12/6/16: Few Thoughts on Anglo Trial Verdicts

A friend recently did me a small service by summing up my comments on twitter on the Anglo Irish Bank - Irish Life & Permanent roundabout loans verdict:

I have provided an expert testimony on the matter in April in a court case involving the Central Bank, the Department of Finance and the Attorney General of Ireland, focusing precisely on the nature of the relationship between the Irish Financial Regulation authorities and the misconduct by banks and banks boards prior to 2008 Global Financial Crisis.  Quoting from my expert opinion:

"Part 4: Regulatory enforcement effectiveness and efficiency

46. In my opinion, and based on literature referenced herein, objectives of the function of enforcement in financial regulation are best served by structuring enforcement processes and taking robust actions so as to:
1. Target first and foremost the core breaches of regulatory and supervisory regimes, starting with systemic-level breaches prior to proceeding to specific institutional or individual level infringements [Targeting];
2. Timely execute enforcement actions, both in the context of market participants’ timing and timing relevant to the efficiency and effectiveness of uncovering the actual facts of specific alleged infringements [Timely execution];
3. Prevent or at the very least reduce, monitor and address any potential conflicts of interest in enforcement-related actions [Conflict of interest minimisation];
4. Assure that enforcement actions are taken within the constraints of the regulatory regime applicable at the time of alleged committing of regulatory breaches, while following well-defined and ex ante transparent processes [Applicability and quality of regulation and enforcement];

5. Assure that regulatory enforcement actions do not contradict or duplicate other forms of enforcement and remedial measures, including legal settlements [Consistency of legal and administrative frameworks]."

In simple terms, systemic lack of imposition of meaningful sanctions on senior policy, regulatory and supervisory decision-makers active in the Irish financial services in the period prior to the Global Financial Crisis severely undermines the signalling and deterrence functions of regulatory enforcements. Convicting bankers for mis-deeds is fine, but not sanctioning regulatory and supervisory officials is not conducive to establishing any tangible credibility to the regulatory enforcement regime. Worse, it establishes a false sense of security that the system has been repaired and strengthened by convictions achieved, whilst in reality, the system remains vulnerable to exactly the same dynamics and risks of collusion between regulators and supervisors and the new financial services executives.

It is, perhaps, telling that my counterparts providing expert opinions in the case on behalf of the Central Bank, Department of Finance and the Attorney General of Ireland have based their analysis on the axiomatic assumption that no regulatory, supervisory and enforcement staff can ever be held liable for their actions or inactions in the events and processes that led to the Global Financial Crisis. No matter what they have done or refused to do. Full impunity must apply.

12/6/16: U.S. Student Loans: A Ticking Time Bomb

If you like hokey stick charts, you’ll love these two covering U.S. student loans debt evolution over time:

The numbers are simply mad: total debt rose from around USD 100 billion ca 2006 to almost USD 1 trillion by the end of 2015. On a per capita of student population basis, same period rise was from around USD 16,000 per student to over USD100,000 per student. More recent data, through May 2016 shows that average student debt is now at USD133,000 and the total quantum of student loans outstanding is at over USD 1.2 trillion.

Data from Bloomberg, through 2014, shows that Federal Government-originated student loans have increased 10-fold since 1990:

 Source: Bloomberg, data from Collegeboard.org 

This is not just worrying - it is outright unsustainable. Students loans are predominantly fixed interest rate loans. However, even in the current benign environment, interest rates on this debt are high:

Source: https://studentaid.ed.gov/sa/about/announcements/interest-rate

So the key risk to the student loans debt is not from interest rates increases, but from the fact that it is a secondary debt: as interest rates rise, households priorities on paying down short term credit (credit cards) will take more precedence over longer-term fixed rate debt. Student loans are likely to suffer from higher risk of non-payment.

Currently, 43% of student loans are in default, representing an improvement over 2014 default rate of 46%. The Wall Street Journal recently attributed this decline to programs that allow some borrowers to lower their student loan payments by connecting them to a percentage of the borrower's income (also known as income-driven repayment). The number of borrowers taking advantage of the schemes nearly doubled since 2015 to 4.6 million.

