10/6/2017: And the Ship [of Monetary Excesses] Sails On...

The happiness and the unbearable sunshine of Spring is basking the monetary dreamland of the advanced economies... Based on the latest data, world's 'leading' Central Banks continue to prime the pump, flooding the carburetor of the global markets engine with more and more fuel.

According to data collated by Yardeni Research, total asset holdings of the major Central Banks (the Fed, the ECB, the BOJ, and PBOC) have grown in April (and, judging by the preliminary data, expanded further in May):

May and April dynamics have been driven by continued aggressive build up in asset purchases by the ECB, which now surpassed both the Fed and BOJ in size of its balancesheet. In the euro area case, current 'miracle growth' cycle requires over 50% more in monetary steroids to sustain than the previous gargantuan effort to correct for the eruption of the Global Financial Crisis.

Meanwhile, the Fed has been holding the junkies on a steady supply of cash, having ramped its monetary easing earlier than the ECB and more aggressively. Still, despite the economy running on overheating (judging by official stats) jobs markets, the pride first of the Obama Administration and now of his successor, the Fed is yet to find its breath to tilt down:

Which is clearly unlike the case of their Chinese counterparts who are deploying creative monetarism to paint numbers-by-abstraction picture of its balancesheet.

To sustain the dip in its assets held line, PBOC has cut rates and dramatically reduced reserve ratio for banks.

And PBOC simultaneously expanded own lending programmes:

All in, PBOC certainly pushed some pain into the markets in recent months, but that pain is far less than the assets account dynamics suggest.

Unlike PBOC, BOJ can't figure out whether to shock the worlds Numero Uno monetary opioid addict (Japan's economy) or to appease. Tokyo re-primed its monetary pump in April and took a little of a knock down in May. Still, the most indebted economy in the advanced world still needs its Central Bank to afford its own borrowing. Which is to say, it still needs to drain future generations' resources to pay for today's retirees.

So here is the final snapshot of the 'dreamland' of global recovery:

As the chart above shows, dealing with the Global Financial Crisis (2008-2010) was cheaper, when it comes to monetary policy exertions, than dealing with the Global Recovery (2011-2013). But the Great 'Austerity' from 2014-on really made the Central Bankers' day: as Government debt across advanced economies rose, the financial markets gobbled up the surplus liquidity supplied by the Central Banks. And for all the money pumped into the bond and stock markets, for all the cash dumped into real estate and alternatives, for all the record-breaking art sales and wine auctions that this Recovery required, there is still no pulling the plug out of the monetary excesses bath.

10/6/17: Visualizing Cyber Security Attacks

Here is a brilliant visualization of data breaches over time and by size: http://www.visualcapitalist.com/worlds-biggest-data-breaches/.

As the chart above clearly shows, the number of reporter/disclosed attacks has exploded, staring with 2014, and the volume of attacks (data files impacted) has blown out starting 2010 (note: Yahoo attacks were severely lagged in reporting). In part, the two factors are down to changes in reporting and disclosure rules, and in part they are down to changes in reporting practices. But, as we observe econometrically in our recent papers on the subject: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2892842 and https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2904749, the pattern on frequency, severity and impact of attacks, as well as their typology, are richer than the chart above provides.

Starting with 2010s, the typology of cyber security risks and attacks has been shifting from malicious and accidental losses of hardware and accidental disclosures of data to malware-based hacks, direct hacks, and illegal disclosures. The distribution of attacks has been changing since 2014, with smaller and larger, state and private sector players being hit with higher frequency, as opposed to the 2000s-early 2010s when we had more concentrated distribution of attacks. And, crucially, the impact of the attacks is also changing: starting with 2014, we are witnessing systemic shocks contagion propagating from individual attack targets to their exchanges and even to other exchanges.

10/6/17: Cart & Rails of the U.S. Monetary Policy

So, folks, what’s wrong with this picture, eh?

Let’s start thinking. The U.S. Treasury yields are underlying the global measure of inflation since the onset of the global ‘fake recovery’. Both have been and are still trending to the downside. Sounds plausible for a ‘hedge’ asset against global economic stagnation. And the U.S. Treasuries can be thought of as such, given the U.S. economy’s lead-timing for the global economy. Except for a couple of things:

1. U.S. Treasury is literally running out of money (by August, it will need to issue new paper to cover arising obligations and there is a pesky problem of debt ceiling looming again);
2. U.S. Fed is signalling two (or possibly three) hikes over the next 6 months and (even more importantly) no willingness to restart buying Treasuries again;
3. U.S. political risks are rising, not abating, and (equally important) these risks are now evolving faster than global geopolitical risks (the hedge’ is becoming less ‘safe’ than the risks it is supposed to hedge);
4. U.S. Fed is staring at the prospect of potential increase in decisions uncertainty as it is about to start welcoming new members ho will be replacing the tried-and-trusted QE-philes;
5. Meanwhile, the gap between the Fed policy’s long term objectives and the reality on the ground is growing: private debt is rising, financial assets valuations are spinning out of control and 

So as the U.S. 10-year paper is nearing yields of 2%, and as the premium on Treasuries relative to global inflation is widening once again, the U.S. Fed is facing a growing problem: tightening rates is necessary to restore U.S. dollar (and U.S. Treasuries) credibility as a global risk hedge (the key reason anyone wants to hold these assets), but raising rates is likely to take the wind out of the sails of the financial markets and the real economy. Absent that wind, the entire scheme of debt-fuelled growth and recovery is likely to collapse. 

