As promised, my slides deck from Tuesday's CXC Global event on the Future of Work and Contingent Workforce
Thursday, April 7, 2016
7/4/16: Globalization and the Future of Work
As promised, my slides deck from Tuesday's CXC Global event on the Future of Work and Contingent Workforce
6/4/16: Apps, Contingent Workforce and U.S. Employment Trends
Here is an interesting chart from the WSJ on the scale of the apps platforms-related Gig-economy employment and the underlying trends in growth on other contingent workforce:
The big 'but' here is that overall app platforms-related employment growth is most likely contributing to the weakening of the quality of contingent workforce (in terms of skills, value added and sustainability), not strengthening it, and thus requires more systemic supports and changes in this workforce management and enablement.
More on this later, so stay tuned.
Sunday, April 3, 2016
2/4/16: Tsipras: Europe's Cross of Forest Gump and Donald Trump
The tragedy of Europe is the comedy of Europe. And it is best illustrated in the case of Greece, or by Greece, where the latest debt-related scandal is telling us more about the infinite degree of European leaders' tupidity and outright lack of duty of care for their own citizens and societies than anything Kafka could have contrived.
The basis for the scandal is the following:
Act 1: IMF staff had a conference call discussing their engagement with the European Institutions in renewing the Greek bailout deal that is due to be renewed (from IMF side) in April. Now, as a precondition to this conversation we have:
- Greece is carrying to much debt after the 'breakthrough' deal 'achieved' last summer and it cannot repay all this debt.
- IMF knows as much and said as much officially
- IMF also knows, and has publicly declared this before, that Greek debt can only be made sustainable by European authorities engaging in debt restructuring for Greece that introduces real haircuts on debt.
- Thus, IMF position going into April is to support Greek economy's objective of attaining debt relief from European 'partners'
- IMF are the good guys for Greek economy (as far as anyone in the game can be a good guy, of course).
Act 2: At the call, details of which were leaked, IMF officials discussed between themselves a possibility for the Fund taking a hardline position with respect to European Institutions in an attempt to influence them to give Greece debt relief. Which means that:
- IMF was considering strong-arming Europe into doing the right thing for Greece; and
- Greece would have benefited socially and economically if IMF were successful in what was discussed
Act 3: Enter 'Forest Gump Grafted on Donald Trump' of European politics - Greek PM Alexis Tsipras. Tsipras goes apoplectic with two things IMF conference call leak did:
- One, Tsipras is livid with the IMF discussing the tactic that could help Greek people by reducing the unsustainable debt burden they are forced to carry courtesy of the EU. The PM of an excessively indebted nation forced onto its knees by collapsed economy and debts is actively fighting against an idea of giving help to that economy. And he is doing so despite the fact that this debt relief was his own electoral platform! The lad is certifiable.
- Two, Tsipras if livid that someone leaked the transcript of the conversation, because, presumably in Europe, when a tree falls in a forest no one cares - out of sight = out of mind. It is the public embarrassment for a PM who barked at the IMF all along despite the fact that the IMF was all along his only friend in the entire EU-led fiasco of debasing the Greek economy. The embarrassment of being shown publicly to be damaging to his own society and economy. The lad is venal.
Details of the drama are conveyed here: http://mobile.reuters.com/article/idUSKCN0WZ0J6.
Sunday, March 20, 2016
20/3/16: Economic Reality v Central Banking: Vegas-styled Showdown
What’s going wrong with the global monetary policy? Nothing, really, except for the economic reality.
Let me explain. In a forthcoming article I will be highlighting the channels through which monetary policy deployed in recent years (a combination of extremely low lending rates, negative in many cases deposit rates, massive asset purchases or QE) have contributed to increasing markets and economic volatility, whilst achieving preciously nothing in terms of lifting up economic growth.
Here, let’s consider what I shall term the ‘extreme impotency’ of monetary policy in the age of a structural debt crisis.
