2/2/17: BRIC Manufacturing PMIs: Russia Leads, Brazil Drags

Quick run through the Manufacturing PMIs for January for BRIC economies:

Brazil's Manufacturing PMI slumped to 44.0 in January 2017, down from 45.2 in December, marking 24th consecutive month of sub-50 readings. Worse, rate of contraction in the sector fell to 46.3 in October 2016, prompting some analysts to declare a possible turnaround in Latin America's largest economy. This has now been fully erased, with month-after-month drops through January. January reading is so dire, it marks the lowest reading in seven months and the fourth lowest reading since April 2009 and ninth lowest on record. Three-month average through January sits at 45.1, which is worse than 46.0 3mo average previously and 45.6 3mo average reading through January 2016. In simple terms, economic contraction is accelerating in the case of Brazil, despite the fact that the country has been in a crisis since mid-2013.

Russian Manufacturing PMI continued to surge in January, rising from 53.7 in December 2016 to 54.7. This marks 6th consecutive above-50 reading and, more importantly, marks the highest rate of growth in 70 months (since March 2011). Another important marker, the index has posted increasing rates of growth every month since July 2016, and has now broke away from the resistance at 53.6-53.7. Index's 3mo average though January 2017 is at 54.0, marking a huge reversal of fortunes compared to 3mo average through January 2016 (49.5). All of this is consistent with rapid recovery from the 2014-2016 crisis and we can date the start of this recovery back to May-June 2016, based on Manufacturing data.

India's Manufacturing PMI regained 50.0 territory rising to statistically insignificant 50.4 in January 2017 from 49.6 in December 2016. 3mo average through January 2071 is at 50.8, which is slightly better than 50.2 3mo average a year ago. The rate of Manufacturing expansion is the second slowest in 13 months, implying that the recovery in the Indian economy is still very fragile. As I noted in 4Q analysis of BRIC PMIs last month, India is suffering from the economic crisis brought about by botched de-monetisation of its economy. This crisis appears to be easing, but is not over, yet.

China's Manufacturing PMI failed to gain faster momentum compared to December 2016 (51.9), falling back to 51.0 in January 2017. 51.0 is not a statistically significant reading for growth in China's case, although the index reading in January was still third highest since August 2014. Chinese Manufacturing PMIs have now been notionally (but not statistically) above 50.0 in five consecutive months. Current 3mo average is at 51.3, which is a sizeable improvement on 3mo average through January 2016 (49.5). Still, current PMI reading continues to signal substantial weakness in Chinese Manufacturing and is a reason to worry.

Charts below plot the trends in Manufacturing PMIs and tabulate more recent changes:

Chart below contextualises January PMI readings into quarterly data set and includes comparative for the Global Manufacturing PMI:

Overall, Russia continues to lead BRIC economies in Manufacturing PMI readings for the third month in a row. China comes in second after Russia for the second month in a row. India is effectively posting stagnant economic performance, while Brazil is showing accelerated rate of contraction.

2/2/17: FactSet on Five 'Notable' 2016 Corporate Data Breaches

In our recent working paper on the systemic effects of cyber risks expressed via financial markets, we have shown the first empirical evidence of systemic (cross exchanges and cross companies) contagion from cyber risks to share prices of the world’s largest corporates, starting with 2014. You can read the full paper here: http://trueeconomics.blogspot.com/2017/01/23117-regulating-for-cybercrime-hacking.html.

Some new evidence on the effects of cyber crime on corporate performance is now also presented in a recent FactSet analysis here.

In this article, FactSet look at the corporate performance effects arising from five “notable” 2016 data breaches, specifically focusing on the stock performance. The methodology in this analysis, unfortunately, is weak and does not lend itself to establishing any specific hypotheses, including those claimed.

Still, an interesting collection of factoids and illustrations of the shorter term impacts (or lags in such).

2/2/17: Global Manufacturing PMI Continues to Signal Potential Growth Recovery in January

Market published Global Manufacturing PMI (Purchasing Managers Index) for January, showing that growth conditions in global manufacturing at the start of 2017 have matched those prevailing in December 2016, with both months posting a PMI reading of 52.7, which is:

1. Statistically above 50.0 (signalling statistically significant expansion in the sector);
2. Statistically above 51.4 - the long run average; and
3. Current reading ties December 2016 reading for a 34-month high and 51st consecutive month of above 50.0 readings.

