22/9/16: The most important charts in the world... BusinessInsider

BusinessInsider published their new set of "The most important charts in the world from the brightest minds on Wall Street" : http://www.businessinsider.com/most-important-charts-in-the-world-september-2016-2016-9?op=1.

My - as always contrarian and, hence, somewhat optimistic - contribution here: http://www.businessinsider.com/most-important-charts-in-the-world-september-2016-2016-9?op=0#/#constantin-gurdgiev-57.

21/9/16: BOJ & Fed: Surprises at the End of Policy Line?

My comment for Portugal's Expresso on Bank of Japan and U.S. Fed rate setting meetings (comment prior to both): http://expresso.sapo.pt/economia/2016-09-20-Mercados-nao-esperam-subida-de-juros-nos-Estados-Unidos

English version:

With Bank of Japan clearly running out of assets to buy to sustain its continued efforts to further ease money supply, the Bank’s September 20th meeting is likely to be more significant from the markets perspective than the Fed’s. Back in July, Bank of Japan initiated a comprehensive review of its current policy measures. This move was based on two key pressures faced by Tokyo: the complete lack of monetary policy effectiveness and the shortages of assets eligible for BOJ purchases, still remaining in the markets.

My suspicion is that BOJ is likely to go for the reversal of the Fed’s Operation Twist, buying - as Washington did in 1961 and 2011 - shorter maturity bonds. In 2011, the Fed opted to buy longer-term debt and selling short term bonds. The Fed objective back then was to flatten the yield curve. Bank of Japan today is more desperate to see steepening in maturity curve instead. Paired with deeper foray into negative deposit rates territory, such an Inverse Twist move is probably the likeliest outrun of the current BOJ policy debate, with both policy changes carrying a probability of around 60-70 percent for September 20th meeting. On a longer odds side, expansion of volumes of purchases of bonds (doing more of the same option) for BOJ, in my opinion carries a probability of just 30-40 percent.

BOJ announcement of new policies is potentially more important to the global markets than the Fed’s, in the short run, because BOJ policy options are pretty much similar to those of the ECB, and because Tokyo faces a greater urgency to move this time around. Across the bonds markets, in recent months, there has been an increasing sense that ultra-aggressive monetary policies (those led by BOJ and ECB) have lost their effectiveness just at the time when the central bankers are rapidly running out of option to produce further monetary stimulus without engaging in an outright helicopter money creation. At the same time, as monetary policy effectiveness declined, markets reliance on central banks pumping more and more liquidity into the global financial system is rising as economic fundamentals stubbornly refusing to support current markets valuations in both equities and bonds.


Fed’s rate setting meeting, coming hours after Bank of Japan’s one, will be less predictable and has the capacity to take markets off guard. Prevailing market consensus is that the Fed will simply amplify its extremely moderate hawkish position, signalling once again the growing consensus toward a rate rise after the November Presidential election. In my view, this is the most probable outrun with a probability of around 75 percent. However, given the signs of strengthening economy over 3Q 2016, and the early indications of improving inflationary outlook on foot of August figures, the Fed might surprise with a 25 bps hike in base rates - a low probability (roughly 25%) event. On the ‘hold policy’ side, there has been some disappointing recent economic releases, with a decline in retail sales, flat producer prices inflation and a large drop in industrial production. These, alongside the political cycle, weigh heavily on the probability of a rate hike this week.


The key to the September rates outlook and the markets dynamics will be the twin combination of BOJ and Fed moves. Dovish Fed, alongside further aggressive expansion of Japan’s monetary policy will serve as a forward signal for the ECB to boost its own asset purchasing programme. This is a more likely outcome of Wednesday news flow, given the conditions in the domestic economies and in the global trade environment. Any surprises on the side of the Fed or BOJ deviating from dovish stands will likely be interpreted by the markets as a trigger for bonds sell-off and will also be negative for share prices.

19/9/16: Survivorship Bias Primers

Not formally a case study, but worth flagging early on, especially in the context of our Business Statistics MBAG 8541A course discussion of the weighted averages and stock markets indices.

A major problem with historical data is the presence of survivorship bias that distorts historical averages, unless we weigh companies entering the index by volumes. Even then, there are some issues arising.