Lessons from the ECB
Earlier this month, ECB did something remarkable. Prior to its March meeting, the ECB has hyped markets expectations for a dramatic monetary expansion (as pre-flagged here: http://trueeconomics.blogspot.com/2016/02/28216-ecb-in-march-thaw-or-spring.html). On the day of the announcement, the ECB actually exceeded markets expectation as I noted here: http://trueeconomics.blogspot.com/2016/03/14316-t-rex-v-paper-clip-of-draghi-and.html and de facto threw in the entire kitchen sink of monetary policies at the fire. This had no real effect.
The ECB forced through extraordinary measures:
- Already negative interest rate on ECB’s main deposit facility were pushed down from -30 to -40 basis points.
- ECB’s monthly bond purchases (the so-called QE programme) were expanded by 1/3rd from EUR60 to EUR80 billion a month, and the time frame for QE was not cut shorter, staying at March 2017 end-date. Better yet (or rather worse), Mario Draghi said the deadline might be extended, if required.
- ECB expanded the range of assets it is buying to include “investment-grade, non-bank corporate bonds” - a measure that will be deployed from June on, reflective of tightening supply in sovereign bond markets and of the ‘kitchen sink’ approach to policy.
- Then, there is an expansion of the T-LTROs universe to introduction of four new targeted long-term refinancing operation facilities with a maturity of four years. The TLTROs are ECB loans to banks designed - so it says on the tin - to help them increase liquidity. Which is, as pure bullshit goes, pure bullshit - there is no shortage of liquidity in the banking system. If there was one - ECB will not be having negative deposit rates. Instead, there is a perceived shortage of lending from that liquidity. Or in simple terms: not enough debt is being issued. So to help banks lend, the ECB promised that those banks where net lending exceeded a benchmark, the interest rate charged by the ECB on TLTRO loans can be set as low as the ECB deposit rate facility rate of -0.4%. In other words the ECB will actually pay banks to issue the loans.
Notice one simple regularity: all measures deployed by the ECB in March and indeed all measures deployed by the ECB across the entire QE are designed to do one thing and one thing only. They are designed to create more debt in the system that has been imploding from too much debt ever since the start of 2008. The ECB is, therefore, curing drug addiction by massively increasing supplies of more pure grade cocaine. If before the ECB started acting the system was sloshing around privately intermediated debt with higher associated costs, now it is being primed by low cost liquidity from the ECB.
The monetary party should have turned into a total rave by now. It did not. Primarily because the financial drug addicts have already over-dosed, so new shipments of the monetarists’ white gold are simply no longer capable of doing much. Just how bad things are? Amidst announcing its most recent ‘blanket bombing with cash’ approach to monetary policy, ECB also lowered its growth projections for the euro area, from 1.7% y/y real GDP growth to 1.4% for 2016. You really can’t make it up: as Mario Draghi bragged about ECB’s valiant efforts to boost economic growth, and as he promised even more of the same, his own forecasters were telling us that none of it is working.
No one in the markets is actually believing anything the Central Bankers say anymore
Bonds investors are refusing to sell bonds (something that should have happened if anyone trusted Central Banks on their promises to deliver higher inflation). Banks shares remain in the same pattern of volatile trading with no one having a faintest idea as to profitability of the paper they are shifting. Asset prices are rising, but they are not rising for real assets (hedges against potential inflation). Banks lending, meanwhile, is getting more questionable. Larger corporate borrowings are funding increasingly higher volumes of shares buybacks (see post here http://trueeconomics.blogspot.com/2016/03/19316-shares-buy-backs-horror-show-of.html). While ECB prints cash, households and SMEs continue to struggle with legacy debts, so that demand for new loans is simply not there no matter how low the interest rates get.
In the U.S., subprime auto loans are now in a securitisation squeeze (see here http://www.wsj.com/articles/subprime-flashback-early-defaults-are-a-warning-sign-for-auto-sales-1457862187). While student loans defaults eased somewhat (down form 2.5% of all loans in 4Q 2014 to 2.3% in 4Q 2015) much of the decline is accounted for by softer loans covenants (see here: http://www.upi.com/Top_News/US/2016/03/17/Report-Student-loan-delinquencies-decline-repayment-on-the-rise/9181458240922/). The 'deleveraged' U.S. households are about to be whacked with healthcare loans markets resting on securitisation model because new debt is good debt until it becomes the unrepayable old debt (http://www.institutionalinvestor.com/article/3538890/banking-and-capital-markets-banking/health-care-loans-offer-possible-remedy-for-high-us-drug-costs.html#/.Vu8pOBIrL_8).
