28/1/17: Trust in Core Social Institutions Has Collapsed

The latest Edelman Trust Barometer for 2017 shows comprehensive collapse in trust around the world in 4 key institutions of any society: the Government (aka, the State), the NGOs (including international organizations), the Media (predominantly, the so-called mainstream media, or established print, TV and radio networks) and the Businesses (heavily dominated by the multinational and larger private and public corporates).

Here are 8 key slides containing Edelman's own insights and my analysis of these.

Let's start with the trend:

In simple terms, world-wide, both trust in Governments and trust in Media are co-trending and are now below the 50 percent public approval levels. For the media, the wide-spread scepticism over the media institutions capacity to deliver on its core trust-related objectives is now below 50 percent for the second year in a row. even at its peak, media managed to command sub-60 percent trust support from the general public, globally. This coincided with the peak for the Governments' trust ratings back in 2013. Four years in a row now, Governments enjoy trust ratings sub-50 percent and in 2017, mistrust in Governments rose, despite the evidence in favour of the on-going global economic recovery.

In 2017, compared to 2015-2016, Media experienced a wholesale collapse in trust ratings. In only three countries of all surveyed by Edelman did trust in media improve: Sweden, Turkey and the U.S. Ironically, the data covering full 2016, does not yet fully reflect the impact of the U.S. Presidential election, during which trust in media (especially the mainstream media) has suffered a series of heavy blows.

 In 2016, 12 out of 29 countries surveyed had trust in Media at 50 percent or higher. In 2017, the number fell to 5.

Similar dynamics are impacting trust in NGOs:

 Of 29 countries surveyed by Edelman, 21 had trust in NGOs in excess of 50 percent in 2017, down from 23 in 2016. Although overall levels of trust in NGOs remains much higher than that for the Media institutions, the trend is for declining trust in NGOs since 2014 and this trend remans on track in 2017 data.

As per trust in Government, changes in 2017 compared to 2015-2016 show only 7 countries with improving Government ratings our of 29 surveyed. This might sound like an improvement, unless you consider the already low levels of trust in Governments.

In 2017, as in 2016 survey, only 7 countries posted trust in Government in excess of 50 percent. This is the lowest proportion of majority trust in Government for any survey on record.

Based on Edelman analysis, the gap between 'experts' (or informed public) view of institutions and that of the wider population is growing.

 And as the above slide from Edelman presentation shows, the gap between informed and general public is substantively the same in culturally (and institutionally) different countries, e.g. the U.S., UK and France. All three countries lead the sample by the size of the differences between their informed public trust in institutions and the general public trust. All of these countries have well-established, historically stable institutions and robust checks and balances underpinning their democracies. Yet, the elites (including intellectual elites) detachment from general public is not only massive, but growing.

These trends are also present in other countries:

As Edelman researchers conclude: the public in general is now driven to reject the status quo.

All of the above suggests that political opportunism, ideological populism and rising nationalism are neither new phenomena, nor un-reflected in historical data, nor fleeting. Instead, we are witnessing organic decline in trust of the institutions that continue to sustain the status quo.

27/1/17: Eurocoin Signals Accelerating Growth in January

Eurocoin, leading growth indicator for euro area growth published by Banca d'Italia and CEPR has risen to 0.69 in January 2017 from 0.59 in December 2016, signalling stronger growth conditions in the common currency block. This is the strongest reading for the indicator since March 2010 and comes on foot of some firming up in inflation.

Two charts to illustrate the trends:

Eurocoin has been signalling statistically positive growth since March 2015 and has been exhibiting strong upward trend since the start of 2Q 2016. The latest rise in the indicator was down to improved consumer and business confidence, as well as higher inflationary pressures. Although un-mentioned by CEPR, higher stock markets valuations also helped.

27/1/17: Sovereign Debt Junkies Can't Get Negative Enough in 4Q 16

There’s less euphoria in sovereign borrowers camps of recent, but plenty of happiness still.

Per latest data from FitchRatings, “global negative-yielding sovereign debt declined slightly to $9.1 trillion outstanding as of Dec. 29, 2016, from $9.3 trillion as of Nov. 28, 2016… The decline came from the strengthening of the US dollar and little net change in European and Japanese sovereign long-term bond yields.” In other words, currency movements are pinching valuations.