Here are few links providing a primer on survivorship bias (we will discuss this in more depth on the class, of course):

• "Morningstar Takes a Closer Look at Survivorship Bias" https://www.ifa.com/articles/morningstar_takes_closer_look_survivorship_bias/
• "SURVIVOR BIAS AND IMPROPER MEASUREMENT HOW THE MUTUAL FUND INDUSTRY INFLATES ACTIVELY MANAGED FUND PERFORMANCE: http://www.etf.com/docs/sbiasstudy.pdf
• "When It Comes to Fund Performance, History Is Often Written by the Winners" http://www.wsj.com/articles/SB10000872396390444025204577545460615317218
• An example from actual data on construction sector activity: http://trueeconomics.blogspot.com/2010/08/economics-9810-irelands-construction.html

19/9/16: Big Data Biases?

A very interesting, and broad (compared to our more statistics-specific discussions in MBAG 8541A) topic is touched in this book: http://time.com/4477557/big-data-biases/. The basic point is: data analytics (from basic descriptive statistics, to inferential statistics, to econometrics and bid data analysis) is subject to all the normal human biases the analysts might possess. The problem, however, is that big data now leads the charge toward behaviour and choice automation.

The book review focuses on ethical dimensions of this problem. There is also a remedial cost dimension - with automated behaviour based on biased algorithms, corrective action cannot take place ex ante automated choice, but only either ex ante analysis (via restricting algorithms) or ex post the algorithm-enabled action takes place. Which, of course, magnifies the costs associated with controlling for biases.

One way or the other - the concept of biased algorithmic models certainly presents some food for thought!

19/9/16: US Median Income Statistics: Losing One's Head in Cheerful Releases

In our Business Statistics MBAG 8541A course, we have been discussing one of the key aspects of descriptive statistics reporting encountered in media, business and official releases: the role that multiple statistics reported on the same subject can have in driving false or misleading interpretation of the underlying environment.

While publishing various metrics for similar / adjoining data is generally fine (in fact, it is a better practice for statistical releases), it is down to the media and analysts to choose which numbers are better suited to describe specific phenomena.

In a recent case, reporting of a range of metrics for U.S. median incomes for 2015 has produced quite a confusion.

Here are some links that explain:

• http://davidstockmanscontracorner.com/ analysis of the data: http://davidstockmanscontracorner.com/deconstructing-median-income-bs/
• Charles Hugh Sith's analysis of the same set from a similar angle: http://charleshughsmith.blogspot.com/2016/09/fun-with-fake-statistics-5-increase-in.html
• Confirming the above, WallStreetExaminer.com: http://wallstreetexaminer.com/2016/09/chart-day-5-2-household-income-gain-vs-reality/ and a the same with links to original release of data: http://wallstreetexaminer.com/2016/09/median-household-income-rose-5-2-yeah-thats-ticket/
• The above are contrasted by the NYTimes coverage: http://www.nytimes.com/2016/09/14/business/economy/us-census-household-income-poverty-wealth-2015.html?_r=0 and Bloomberg view: http://www.bloomberg.com/news/articles/2016-09-13/u-s-poverty-rate-falls-to-post-recession-low-as-incomes-gain

So, as noted on many occasions in our class: if you torture data long enough, it will confess... but as with all forced confessions, the answer you get will bear no robust connection to reality...

19/9/16: FocusEconomics: The Italian Dilemma

Good post from FocusEconomics on the saga of Italian banking crisis: http://www.focus-economics.com/blog/posts/the-italian-dilemma-weak-banks-pose-risk-to-already-faltering-domestic-demand.

And an infographic from the same on the scale of the Italian banking woes:

Click to enlarge

It is worth noting that in the Italian banking case, asset quality crisis (NPLs etc) and compressed bonds returns (yield-related income decline due to ECB QE) are coinciding with elevated macroeconomic risks, as noted by the Tier-3 ranking for Italy in Euromoney Country Risk surveys:

17/9/16: The Mudslide Cometh for Your Ladder

One chart that really says it all when it comes to the fortunes of the Euro area economy:

And, courtesy of these monetary acrobatics, we now have private corporates issuing debt at negative yields, nominal yields...  http://blogs.wsj.com/moneybeat/2016/09/15/negative-yielding-corporate-debt-good-for-your-wealth/.