U.S. student loans are, in very simple term, a ticking time bomb. The indebted generation is in the younger demographic with limited income prospects and the job markets that are longer-term characterised by greater income volatility and lower income trends. This means that repayment of these loans exerts greater pressure on household savings and investments exactly at the period of the household life-cycle when American workers benefit the greatest from the compounding effects of savings and investments on life-time income. In other words, the opportunity cost of this debt is the greatest.

11/6/16: 5,000 Years Record…

A quick classic from the 11-months-old Andrew Haldane’s chart plotting history of interest rates from 3000BC through NIRP/ZIRP

Oh, and yes, this is record low…

You can read the full speech here:
www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  - search for Haldane, June 30, 2015 speech.

11/6/16: Too Little CAPEX? Why, Even Investors are Catching Up

Much has been written about the lagging capex cycle in the global economy and its impact on global growth. Including on this blog. So here’s another nice chart, courtesy of BAML showing that investors currently hold extremely pessimistic view of the companies capex activities on aggregate:

“… and laugh again…” as Leonard Cohen proposed… 

11/6/16: Sovereign to Corporate Risk Spillovers

As noted recently in my posts on the new iteration in the Greek Crisis, we are now into the sixth year (officially) of the Euro area sovereign debt crisis. Alas, of course by unofficial, yet more realistic metrics, we are really into the ninth year of the crisis (who cares what you call it).

Now, you might just think that at the present, there is little to worry about, as the crisis seemed to have abated, if not completely gone away. But the problem is that the real lesson from the 2008-present crisis should be exactly the acquired awareness that such thinking is dangerous.

Here’s why. In a recent ECB working paper,  Augustin, Patrick and Boustanifar, Hamid and Breckenfelder, Johannes H. and Schnitzler, Jan, titled “Sovereign to Corporate Risk Spillovers” (January 18, 2016, ECB Working Paper No. 1878: http://ssrn.com/abstract=2717352) “quantify significant spillover effects from sovereign to corporate credit risk in Europe” in the wake of the announcement of the first Greek bailout on April 11, 2010.

“A ten percent increase in sovereign credit risk raises corporate credit risk on average by 1.1 percent after the bailout. These effects are more pronounced in countries that belong to the Eurozone and that are more financially distressed. Bank dependence, public ownership and the sovereign ceiling are channels that enhance the sovereign to corporate risk transfer.”

We should worry.

1) Corporate and sovereign bond risks are tied at a hip. And guess what we are witnessing today? A massive bubble in sovereign bonds and a bubble in corporate bonds. When one blows, the other will too. Be warned, per my contribution to the Summer edition of Manning Financial (LINK HERE).

2) Eurozone countries are at a greater contagion risk. Doh… like we never heard that before. But, still, good reminder to remember. I wrote a paper on that for the EU Parliament not long ago (LINK HERE).

3) Bank dependence is bad for contagion - in a sense that it increases contagion, not reduces it. And guess what the Eurozone been doing lately via ECB’s policy and via CMU and EBU? Right… increasing bank dependency. (LINK HERE)

In short, things might be a bit brighter today than they were yesterday, but tomorrow might bring another hurricane.

10/6/16: Italian Manufacturing Capacity post-crisis

A third paper on manufacturing capacity, also from Italy is by Libero Monteforte and Giordano Zevi, titled “An Inquiry into Manufacturing Capacity in Italy after the Double-Dip Recession” (January 21, 2016, Bank of Italy Occasional Paper No. 302: http://ssrn.com/abstract=2759786).

Here, the authors “…investigate the effects of the prolonged double-dip recession on the productive capacity of the Italian manufacturing sector”. The authors “…estimate that between 2007 and 2013 capacity contracted by 11–17%, depending on the method.”

In addition, the authors “…conduct an exercise to quantify the loss with respect to a counterfactual evolution of capacity in a ‘no-crisis’ scenario in which pre-2008 trends are extrapolated: in this case the loss is close to 20% for all methods.”

Summary of the results:

And here is decomposition of the potential output drop by factor of production:

Per authors: “In terms of factor determinants, about 60% of the cumulated drop of potential output in 2007-13 came from labour, while around 25% was attributable to the TFP (Chart above). The reason why the contribution of capital is comparatively small is twofold: first, the industrial
sector is characterized by a large wage share (close to 70%), therefore the contribution of K in the production function is limited; second, capital is a highly persistent variable and the fall in investments recorded during the two recessions, even if remarkably large, has not (so far)
resulted in a dramatic drop of the capital stock.”

