growth equation is now close to / already in expansionary territory, while demand (and investment) sides are both still struggling.

Problem is, this imbalance should be leading to rapidly declining inflation. In part this is starting to show through. As noted by Danske team: “Inflation eased to 8.1% y/y in February, from 9.8% y/y in January, as prices already included the RUB devaluation and the high base effect is weighing on the CPI. We expect 2016 inflation to stay single digit, posting 8.1% y/y in December 2016.”

With this in mind, table below shows Danske’s forecasts summary

At -2.1% for 2016, this is a relatively moderate forecast, at the lower end of the forecast envelope for the consensus, but not low enough to raise eyebrows as with their 2015 outlook. CPI forecasts at 8.1% for 2016 is probably realistic, whilst 5.8% forecast for 2017 is quite likely to go unmet, given upside to growth penciled in and M1 expansion estimated at 9.3% and 10.2% in 2016-2017.

Overall, not that far off from my own expectations for the year, though Current Account surplus is, in my view, more likely to come in at around 3.5-3.8 percent of GDP.

The key to the above is the headline GDP figure (weak and likely to remain weak for some time into 2016) and external balances (strong and likely to remain such into 2016-2017). The economy is struggling to gain the elusive recovery footing, but it is also paying for itself.

16/3/16: ESRI and Imaginary Numbers: Irish Economy Forecast 2016-2017

My article for Sunday Business Post on latest ESRI forecasts for the Irish economy 2016-2017: http://www.businesspost.ie/esri-report-irelands-growth-rate-increasingly-resembles-imaginary-numbers/.

15/3/16: Irish Banks: CoCos Locos

Remember CoCos? Those pretty ugly convertible securities the banks have been issuing to provide bailable cushions in case of a solvency crisis? I covered them in a recent post on Deutsche here: http://trueeconomics.blogspot.com/2016/02/12216-deutsche-bank-crystallising.html.

Well, the Additional Tier 1 instruments have been issued primarily by European banking giants over the last 7 years and not surprisingly, by Irish banks too.  Alas, Irish banks are not known for doing things in moderation, and so Per ValueWalk data, Irish banks have managed to issue some USD4.1 billion of this 'innovative' paper, which is the 5th largest issuance in the world... yes... FIFTH LARGEST in the WORLD.

15/3/16: Times Higher Education Europe Rankings: Not Too Kind for Ireland

Times Higher education 2016 rankings for European Universities, published recently here are an interesting read.

We have:

• TCD at 78th place, below TU Dresden, U of Liverpool, and a bunch of other not too 'premier league' schools. Average showing, given it is 78th across Europe.
• UCD in 88th place. Below Eidhoven UofTech, U of Konstanz, U of Barcelona et al. Good news, it is close to TCD, creating something of a cluster. Bad news is: no Irish Uni in top50 for Europe.
• Third highest ranked school in Ireland is apparently NUI Galway (edging out UC Cork) which is ranked somewhere between 131st and 140th places. Not in top100, thus, despite the fact these rankings are for Europe alone.
• Fourth highest ranked is a specialist school - the Royal College of Surgeons in Ireland - a stronger position for the school, given it has no broader remit of, say NUIG. It also ranks somewhere between 131st and 140th.
• Fifth is UC Cork in the group of Unis ranked 181st through 190th in Europe. It makes top 200, thus, but only by a small margin.
• Sixth is NUI Maynooth which manages to make top 200 in Europe by squeezing into the ranking group between 191st and 200th. 

Overall, not a pretty picture, to be honest. Yes, rankings are not the only metric worth pursuing. Not even the main metric (in my opinion). But rankings do determine students demand for schools, and they determine faculty recruitment. And they do reflect a range of assessment metrics that do matter. And worse, they are all starting to converge on a conclusion that Irish Universities have suffered a long-term set back to their competitiveness during the years of the crisis.

Don't blindly trust the rankings. But don't ignore them either.

14/3/16: T-Rex v Paper Clip: Of Draghi and His Whatevers...

Remember recent ECB commitment to start buying more non-sovereign, non-financial corporates' paper? It was the part of the blanket bombing with 'measures' deployed by Mario Draghi last week.

Here is my summary as a reminder: The European Central Bank cut its key lending rate to zero (from 0.05 percent) in March, slashing its deposit rate further into negative territory (to -0.4 percent from -0.3 percent). Desperate for stimulating slack corporate investment, the ECB also significantly expanded the size and scope of its asset-buying program, hiking monthly purchases targets from EUR60 billion to EUR80 billion. Worse, Mario Draghi also expanded the scope of the programme to include investment grade, euro-denominated debt issued by non-financial corporations. And he announced yet another TLTRO – a longer-term lending programme (4 years duration this time around, having previously failed to deliver any meaningful uplift in the corporate capex via three 3-year long programmes). The new TLTRO will be operating on the basis of the ECB deposit rate, effectively implying that Frankfurt will be giving away free money to the banks as long as they write new loans using this cash. Last, but not least, the finish line for the ECB’s flagship QE programme was pushed out into March 2017 from September 2016. And yet, the ECB’s leatest blietzkrieg into the uncharted lands of monetarist innovation ended with exactly the same outrun as was the case for the Bank of Japan few weeks before it.