The train wreck of monetarist absurdity is now so far out on the wobbly bridge of economic systems devoid of productivity growth, consumer demand growth and capex demand that even the vultures have taken into the skies in anticipation of some juicy carrion. With $16 trillion (at the end of August) in sovereign debt yielding negative and with corporates now being paid to borrow, the idea of the savings-investment link - the fundamental basis of the economy - makes about as much sense today as voodoo does in medicine. Even WSJ noted as much: http://www.wsj.com/articles/the-5-000-year-government-debt-bubble-1472685194.

Which brings us to the simple point of action: don't buy bonds. Don't buy stocks. Hold defensive assets in stable proportions: gold, silver, land, fishing rights... anything other than the fundamentals-free paper.

As I recently quipped to an asset manager I used to work with:

"A mudslide off this mountain of debt will have to happen in order to correct the excesses built up in recent years. There is too much liquidity mass built into the markets devoid of investment demand, and too weak of an economy holding it. Everywhere. By fundamental metrics of value-added growth and organic demand expansion potential, every economy is simply sick. There is no productivity growth. There is no EPS growth, even with declining S down to waves of buy-outs. There is debt growth, with no capex & no EPS growth to underwrite that debt. There is a global banking system running totally on fumes pumped into it at an ever increasing rate by the Central Banks through direct monetary policies and by indirect means (regulatory shenanigans of ever-shifting capital and assets quality revisions). There is no trade growth. There is no market growth for trade. Neither supply side, nor demand side can hold much more, and countries, like the U.S., have run out of ability to find new lines of credit to inflate their economies. Students - kids! - are now so deep in debt before they even start working, they can't afford rents, let alone homes. Housing shortages & rents inflation are out of control. GenZ and GenY cannot afford renting and paying for groceries, and everyone is pretending that the ‘shared economy’ is a form of salvation when it really is a sign that people can’t pay for that second bedroom and need roommates to cover basic bills. Amidst all of that: 1% is riding high and dragging with it 10% that are public sector ‘heroes’ while bribing the 15% that are the elderly and don't give a damn about the future as long as they can afford their prescriptions. Take kids out of the equation, and the outright net recipients of subsidies and supports, and you have 25-30% of the total population who are carrying all the burden for the rest and are being crushed under debt, taxes and jobs markets that provide shit-for-wages careers. Happy times! Buy S&P. Buy penny stocks. Buy bonds. Buy sovereign debt. Buy risk-free Treasuries… Buy, Buy, Buy we hear from the sell-side. Because if you do not 'buy' you will miss the 'ladder'... Sounds familiar, folks? Right on... just as 2007 battle cry 'Buy Anglo shares' or 2005 call to 'Buy Romanian apartments' because, you know... who wants to miss 'The Ladder'?.."

14/9/16: Apple Tax on Keiser Report

My interview with Max Keiser for Keiser Report on Apple Tax fiasco: https://www.rt.com/shows/keiser-report/358886-episode-max-keiser-965/

14/9/16: Economics as Art

My conversation with Inspireland on Economics, philosophy of social studies and social inquiry:
https://inspirelandpodcast.com/2016/09/06/e47-constantin-gurdgiev-economics-is-art/

14/9/16: Expresso on ECB forward policy options

My comment on ECB's recent decisions (pre-meeting) in Portugal's Expresso
http://expresso.sapo.pt/economia/2016-09-07-Com-os-governos-ausentes-BCE-empurrado-para-fazer-mais

13/9/16: U.S. business investment slump: oil spoil?

Credit Suisse The Financialist recently asked a very important question: How low can U.S. business investment go? The question is really about the core drivers of the U.S. recovery post-GFC.

As The Financialist notes: “Over the last 50 years, there has usually been just one reason that businesses have slashed investment levels for prolonged periods of time—because the economy was down in the dumps.”

There is a handy chart to show this much.

“Not this time”, chimes The Financialist. In fact, “Private, nonresidential fixed investment fell 1.3 percent in real terms over the previous year in the second quarter of 2016, the third consecutive quarterly decline.” This the second time over the last 50 years that this has happened without there being an ongoing recession in the U.S.