The key lessons from all of this are: potential output in Italy fell precipitously across the manufacturing economy in the wake of the Global Financial Crisis. Meanwhile, counterfactual extension of pre-crisis trends was strongly signalling to the upside in manufacturing.

Majority of metrics used suggest that productive capacity in Italy declined by 15-18 percent through 2013, while counterfactual estimates for pre-crisis trend would have implied an average rise of ca 5 percent.

Last, but not least, “Firms producing basic metals, fabricated metal products and machinery and equipment are found to be the ones that were most penalized by the crisis of the last six years; by contrast, sectors that were already shrinking before 2008, such as the manufacture of textiles, appear not to have performed significantly worse during the double-dip recessions than they had in the early 2000s.”

10/6/16: Italian Industrial Production: 2007-2013

Staying with the earlier theme of industrial / manufacturing sector trends, here is a paper from the Banca d’Italia, authored by Andrea Locatelli, Libero Monteforte, and Giordano Zevi, titled “Heterogeneous Fall in Productive Capacity in Italian Industry During the 2008-13 Double-Dip Recession” (January 21, 2016, Bank of Italy Occasional Paper No. 303: http://ssrn.com/abstract=2759788) looks at the two periods of shocks, separated by one period of brief recovery.

Per authors, “between 2008 and 2013 productive capacity was considerably downsized in the Italian manufacturing sector” based on micro data from the Bank of Italy surveys across “the whole 2008-13 period and in four sub-periods (pre-crisis 2001-07, first phase of the crisis 2008-09, recovery 2010-11, and second crisis 2012-13).”

The study main findings are:
i) “losses of productive capacity varied widely across manufacturing sub-sectors with differences in pre-crisis trends tending to persist in a few sub-sectors during the double-dip recession”;
ii) “large firms were more successful in avoiding major capacity losses, especially in the first phase of the crisis”;
iii) “the share of sales on foreign markets was negatively correlated with performance in 2008-09, but the correlation turned positive in 2012-13”;
iv) “among the Italian macro-regions, the Centre weathered the long recession better” (see charts below);
v) “subsidiaries underperformed firms not belonging to any group”; and
vi) “the negative effects on productive capacity of credit constraints, which discouraged investments, were felt by Italian firms particularly in 2012-13”.

Very interesting outrun by region, presented here in two charts:

Some beef on that point: “The decline in [productive capacity] was not evenly distributed across the Italian macro-regions. The macro-regions more exposed to foreign demand were severely hit by the global financial crisis, with [productive capacity] declining by 8.6% in the North West and 7.0% in the North East.” Now, here’s the irony: Italy was (barely) able to sustain long-term Government borrowing on foot of its extremely strong exporters. During the recent twin crises, this very strength of the Italian economy turned against it. Which sort of raises few eyebrows: strong exporting capacity of Italy led the country to experience sharper shock than in many other states. Yet, the core prescription for growth from across the EU members states is - export!; and core prescription for recovery from the status quo main stream economists is - beef up current ace t surpluses (aka, raise exports relative to imports). Italian evidence does not really sound that supportive of these two ‘solutions’…

“During the temporary recovery, the South under-performed the rest of the country, losing 4.0% of its [productive capacity], while [productive capacity] stagnated in the other macro-regions.”

“The sovereign debt crisis affected the entire country more evenly. As a result, between 2010 and 2013 the loss of [productive capacity] in the South (-8.0%) was roughly twice as large as that recorded in the rest of the country (-4.7%)… The gap reflects the within-country heterogeneity in firms’ characteristics : …South Italy has mainly small firms, with an average of 100 employees (roughly constant during the double-dip crisis). Average firm size is larger in the Centre, just below 150, and in the North East, around 180, and even more so in the North West (consistently above 200). …southern regions have smaller export shares (about 20%), which are higher everywhere else (around 35% at the beginning of the sample); the export share shows a positive trend in all macro-regions.” You can see these reflected in the charts above.