What is important however is not the above summary, but the estimated quantum of paper that the ECB so courageously planning to buy in order to prevent Euro area from sliding in a Japan-styled depression.

Enter BAML with their estimate:

No, the lads ain't kidding. The Big Bang is at 100% of the market only EUR554 billion. Shaving off for some tightening of yields, stretching of spreads and eliminating holdings not available for sale, suppose ECB hoovers out 50% of the market. The latest 'stimulus' to the Euro area economy will be... EUR275 billion or so...

You can't make this up.

Or can you? Here's the problem, folks: Last time Bank of Japan’s policy rate was at or above 1% was in June 1995. Before the era of low rates on-set, Japanese economy managed to deliver average annual rate of real economic growth of around 3.6 percent. Since the onset of monetary easing, Japanese economic growth averaged less than 0.8 percent. Bad?.. Bad. But not as bad as in the glowing success of the Eurozone. Here, ECB policy rate fell below its pre-crisis historical low in March 2009 and continued on a downward trend from then on. This coincided with a swing in average real growth rates from 2.02 percent per annum to 0.05 percent. Yes, the numbers speak for themselves: since the start of the Global Financial Crisis, Euro area enjoyed average rates of economic growth that are 16 times lower than the same period average growth in Japan. No need to remind you which economy suffered from a devastating earthquake and a tsunami in 2011.

And to counter this, the ECB is deploying a measure that at most can deliver ca EUR275 billion. 

Forget the idea of going after the bear with a buckshot load. Try going after a T-Rex with a paperclip... 

14/3/2016: Foreign Investors, Sovereign Risks & Regulatory Clowns

Over 2012-2013, sovereign and corporate bonds markets started showing sigs of QE-related fatigue within the system, most commonly associated with periodically volatile trading spreads, term premia and risk spreads. In 2013, following the onset of the Fed-related “taper tantrum” many emerging markets spreads on their sovereign bonds widen dramatically, especially in response to rapid devaluations of their domestic currencies.

“This prompted market analysts to identify five of the worst hit economies as the “fragile five,” attributing their vulnerability to economic fundamentals, particularly to current account deficits.” Which is fine - current account is a reasonably important signal of the overall external balance in the economy, but… the but bit is that current account alone means little. Take for example Russia: back in 2013, the economy enjoyed record current account surpluses - so was a picture of rude health by the analysts criteria. Yet, within the economy there was already an apparent and fully recognised on-going structural slowdown.

Bickering over indicators validity aside, however, it would be nice to know which indicators and which risk models do investors flow when they decide to buy or sell emerging market bonds?

Traditionally, we think about two types of factors: “push” and “pull” factors, determining whether the emerging economy experiences capital inflows or outflows.

- “The push factors often relate to economic or financial developments in the global economy as a whole or in the advanced economies, notably the United States.”
- “The pull factors often relate to country-specific economic fundamentals in emerging markets”

Both push and pull factors seem to be important.

In analyzing returns on sovereign CDS contracts, the BIS paper looks at CDS returns “for 18 emerging markets and 10 advanced countries over 11 years of monthly data from January 2004 to December 2014.”

Findings in a nutshell:

• “Statistical tests for breaks in the movements of CDS returns suggest a break at the time of the eruption of the global subprime crisis in October 2008. This leads us to consider two subperiods separately, an “old normal” before the outbreak of the crisis and a “new normal” afterwards.”
• “In both the old normal and new normal, we seek to explain the variation of these [principal factors] loadings [onto risk premia] in terms of such fundamentals as debt-to-GDP ratios, fiscal balances, current account balances, sovereign credit ratings, trade openness, GDP growth and depth of the domestic bond market.”
• “In the old normal, the first risk factor alone explains about half of the variation in CDS returns…” 
• “This factor becomes more dominant in the new normal, in which it explains over three-fifths of the variation in returns.”
• “When it comes to how the different countries load on this factor, we find that that the commonly cited economic fundamentals have little influence on the country-specific loadings on the factor. Instead the single most important explanatory variable for the differences in loadings is a dummy variable that identifies whether or not a country is an emerging market.”