The UK household debt is heading for new highs (http://www.telegraph.co.uk/business/2016/03/17/household-debt-binge-has-no-end-in-sight-says-obr/). Canadian household debt is already there (http://www.theglobeandmail.com/report-on-business/economy/canadians-debt-burden-still-growing-hits-record-in-fourth-quarter/article29172712/). In the U.S., borrowing is rising across virtually all categories (https://www.nerdwallet.com/blog/credit-cards/household-debt-edged-upward-at-end-of-2015/). In Europe, Finland, Spain, Portugal, UK, Sweden, Ireland, Norway, Cyprus, Netherlands and Denmark all have household debt in excess of 100% of GDP.
Meanwhile, negative deposit rates for the banks holding funds with the central banks are hurting banking profitability, costing bank services users in higher fees and higher cost of loans, and dis-incentivising more conservative banks' reserves accumulation.
The real problem, of course, is that the Central Banks are unwilling to face the music. Again, consider the euro area. Here, sluggish demand and weak growth are the key drivers for low inflation. And these drivers themselves are determined by the well-known factors, such as, structural decline in labour and TFP productivity growth, lack of serious competition and free trade across much of services, legacy of pre-crisis debt overhang in household sectors and over-leveraging that has gone on in corporate sector since 2010. Both of these now require restricting legacy debts and/or their partial repayment funded by the ECB. There are also bottlenecks in labour markets, including in areas relating to labour costs, but also in areas relating to skills, workplace practices, wages growth, hours of work demanded, labour force participation, etc.
All of which means that the ECB has been targeting wrong policy objectives using wrong policy tools. And the result is utter and total failure to deliver on its targets. A failure that is equally present for Bank of Japan, and in the longer run - potentially for the U.S. Fed. Let me put this simply: the only functional tool that central banks like ECB and Bank of Japan have is the tool of directly injecting liquidity into debt-burdened companies and households, targeting such injections to either repayments of legacy debts or to building up functional pensions and capex savings buffers. This is much more nuanced than Friedman’s ‘helicopter drop of money’, but it is similar to it in so far as the ‘drop’ must not target debt underwriting intermediaries (banks) and it should not aim to increase issuance of new debt. Instead, it should target balance sheets of households and companies.
The markets know that the Central Banks are out of options, out of depth and out of understanding of what is really wrong with the economy. And, thus, markets are no longer listening to what the Central Bankers say, resting upon the knowledge that the extraordinary policies of the recent past are not a cure of the disease, but the symptom of it: the stronger the Central Bank's signalled commitment to easing, the weaker is the underlying economy, the less likely is the Central Bank's announced policies to have an effect.
Lessons from Japan
Back on January 29th, Bank of Japan announced a convoluted program of differential negative interest rates on deposits.
After the initially positive reaction, the entire game was up: yen rose (instead of falling), and Japan’s terms of trade deteriorated instead of improving. With the negative rates sitting on top of a USD700 billion annual money printing QE programme, yen appreciation was concentrated in two currencies (both the USD and renminbi) which account for most of the Japanese exports. What is more amazing is that following the announcement, Japanese bond yields collapsed (predictably), only to subsequently rise again. The whole market for Japanese Government paper was oscillating like a precarious bubble ready to pop. In this environment, as U.S. is heading for a Fed-declared ‘monetary normalisation’, Government bond yields continue to fall. Meanwhile, in the monetary expansion-minded Europe, German yields are rising, then falling, then rising again. Ditto for Japan. In other words, there is no longer any real connection between monetary policy and markets pricing of Government bonds.