Notably, “there was $5.5 trillion in Japanese government bonds yielding less than 0%, down about $2.4 trillion since the end of June 2016. Slight increases in Japanese yields and a weaker yen contributed to the ongoing decline in the amount of negative-yielding debt outstanding in Japan.” Never mind: world’s third largest economy accounts for 60.5 percent of all negative yielding sovereign debt. That’s just to tell you how swimmingly everything is going in Japan.

27/1/17: U.S. GDP Growth is Down, Not Quite Out...

So President Trump wants U.S. economy growing at 4 percent per annum. And he wants a trade tussle with Mexico and China, and possibly much of the rest of the world, or may be a trade war, not a tussle. And he wants tariffs on imports from Mexico to pay for the Wall. And all of this is as likely to support his 4 percent growth target, as a crutch is to support a two-legged sheep.

Take the latest U.S. GDP figures. The latest preliminary estimates for the 4Q 2016 U.S. GDP growth came out today. It is pretty ugly. The markets expected 4Q GDP print to come in up 2.2 percent, with some forecasters being on a much more optimistic side of this figure. Instead, q/q growth (preliminary estimate) came in at 1.9 percent. This puts full year 2016 growth estimate at 1.6 percent which, if confirmed in subsequent revisions, will be the one of the two lowest rates of growth over 2010-2016 period. In 2015, FY growth was 2.6 percent.

The key reason for the drop in growth that everyone is talking about is net exports. In 4Q 2016, net exports subtracted 1.7 percentage points from the U.S. GDP, which is the largest negative impact for net trade figures since 2Q 2010. This was ugly. But less-talked about was a rather not-pretty 1 percentage point positive contribution to GDP from inventories which was the largest positive contribution since 1Q 2015. And more: inventories overall contribution to 2016 FY growth was higher than in both 2014 and 2015.

Quarterly GDP Growth and Contributions to Growth

Source: ZeroHedge

Good news: business investment rose, adding 0.67 percentage points to overall growth, and private sector equipment purchases rose 3.1 percent. Good-ish news: (after-tax) disposable personal income rose 1.5 percent in real terms on an annualised basis, but this marked the lowest growth rate in income over 3 years. Slower rate of growth in personal income over 4Q 2016 was down to “deceleration in wages and salaries”. Structurally, this suggests we might see some capex growth in 2017, while wages and salaries growth slowdown is likely to give way to more labour costs inflation, consistent with headline unemployment figures. If so, 1.6 percent annual growth can shift to 2-2.2 percent range.

Adding a summary to the above, BEA report notes:  “The increase in real GDP in 2016 reflected positive contributions from PCE [private consumption], residential fixed investment, state and local government spending, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.” In other words: borrowed money-based personal spending, plus borrowed money-based government spending, borrowed money-based property ‘investments’ were up. Capacity investments were down.

So, about that 4% target figure, Mr. President... time to hire some Chinese 'state statisticians' to get the figures right?..


In a final caveat: this is the first print of GDP growth and it is subject to future revisions.

27/1/17: Eurogroup has ignored Brexit risks to Ireland

My article for the Sunday Business Post on the latest Eurogroup meeting:  https://www.businesspost.ie/opinion/constantin-gurdgiev-eurogroup-ignored-brexit-risks-irish-economy-376645.

27/1/17: Some News Links

Some recent news links that reference the site or carry my comments:

Global Capital article by Jeremy Weltman looking at key country risks for 2016-2017: http://www.globalcapital.com/article/b1157nr86h8byh/country-risk-review-2016-populism-is-risky.

Il Foglio (Italian) looking at the failures of policymakers around the world to address the issues of demographics, citing one of the analysis pieces published on this blog: http://www.ilfoglio.it/list/2017/01/04/news/cona-cie-demografia-dimenticata-113573/?refresh_ce.

23/1/17: Regulating for Cybersecurity: A Hacking-Based Mechanism

Our second paper on systemic nature (and regulatory response to) cyber security risks is now available in a working paper format here: Corbet, Shaen and Gurdgiev, Constantin, Regulatory Cybercrime: A Hacking-Based Mechanism to Regulate and Supervise Corporate Cyber Governance? (January 23, 2017): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2904749.