To summarise the BIS findings: “In the end, we find that CDS returns in the new normal move over time largely to reflect the movements of a single global risk factor, with the variation across sovereigns for the most part reflecting the designation of “emerging market”. There seems to be no “fragile five”; there are only emerging markets. While the emerging markets designation may serve to summarize many relevant features of sovereign borrowers, it is a designation that lacks the kind of granularity that we would have expected for a fundamental on which investors’ risk assessments are based. The importance of the emerging markets designation in the new normal suggests that index tracking behaviour by investors has become a powerful force in global bond markets.”

And the cherry on top of the proverbial pie? Why, here it goes: “Haldane (2014) has argued that in the world of international finance, the global subprime crisis and the regulations that followed made asset managers more important than banks. Miyajima and Shim (2014) show that even actively managed emerging market bond funds follow their benchmarks portfolios  quite closely. For the most part, when global investors invest in emerging markets, instead of picking and choosing based on country-specific fundamentals, they appear to simply replicate their benchmark portfolios, the constituents of which hardly change over time.”

Wait, what? All regulators are running around the world chasing the bad bankers (for their pre-2008 shenanigans), all the while the new threat has already migrated to asset management. The regulators and enforcers are busy bee-buzzing around courts and regulatory hearings chasing the elusive ‘signalling value’ of enforcing old rules onto the heads of the bankers. With little real outcome to show, I must add. … But the future culprits are not to be found amongst those who care to watch the fate of bankers unfolding in front of them.

In short, having exposed the farce of bond / CDS markets pricing risks based on a vague and vacuous designation of a country, the BIS paper inadvertently also exposed the massive futility of the financial regulators chasing their own tails trying to get past crises culprits to prevent new crises from happening, even though the future culprits don;t give a toss about the past culprits.

Dogs, tails, everything wagging everyone, and vice versa…


Full paper here: Amstad, Marlene and Remolona, Eli M. and Shek, Jimmy, “How Do Global Investors Differentiate between Sovereign Risks? The New Normal versus the Old” (January 2016). BIS Working Paper No. 541: http://ssrn.com/abstract=2722580

14/3/2016: Inheritance-Rich Social Disasters?

Using microdata from the Household Finance and Consumption Survey (HFCS), a recent research paper from the ECB examined “the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries.”

Top of the line findings:

1) “About one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit.” Which is sort of material: in a democracy 1/3 of voters making their decisions based on inherited wealth can and (I would argue) does impose a cost on those who do not stand (do not expect) to inherit wealth. Examples of such mis-allocations? Take Ireland, where everything - from retirement to housing markets to childcare provision to education hours is predicated on transfers of income and / or wealth within the family. While those who stand to gain through this system cope well, those who stand to not gain through this familial wealth and income transfers system, stand to lose. Guess who the latter are? Of course: the poor (or those from the poor background, even if they are higher earners today) and the foreign-born.

2) “Regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries.” Which, in basic terms means that you have to work 2.5 times harder to achieve the same impact as inheritance for every point increase in inherited wealth. Merit, you say? Of course not: daddy’s money vastly outperforms, as far as financial returns go, own education, effort, aptitude etc… Though, of course, here’s a pesky bit: for all those pursuing equality and other nice social objectives, higher income taxes, of course, make it even less feasible for income (work) to catch up with inherited wealth. Which might explain why well-heeled (and often inept) folks of Dublin South are so much in favour of the ideas of raising income taxes, but are not exactly enthused about hiking inheritance taxes.

3) “Multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth.” Which, basically, says the utterly unsurprising: wealthy households don’t rely on social welfare. Doh, you’d say. But not quite. The “findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase -- rather than a decrease -- of observed wealth inequality.”

In other words, inheritance induces higher inequality in wealth. It compounds this effect by allocating inheritance without any sense of merit and at an indirect (policy) cost to those households that are not standing to inherit wealth. Which means that more inheritance-based is the given society, more wealth inequality you will get in it, and less merit in wealth allocation will result. Which, in turn implies you gonna pay for this with higher taxes (everyone will, except, of course, the really wealthy).

Next time you driving through, say Monkstown, check them out: the *daddy’s money* wandering around… they cost you, in tax, in higher charges for policy-related services, and in merit-less society.


Full paper here: Fessler, Pirmin and Schuerz, Martin, Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State (September 22, 2015). ECB Working Paper No. 1847: http://ssrn.com/abstract=2664150

11/3/16: This Week: From Dublin...

Couple of quick deliveries from this week:

• Enjoyed teaching my Applied Investment Management and Trading course at TCD, MSc Finance;

• The book we have been working on with co-editors and co-authors since 2015 is finally out: "Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery" part of Emerald's series Advances in Sustainability and Environmental Justice:  http://www.amazon.com/Lessons-Great-Recession-Sustainability-Environmental/dp/178560743X. Two chapters co-authored by myself are available (in working paper format) here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2713332 and here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2713335.