Per Credit Suisse, the entire problem is down to oil-linked investment. And in part they are right. Latest figures reported by Bloomberg suggest that oil majors are set to slash USD1 trillion from global investment and spending on exploration and development. This is spread over 6 years: 2015-2020. So, on average, we are looking at roughly USD160 bn in capex and associated expenditure cuts globally, per annum. Roughly 2/3rds of this is down to cuts by the U.S. companies, and roughly 2/3rds of the balance is capex (as opposed to spending). Which brings potential cuts to investment by U.S. firms to around USD70 billion per annum at the upper envelope of estimates.

Incidentally, similar number of impact from oil price slump can be glimpsed from the fact that over 2010-2015, oil companies have issued USD1.2 trillion in debt, most of which is used for funding multi annual investment allocations.

Wait, that is hardly a massively significant number.

Worse, consider shaded areas marking recessions. Notice the ratio of trough to peak recoveries in investment in previous recessions. The average for pre-2007 episode is a 1:3 ratio (per one unit recovery, 3 units growth post-recovery). In the current episode it was (at the peak of the recovery) 1:0.6. Worse yet, notice that in all previous recoveries, save for dot.com bubble crisis and most recent Global Financial Crisis, recoveries ended up over-shooting pre-recession level of y/y growth in capex.

Another thing to worry about for 'oil's the devil' school of thought on corporate investment slowdown: slump in oil-related investment should be creating opportunities for investment elsewhere. One example: Norway, where property investments are offsetting fully decline in oil and gas related investment. When oil price drops, consumers and companies enjoy reallocation of resources and purchasing power generated from energy cost savings to other areas of demand and investment. Yet, few analysts can explain why contraction in oil price (and associated drop in oil-related investment) is not fuelling investment boom anywhere else in the economy.

To me, the reason is simple. Investing companies need three key factors to undertake capex:
1) Surplus demand compared to supply;
2) Technological capacity for investment; and
3) Policy and financial environment that is conducive to repatriation of returns from investment.

And guess what, they have none of these in the U.S.

Surplus demand creates pressure factor for investment, as firms face rapidly increasing demand with stable or slowly rising capacity to supply this demand. That is what happens in a normal recovery from a crisis. Unfortunately, we are not in a normal recovery. Consumer and corporate demand are being held down by slow growth in incomes, significant legacy debt burdens on household and corporate balance sheets, and demographics. Amplified sense of post-crisis vulnerability is also contributing to elevated levels of precautionary savings. So there is surplus supply capacity out there and not surplus demand. Which means that firms need less investment and more improvement in existent capital management / utilisation.

Technologically, we are not delivering a hell of a lot of new capacity for investment. Promising future technologies: AI-enabled robotics, 3-D printing, etc are still emerging and are yet to become a full mainstream. These are high risk technologies that are not exactly suited for taking over large scale capex budgets, yet.

Finally, fiscal, monetary and regulatory policies uncertainty is a huge headache across a range of sectors today. And we can add political uncertainty to that too. Take monetary uncertainty alone. We do not know 3-year to 5-year path for U.S. interest rates (policy rates, let alone market rates). Which means we have no decent visibility on the cost of capital forward. And we have a huge legacy debt load sitting across U.S. corporate balance sheets. So current debt levels have unknown forward costs, and future investment levels have unknown forward costs.

Just a few days ago I posted on the latest data involving U.S. corporate earnings (http://trueeconomics.blogspot.com/2016/09/7916-dont-tell-cheerleaders-us.html) - the headline says it all: the U.S. corporate environment is getting sicker and sicker by quarter.

Why would anyone invest in this environment? Even if oil is and energy are vastly cheaper than they were before and interest rates vastly lower...

12/9/16: Fiscal Policy in the Age of Debt

In recent years, there has been lots and lots of debates, discussions, arguments and research papers on the perennial topic of fiscal stimulus (aka Keynesian economics) on the recovery. The key concept in all these debates is that of a fiscal multipliers: by how much does an economy expand it the Government spending rises by EUR1 or a given % of GDP.

Surprisingly, little of the debate has focused on a simple set of environmental factors: fiscal stimulus takes place not in a vacuum of environmental conditions, but is coincident with: (a) economies in different stages of fiscal health (high / low deficits, high/low debt levels etc) and (b) economies in different stages of business cycle (expansion or contraction). One recent paper from the World Bank decided to correct for this glaring omission.