Abstract: This paper examines the impact of cybercrime and hacking events on equity market volatility across publicly traded corporations. The volatility influence of these cybercrime events is shown to be dependent on the number of clients exposed across all sectors and the type of the cyber security breach event, with significantly large volatility effects presented for companies who find themselves exposed to cybercrime in the form of hacking. Evidence is presented to suggest that corporations with large data breaches are punished substantially in the form of stock market volatility and significantly reduced abnormal stock returns. Companies with lower levels of market capitalisation are found to be most susceptible. In an environment where corporate data protection should be paramount, minor breaches appear to be relatively unpunished by the stock market. We also show that there is a growing importance in the contagion channel from cyber security breaches to markets volatility. Overall, our results support the proposition that acting in a controlled capacity from within a ring-fenced incentives system, hackers may in fact provide the appropriate mechanism for discovery and deterrence of weak corporate cyber security practices. This mechanism can help alleviate the systemic weaknesses in the existent mechanisms for cyber security oversight and enforcement.

20/1/17: Obama Legacy: Debt

Great chart via @Schuldensuehner showing that Trump presidency is off to a cracking start, courtesy of Obama legacy: debt overhang

Now, keep in mind: the entire legislative legacy of Obama's administration (amounting pretty much to Obamacare) can be undone by Congress and the new President. What cannot be undone is the debt mountain accumulated by the U.S. That mountain is here to stay. For generations to come.

Oh, and the above chart does not even begin to describe the mountain of unfunded liabilities that keeps expanding from President to President.

18/1/17: Bitcoin Demand: It's a Chinese Tale

Bitcoin demand by geographic location of trading activity:

H/T for the chart to Dave Lauer @dlauer

It shows exactly what it says: Bitcoin is currently driven by safe haven instrument (and not as a hedge) against capital controls. Which implies massive expected price and volumes volatility in the future, wider cost margins and artificial support for demand in the near term.

17/1/17: Government Debt in the Age of Austerity

The fact that the world is awash with debt is hard to dispute (see data here and here), but it is quite commonly argued that the aggressive re-leveraging happening in the corporate and household sectors runs contrary to the austerity trends in the public debt segment of the total economic debt. The paradox of the austerity arguments is, of course, that whilst debt is rising, public investment is falling and public consumption remains either stagnant of rising slowly. This should see public debt either declining or remaining static. Of course, banks bailouts in a number of advanced economies would have resulted in an uplift in public debt during the early years of the Global Financial Crisis and the Great Recession, but these years behind us, we should have witnessed the austerity translating into moderating debt levels in the global economy when it comes to public debt.

Alas, this is not the case, as illustrated in the chart below:

Here's a tricky bit:

• In the 5 years 2012-2016 (post-onset of the recovery) Government debt around the world rose 11.4% in level terms (USD), and 14.51 percentage points as a share of GDP per capita. During the crisis years of 2007-2011, Government debt rose 72.7% in dollar terms and was down 4.39 percentage points as a share of GDP.
• In the advanced economies, Government debt rose 67.6% in dollar terms in 2007-2011 period, up 4.7 percentage points, before rising 5.44% in dollar terms over subsequent 5 years (up 26.65 percentage points in terms of debt to GDP ratio). 
• In the euro area, Government debt was up 57.4% in dollar terms and up 0.51 percentage points in GDP ratio terms over the period of 2007-2011, before falling 6.9 percent in dollar terms but rising 24.8 percentage points relative to GDP in 2012-2016 period.
• And so on...

As the above chart shows, globally, total volume of Government debt was estimated to be USD63.2 trillion at the end of 2016, up USD6.46 trillion on the end of 2011. That is almost 84.1% of the world GDP today, as opposed to 78% of GDP at the end of 2011. More than half of this increase (USD3.91 trillion) came from the Emerging and Developing Economies, and USD2.3 trillion came from G7 economies. Meanwhile, euro area Government Debt levels declined USD815 billion, all of which was due solely to changes in the exchange rate and the rollover of some debt into multinational organisations' (e.g. ESM) and quasi-governmental (e.g. promissory notes) debt. Worse, over the said period of time, only one euro area country saw reduction in the levels of debt: Greece (down EUR34.46 billion due to restructuring of debt). In fact, in Euro terms, total euro area government debt rose some EUR1.36 trillion over the span of the 2011-2016 period.

All in, global pile of Government debt is now USD27.84 trillion (or 78.7%) up on where it was at the end of 2007 and the start of the Global Financial Crisis.

So may be, just may be, the real economy woe is that most of the new debt accumulated by the Governments in recent years has flown into waste (supporting banks, financial markets valuations, doling out subsidies to politically favoured sectors etc), instead of going to fund productive public investments, including education, skills training, apprenticeships and so on. Who knows?..