In summary, thus, “the degree of foreign exposure helps to explain why the North suffered more during the global financial crisis. Also, the continuing decline of [productive capacity] in the South since 2007 is consistent with the smaller firm size in that macro-area (discussed above) and the larger decline of domestic demand there”.


So the key lesson here is: in the current environment characterised by rising regionalisation of trade flows and weak global demand, the exports-led recovery is more likely to trigger a negative shock to the economy than support economic growth.

Unless you are talking about a country like Ireland, where exports are booming despite global demand slowdown. Which, of course, cannot be explained by anything other than beggar-thy-neighbour tax optimisation policies.

10/6/16: Wither Manufacturing? Evidence from Denmark

Couple of posts relating to most current research on the recovery and longer term prospects in global manufacturing. As usual here, we shall focus on the advanced economies.

A recent NBER paper, by Andrew Bernard, Valerie Smeets, and Frederic Warzynski, titled “Rethinking Deindustrialization” (March 2016, NBER Working Paper No. w22114: http://ssrn.com/abstract=2755386) looked at decline in manufacturing activity in Denmark, showing that “manufacturing employment and the number of firms have been shrinking as a share of the total and in absolute levels.” The authors examine this phenomena over the period of 1994 to 2007.

“While most of the decline can be attributed to firm exit and reduced employment at surviving manufacturers, we document that a non-negligible portion is due to firms switching industries, from manufacturing to services.”

Here is an interesting list of related findings based on looking closer at the “last group of firms before, during, and after their sector switch”:

• “Overall this is a group of small, highly productive, import intensive firms that grow rapidly in terms of value-added and sales after they switch.”
• “By 2007, employment at these former manufacturers equals 8.7 percent of manufacturing employment, accounting for half the decline in manufacturing employment.”
• “…we identify two types of switchers: one group resembles traditional wholesalers and another group that retains and expands their R&D and technical capabilities.”

Net result? Quite surprising conclusion that the “findings emphasize that the focus on employment at manufacturing firms overstates the loss in manufacturing-related capabilities that are actually retained in many firms that switch industries.”

31/5/16: Markets Outlook: Summer 2016

My latest contribution for Manning Financial covering markets outlook: https://issuu.com/publicationire/docs/mf_summer_2016?e=16572344/36072504

30/5/16: Aid:Tech Through to the Irish Times Innovation Awards Finals

Some really great news for a start up I have been working with for some time now, https://aid.technology/ Aid:Tech has been selected as one of three finalists in the Fintech category of the Irish Times Innovation Awards: http://www.irishtimes.com/business/irish-times-innovation-awards-finalists-original-thinkers-from-all-sectors-1.2663210.

Per Irish Times citation: "Aid:tech is an Irish start-up tech firm using the Blockchain system to help aid agencies and NGOs control and manage the distribution of international aid. Its system already delivered aid to 500 Syrian refugees in Lebanon. The firm’s system significantly overcomes the risk of fraud, a major problem with the distribution of aid funds."

In simple terms, Aid:Tech is the largest blockchain (private blockchain, as opposed to Bitcoin or other e-coins) application for provision of services in international development and aid areas in the world. Aid:Tech platform is now fully developed and ready for engaging with our partners in the global NGO sector. It has been field-tested in a series of trials, including a pilot in Lebanon, mentioned by the Irish Times.

We will be announcing some major forthcoming business and platform news over the next few weeks, so keep an eye out for Aid:Tech.

Last, but not least, all credit for these (and forthcoming) wins is due to our fantastic team!

30/5/16: On-shoring Russian start ups into Ireland

My comment for the Irish Independent on some aspects of the reported increases in Russian tech start ups presence in Ireland: http://www.independent.ie/business/technology/russian-advance-into-irish-tech-sector-facilitated-by-bonoenda-double-act-34754317.html.

Must add that the EI are doing excellent job in Russian marketplace in sourcing some really exciting business development opportunities and providing huge support for Irish companies exporting into the market.

Also, note: Ireland Russia Business Association has merged with i-Cham at the beginning of 2016.

30/5/16: ECB's TLTROs, via Expresso

Portugal's Expresso on ECB's TLTROs programme, with quotes from myself (amongst others):