“Do Fiscal Multipliers Depend on Fiscal Positions?” by Raju Huidrom, M. Ayhan Kose, Jamus J. Lim and Franziska L. Ohnsorge (Policy Research Working Paper 7724, World Bank) looked at “the relationship between fiscal multipliers and fiscal positions of governments” based on a “large data-set of advanced and developing economies.” The authors deployed methodology that “permits tracing the endogenous relationship between fiscal multipliers and fiscal positions while maintaining enough degrees of freedom to draw sharp inferences.”

The authors report three key findings:

“First, the fiscal multipliers depend on fiscal positions: the multipliers tend to be larger when fiscal positions are strong (i.e. when government debt and deficits are low) than weak.” In other words, fiscal expansions work better in case where sovereigns are in better health.

“For instance, our estimates suggest that the long run multiplier can be as big as unity when the  fiscal position is strong but it can turn negative when the fiscal position is weak. A weak fiscal position can undermine fiscal multipliers even during recessions. Consistent with theoretical predictions, we provide empirical evidence suggesting that weak  fiscal positions are associated with smaller multipliers through both a Ricardian channel and an interest rate channel.”

By strong/weak fiscal position, the authors mean low/high sovereign debt to GDP ratio. And they show that fiscal expenditure uplift for higher debt ratio states results in economic waste (negative multipliers) in pro-cyclical spending cases (when fiscal expansion is undertaken at the times of growing economy). Which is important, because most of the ‘stimuli’ take place in such conditions and majority of the arguments in favour of fiscal spending increases happen on foot of rising economic growth (‘spend/invest while you have it’).

“Second, these effects are separate and distinct from the impact of the business cycle on
the fiscal multiplier.” Which means that debt/GDP ratio has an impact in terms of strengthening or weakening fiscal policy impact also regardless of the business cycle. Even if fiscal expansion is counter-cyclical (Keynesian in nature, or deployed at the time of a recession), fiscal multipliers (effectiveness of fiscal policy) are weaker whenever the debt/GDP ratio is higher. In a way, this is consistent with the issues arising in the literature examining effects of debt overhang on growth.

“Third, the state-dependent effects of the fiscal position on multipliers is attributable to two factors: an interest rate channel through which higher borrowing costs, due to investors’ increased perception of credit risks when stimulus is implemented from a weak initial fiscal position, crowd out private investment; and a Ricardian channel through which households reduce consumption in anticipation of future fiscal adjustments.”

What this means is that low interest rates (accommodative monetary policy) may be supporting positive effects of fiscal expansion, but at a cost of reducing private investment. In a sense, public investment, requiring lower interest rates, crowds out private investment. Now, no medals for guessing which environment we are witnessing today.

Some charts

First, median responses to increased Government spending

Once you control for debt/GDP position with stimulus taking place during recessions:

“Note: The graphs show the conditional fiscal multipliers during recessions for different levels of fiscal position at select horizons… Government debt as a percentage of GDP is the measure of fiscal position and the values shown on the x-axis correspond to the 5th to 95th percentiles from the sample. …Fiscal position is strong (weak) when government debt is low (high). Solid lines represent the median, and dotted bands are the 16-84 percent confidence bands.”

In the two charts above, notice that the range of public debt/GDP ratios for positive growth effect (multiplier > 1) of fiscal policy is effectively at or below 25%. At debt levels around 67%, fiscal expansion turns really costly (negative multipliers) in the long run. How many advanced economies have debt levels below 67%? How many below 25%? Care to count? Five  economies have debt levels below 25% (Estonia, Hong Kong, Macao, Luxembourg and San Marino). For 67% - nineteen out of 39 have debt levels above this threshold. Not exactly promising for fiscal expansions...

Overall, the paper is important in: (1) charting the relationship between fiscal policy effectiveness, and debt position of the sovereign; (2) linking coincident fiscal and monetary expansions to weaker private investment; and (3) showing that in the long run, fiscal expansion has serious costs in terms of growth and these costs are more pronounced for countries with higher debt levels. Now, about that idea that Greece, or the rest of PIGS, should run up public investment to combat growth crisis…