• Our paper "Tsallis Entropy: Do the Market Size and Liquidity Matter?" (working paper here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2507977) is now in production process with Finance Research Letters (http://www.journals.elsevier.com/finance-research-letters/).

It has been a busy and rewarding week, so apologies for not blogging... 

4/3/16: Can Cryan halt Deutsche Bank's decline? Euromoney

Recently, I wrote about the multiple problems faced by the Deutsche Bank (see post here http://trueeconomics.blogspot.com/2016/02/12216-deutsche-bank-crystallising.html).

Subsequently, Euromoney published a well-researched and wide-ranging article on the same subjects that is also worth reading, even though there are quite significant overlaps with my earlier post: http://www.euromoney.com/Article/3534126/Can-Cryan-halt-Deutsche-Banks-decline.html?single=true.

3/3/16: BRIC Composite Activity - February

On a cumulative basis (based on Composite PMIs for each country), the BRIC economies as a group have posted a very disappointing performance in February 2016.

Note: for this index, 100.0 is a zero growth marker.

Russian economy Composite Indicator posted a positive upside surprise, rising from a contractionary reading of 96.8 in January to a weakly-expansionary reading of 101.2. 3mo average through February 2016, however, remains below 100 line at 97.9, which is weaker than the 3mo average through November 2015 at 100.3. The details of Russian Manufacturing sector woes are covered here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html, while details of Russian Services and Composite PMIs upside are covered here: http://trueeconomics.blogspot.com/2016/03/3316-russia-services-composite-pmi.html.

As a result, Russian economy acted as a factor pushing up BRIC rates of growth in February:

In contrast with Russia, Chinese Composite Indicator posted a significant contraction in February, falling from 100.2 (zero growth) in January 2016 to 98.8 (weak contraction) in February. On a 3mo average basis, the index is now at 99.3 for the period through February 2016, up marginally on 98.9 reading for the 3months through November 2015, but down on 102.4 reading for the 3mo average through February 2015. Details of Chinese Manufacturing PMIs are covered here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html, while details of Services and Composite PMIs are covered here: http://trueeconomics.blogspot.com/2016/03/3316-china-services-composite-pmi.html.


India’s Composite Indicator fell from 106.6 in January to 102.4 in February, signalling major slowdown in the rate of economic expansion. 3mo average through February 2016 is at 104.1, reflecting robust growth in January, and up on 102.9 3mo average through November 2015, but below 105.3 reading for the 3 months period through February 2015. The weakness in the Indian economic growth is highlighted by comparison to the historical average, which stands at 109.5.

Per Markit: “February data showed that services firms and goods producers alike registered weaker increases in activity. …Falling to a three-month low of 51.4 in February, from 54.3 in January, the seasonally adjusted Nikkei Services Business Activity Index highlighted a softer expansion of output that was only marginal. Where growth was seen, businesses reported higher levels of incoming new work. Although new orders at services firms continued to rise in February, the rate of expansion eased to the weakest since last November as firms reportedly faced strong competition for new work during the month. A quicker increase in order book volumes in the manufacturing economy was insufficient to prevent growth of private sector new orders from easing to a three-month low.”

Conditions in Indian Manufacturing are covered in detail here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html.


Meanwhile, Brazil remained the sickest economy in the BRIC group. Composite Indicator for Brazilian economy sunk to an all-time low of 78.0 from an already recessionary 90.2 in January. As the result, 3mo average for Brazil’s Composite Indicator was at 85.3, down on already extremely weak 86.6 recorded over the 3 months through November 2015 and on 100.1 3mo average through February 2015.

According to Markit: “The downturn in the Brazilian economy took a noticeable turn for the worse in February. Business activity, new orders and employment all fell at, or near to, the fastest rates since the combined manufacturing and service survey began in March 2007. Companies continued to link the adverse operating environment to the ongoing economic, financial and political crises. …Accelerated downturns were registered at manufacturers and service providers alike, although the slump at services companies was especially severe. At 36.9 in February, down from 44.4 in January, the seasonally adjusted Markit Services Business Activity Index posted its lowest reading in the nine-year survey history. Business activity has fallen in each of the past 12 months.”

Brazil’s Manufacturing PMIs were covered in detail here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html.

The summary of changes in both manufacturing and Services sectors across all BRIC economies is here:

Thus, overall, global GDP-weighted BRIC PMI Indicator (computed by me) fell to 98.4 - signalling moderate or mild contraction, down from January reading of 100.6. The Index is now registering sub-100 readings in seven out of nine last months. Worse, BRIC economies last posted a statistically significant reading for growth back in December 2014. On a 3mo basis, 3 months average through February 2016 is at 99.1, which is basically unchanged on 3mo average through November 2015 (99.0) and significantly lower than the 3mo average through January 2015 (101.8). Starting with February 2015, the index has been averaging zero growth.