Some important details from Markit release are:

• “The improvement in business conditions was led by the investment goods sector, where the PMI rose to its highest level in over five-and-a-half years.” This suggests that the globally depressed capex cycle might be turning to the upside, finally, after years of subdued capita investment by companies;
• “The improvement at consumer goods producers was slightly better than that seen in December, while growth in the intermediate goods category lost some momentum.” This suggests that current outlook is for improved short run consumer demand, but a moderation in previous expectations about future growth in demand might be afoot. 
• Growth was concentrated in the US, the euro area and the UK, but slowed in Japan. South Korea, Brazil, Turkey and Greece were “the only nations to register contractions.”
• “…the rate of growth in new business intakes accelerated to a two-and-a-half year high. Part of the increase in demand reflected stronger international trade flows, as new export orders rose at the quickest pace since September 2014.” This fed into “a further increase in outstanding business during January. Backlogs of work expanded for the eighth consecutive month, with growth registered across the consumer, intermediate and investment goods categories.” This is consistent with my view - expressed earlier - that going forward, expectations of future growth in final demand might be moderating.

Additionally, “the latest release sees the launch of a new index tracking business sentiment – the Future Output Index – that is based on a question asking companies if they expect output to be higher, the same or lower in 12 months’ time. The start of 2017 saw positive sentiment climb to a 19- month high, with improvements seen in the US, the euro area, Japan, the UK, India, Brazil and Russia.” I would not hold my breath for the robustness of this indicator for quite some time, as we need to see more historical data building up to assess just what exactly does it tell us about the sector activity.

As the chart above clearly shows, we are only inching toward late-2009-mid 2011 levels of activity, although we have now breached 2015-mid-2016 doldrums trend.

Overall, the data is a welcome news for the global growth, but we will have to wait and see for China and Indonesia Manufacturing PMIs to come out to see more robust picture of what is happening in global trade and manufacturing trends. We also need to see if the current levels of growth can be successfully breached to the upside in February-March. January is, overall, a challenging month to base one’s assessment for broader 1Q economic performance signals due to shorter range of working days and lags from December feeding into January numbers.

2/2/17: What Euro Health Index 2016 Tells Us about Ireland's Health System?

Some pretty harsh ratings of the Irish Health system have been released by the Euro Health Consumer Index back at the end of January. Overall, based on data across 35 countries, including European Union member states, Norway, Iceland, Switzerland and the Balkan states (Montenegro, Albania, Serbia and FYR Macedonia), Irish health system ranks miserly 21st, scoring 689 points across 6 key macro-categories of assessment (or sub-disciplines).

The sub-disciplines on which assessments were based are:

1) Patient Rights and Information

2) Accessibility (waiting times of treatment)

3) Outcomes

4) Range and reach of services

5) Prevention

6) Pharmaceuticals

Ireland’s total score is statistically indistinguishable with a higher-ranked FYR of Macedonia (20th place), not exactly a known powerhouse of social or public services and Italy (ranked 22nd). With exception of Italy, Ireland’s ranking is the weakest amongst all high income countries present in the EU and in the sample overall. 

The issue of income and relationship between amounts spent on healthcare and the system performance is a complex one. And the report does attempt some analysis of this. However, it might be an interesting exercise to see, just how much better would Ireland’s system perform were we to adapt the best practices found across each sub-discipline amongst two subsets of the countries, both with vastly lower incomes than here. 

I undertake this exercise below under two scenarios. For each sub-discipline:

1) Scenario IRL “Peripheral” assumes that Ireland adopts the best practice found in the group of the euro ‘peripherals’ states (Greece, Ireland, Italy, Portugal and Spain); and 

2) Scenario IRL “Emerging” assumes that Ireland adopts the best practice found in the group of the sampled states that comprise emerging economies of East-Central Europe (Slovenia, Estonia, Croatia, FYR Macedonia, Slovakia, Serbia, Lithuania, Latvia, Hungary, Poland, Albania, Bulgaria, Montenegro and Romania).

Note: these are not exactly scientific exercises, so treat them as an indicative analysts, rather than an in-depth and conclusive. However, I did perform some simple statistical robustness checks on these findings and they do not appear to be complete ad hoc.

The two scenarios are co-plotted in the following charts alongside the actual Euro Health Consumer Index scores:

As shown in the last chart above, adopting best practices from the countries with vastly lower incomes (and, thus, lower per capita expenditures on healthcare - controlling for the argument that the issue with Irish system is lack of money) would have resulted in a vastly better performance of the system across the board. That is because with exception of just one sub-discipline (Pharmaceuticals), Ireland’s performance is substantially sub-par when compared to the lower income countries best practice experiences. 

The truth is: the Euro Health Consumer Index suggests that the real problem with Irish health system's abysmal performance is not necessarily solely down to the lack of money (although that too might be the case) but may be significantly down to the lack of will to adapt some of the better practices that are, apparently, available and accessible for lower income economies. Yet, despite this pretty simple to grasp observation, majority of Irish analysts and media continue to insist that improving Irish health system requires only one thing: more cash from the taxpayers. What's the margin of error on this argument, given Macedonia scores better on Health Index than Ireland? I would say it is huge.

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.