17/1/17: Economics of Blockchain

One of the first systemic papers on economic of blockchain, via NBER (http://www.nber.org/papers/w22952) by Christian Catalini and Joshua S. Gans, NBER Working Paper No. 22952 (December 2016).

In basic terms, the authors see blockchain technology and cryptocurrencies influencing the rate and direction of innovation through two channels:

1. Reducing the cost of verification; and 
2. Reducing the cost of networking.

Per authors, for any "exchange to be executed, key attributes of a transaction need to be verified by the parties involved at multiple points in time. Blockchain technology, by allowing market participants to perform costless verification, lowers the costs of auditing transaction information, and allows new marketplaces to emerge. Furthermore, when a distributed ledger is combined with a native cryptographic token (as in Bitcoin), marketplaces can be bootstrapped without the need of
traditional trusted intermediaries, lowering the cost of networking. This challenges existing
revenue models and incumbents's market power, and opens opportunities for novel approaches to
regulation, auctions and the provision of public goods, software, identity and reputation systems."

A bit more granularly, per authors,

• "Because of how it provides incentives for maintaining a ledger in a fully decentralized way, Bitcoin is also the first example of how an open protocol can be used to implement a marketplace without the need of a central actor." In other words, key feature of cryptocurrencies and blockchain is that it removes the need to create a central verification authority / intermediary / regulator or repository of data. The result is more than the cost reduction (focus of the Catalini and Gans paper), but the redistribution of market power away from intermediaries to the agents of supply and demand. In other words, a direct streamlining of the market away from third parties power toward the direct power for economic agents.
• "Furthermore, as the core protocol is extended (e.g. by adding the ability to store documents through a distributed ledger-storage system), as we will see the market enabled by a cryptocurrency becomes a  flexible, permission-less development platform for novel applications." Agin, while one might focus on reductions in the direct costs of innovation in that context, one cannot ignore the simple fact that blockchain is resulting in reduced non-cost barriers to innovation, further reducing monopolistic market power (especially of intermediaries and regulators) and diffusing that power to innovators.

So what are the implications of this view of economics of blockchain? "Whereas the utopian view has argued that blockchain technology will affect every market by reducing the need for intermediation, we argue that it is more likely to change the scope of intermediation both on the intensive margin of transactions (e.g., by reducing costs and possibly influencing market structure) as well as on the extensive one (e.g., by allowing for new types of marketplaces)." So far, reasonable. Intermediation will not disappear as such - there will always be need for some analytics, pricing, management etc of data, contracts and so on, even with blockchain ledgers in place. However, the authors are missing a major point: blockchain ledgers are opening possibility to fully automated direct data analytics and AI deployment on the transactions ledgers. In other words, traditional forms of intermediation (for example in the context of insurance contract transactions, those involving data collection, data preparation, risk underwriting, contract pricing, contract enforcement, contract payments across premia and payouts, etc) all can be automated and supported by live data-based analytics engine(s) operating on blockchain ledgers. If so, the argument that the utopian view won't materialise is questionable.

The paper is worth reading, for it is one of the early attempts to create some theoretical framework around blockchain systems. Alas, my gut feeling is that the authors are failing to fully understand the depth of the blockchain technology. 

17/1/17: Russian Economic Policy Uncertainty 2016

In the previous post (link here), I covered 2016 full year spike in economic policy uncertainty in Europe on foot of amplification of systemic risks. Here is the analysis of Russian index.

As shown in the chart above, 2016 continued the trend for downward correction in Russian economic policy uncertainty that took the index from its all-time high in 2014 (at 180.4) to 160 in 2015 and 142.5 in 2016. All data is rebased to 1994 - the first year for which Russian data is available. However, at 142.5, the index is still well above its historical average of 94.1 and stands at the fifth highest reading in history.

Much of the reduction in economic policy uncertainty over 2016 came over the fist seven months of the year, with index readings rising into the second half of 2016 and peaking at 251.1 in December.

In simple terms, while the peak of 2014 crisis has now passed, questions about economic policies in Russia remain, in line with concerns about the sustainability of the nascent economic recovery. Moderation in economic policy uncertainty over the course of 2016 appears to be closely aligned with:

1. Variations in oil prices outlook; and
2. External geopolitical shocks (including the election of Donald Trump, with raw index data spiking in August and September 2016 and November and December 2016, while falling in October, in line with Mr. Trump's electoral prospect).

In other words, relative moderation in the index appears to reflect mostly exogenous factors, rather than internal structural reforms or policies changes.