The Central Banks no longer have signalling power left, as the markets have largely stopped listening to the monetary authorities pronouncements. While the Fed has de facto destroyed monetary policy credibility by the way it prepared for, carried out and followed upon its December 15 rate hike, Bank of Japan and the ECB have finished the same off by their kitchen sink efforts at stimulating inflation.
Bill Gross has a neat summary of the state of play: “Instead of historically generating economic growth via a wealth effect and its trickledown effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects… Negative yields threaten bank profit margins as yield curves flatten worldwide and bank NIM’s (net interest rate margins) narrow. The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future ROE’s will be much akin to a utility stock. Observe the collapse in bank stock prices – not just in the last few months but post Lehman. I’ll help you: Citibank priced at $500 in 2007, now $38 as shown in Chart I. BAC $50/now $12. Credit Suisse $70/now $13. Deutsche $130/now $16. Goldman Sachs $250/now $146. Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of writeoffs, tighter regulation and significantly lower future margins. I’ll vote for the latter.” (Bill Gross Investment Outlook March 2016)
More of the same v much much much more of the same
Which brings us about to the key question: with monetary policy becoming completely impotent, what can be done to provide a meaningful stimulus to the economies staring at a de facto stagnation (Japan and the Euro area) or the risk of structurally slower growth (the U.S. and much of the rest of the advanced economies)?
The answer depends on what your monetary ideology is.
In the camp of traditional Central Bankers, it is ‘doing more of the same’ with ever widening scope of instruments: when printing money via QE is not enough, go to negative deposit rates and expand QE to all sorts of corporate debt papers. The key premise here is that issuing more debt is the only solution to the debt crisis. The problem with this approach is apparent. There is too much debt in the system already and our (companies and households) capacity to absorb more of it is exhausted.
In the other camp (and I must disclose personal interest here), the view is that given we are faced with the debt crisis, the only answer is to reduce debt or deleverage. This can be done destructively (by engaging in bleeding the economy dry by forcing debt foreclosures and bankruptcies, while simultaneously reducing the cost of debt carry through lower interest rates), or constructively (via structured write-offs of debt and through QE that injects funds directly into companies and households accounts for the purpose of debt write downs). The former approach requires sustained economic contraction over the period of forced deleveraging. The latter approach implies actually healthier balance sheets across the entire economy.
The first camp of ‘traditionalists’ is only now starting to realise that the only way their approach might work is if the Central Banks de facto commit to a perpetual easing (as opposed to temporary). Narayana Kocherlakota thinks same should apply to the negative deposit rates, although one is hard pressed to imagine what quality of assets and capital does he think the banks will hold in the medium term with negative deposit rates.
The problem, however, is that the ‘traditionalists’ - who dominate Central Banks and Government advisory - are still refusing, some 9 years into the crisis, to acknowledge the debt overhang nature of the crisis. Until they do, Central Banks will continue throwing good money at the wrong targets, delivering neither a relief for the real economy nor a momentum for real growth.
Saturday, March 19, 2016
19/3/16: Shares Buy-Backs: The Horror Show of QE Cash Excesses is Back
Remember the meme of the ‘recovery’?
The story of years of rising shares buy-backs by corporate desperate to do something / anything with all the debt they could get their hands on from the lending banks, whilst having no interest in investing any of these loans in real activity.
Well, back at the end of 2011 and the start of 2014, pumped up on hopium of the so-called imminent recovery in global demand, we witnessed two dips in shares buy-backs, with resulting volatility going the flat trend taking us through some 12 months before lifting off the whole circus to new highs.
And as you can see, the same momentum is now back. Shares buy-backs are booming once again, almost reaching all time highs of 2007. Thus, the toxic scenario whereby companies use cheap credit (QE-funded) to leverage themselves only to fund shares buybacks and not to fund new investment - that vicious cycle of leverage risk and wealth destruction - is open us once again.
Note: I have been tracking the topic on this blog, covering few months back the link between buybacks and lack of corporate capex: http://trueeconomics.blogspot.com/2015/11/111115-take-buyback-pill-us-corporates.html.
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.
Wednesday, March 16, 2016
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.
Tuesday, March 15, 2016
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.
Monday, March 14, 2016
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:
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...
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