Cart is flying one way. Rails are pointing the other. And no one is calling it a crash… yet…

7/6/17: TrueEconomics Makes Top 100 List... again

A quick note: delighted to see the blog profiled in Top 100 Economics Blogs of 2017 by the Intelligent Economist : https://www.intelligenteconomist.com/economics-blogs/.

7/6/17: European Policy Uncertainty: Still Above Pre-Crisis Averages

As noted in the previous post, covering the topic of continued mis-pricing by equity markets of policy uncertainties, much of the decline in the Global Economic Policy Uncertainty Index has been accounted for by a drop in European countries’ EPUIs. Here are some details:

In May 2017, EPU indices for France, Germany, Spain and the UK have dropped significantly, primarily on the news relating to French elections and the moderation in Brexit discussions (displaced, temporarily, by the domestic election). Further moderation was probably due to elevated level of news traffic relating to President Trump’s NATO visit. Italy’s index rose marginally.

Overall, European Index was down at 161.6 at the end of May, showing a significant drop from April 252.9 reading and down on cycle high of 393.0 recorded in November 2016. The index is now well below longer-term cycle trend line (chart below). 

However, latest drop is confirming overall extreme degree of uncertainty volatility over the last 18 months, and thus remains insufficient to reverse the upward trend in the ‘fourth’ regime period (chart below).

Despite post-election moderation, France continues to lead EPUI to the upside, while Germany and Italy remain two drivers of policy uncertainty moderation. This is confirmed by the period averages chart below:

Overall, levels of European policy uncertainty remain well-above pre-2009 averages, even following the latest index moderation.

7/6/17: Equity Markets Continue to Mis-price Policy Risks

There has been some moderation in the overall levels of Economic Policy Uncertainty, globally, over the course of May. The decline was primarily driven by European Uncertainty index falling toward longer-term average (see later post) and brings overall Global EPU Index in line with longer term trend (upward sloping):

This meant that short-term correlation between VIX and Global EPUI remained in positive territory for the second month in a row, breaking negative correlations trend established from October 2015 on.

The trends in underlying volatility of both VIS and Global EPUI remained largely the same:

The key to the above data is that equity markets risk perceptions remain divorced from political risks and uncertainties reflected in the Global EPUI. This is even more apparent when we consider actual equity indices as done below:

Both, on longer-run trend comparative and on shorter term level analysis bases, both S&P 500 and NASDAQ Composite react in the exactly opposite direction to Global Economic Policy Uncertainty measure: rising uncertainty in the longer run is correlated with rising equities valuations.

7/6/17: Markets, Investors Exuberance and Fundamentals

Latest data from FactSet on S&P500 core metrics is an interesting read. Here are a couple of charts that caught my attention:

Look first at the last 6 months worth of EPS data through estimated 2Q 2017 (based on 99% of companies reporting). The trend continues: EPS is declining, while prices are rising. On a longer time scale, EPS have been virtually flat in 2014-2016, but are forecast to rise nicely in 2017 and 2018. Whatever the forecast might be for 2018, 2017 increase would do little to generate a meaningful reversion in EPS to price trend

However, the good news is, expectations on rising EPS are driven by rising sales for 2017, and to a lesser extent in 2018. This would be (if materialised) an improvement on the 2014-2016 core drivers, including shares repurchases (chart below).

Next, consider P/E ratios:

As the chart above indicates, P/E ratios are expected to continue rising in the next 12 months. In other words, the markets are going to get more expensive, relative to underlying earnings. Worse, on a 5-year average basis, all sectors, excluding Financials, are at above x14. Hardly a comfort zone for 'go long' investors. The overvalued nature of the market is clearly confirmed by both forward and trailing P/E ratios over the last 10 years:

Forward expectations are now literally a run-away train, relative to the past 10 years record (chart above), while trailing (lagged) P/Es are dangerously close to crisis-triggering levels of exuberance (chart below).

In summary, thus, latest data (through end-of-May) shows continued buildup of risks in the equity markets. At what point the dam will crack is not something I can attempt to answer, but the lake of investors' expectations is now breaching the top, and the spillways aren't doing the trick on abating them.

6/6/17: Trump, Paris, Climate: The Problem is Bigger than COP21

U.S. withdrawal from Paris Climate Accord has been described by various policymakers, analysts and journalists around the world as a travesty, betrayal of the environment, and the surrender of the U.S. leadership (from undefinable 'global leadership' to historically incorrect 'environmental leadership'). In reality, it is none of the above, despite the fact that it does not bode well for the future of environmental policies worldwide and for the environment in general.

Paris Agreement: Taking an Unnecessary 'Exit' Route

The reasons for why the U.S. 'exit' from Paris deal is more rhetorical than tangible are numerous, but here are some major ones.

1) Paris COP21 Agreement was never ratified by the U.S. so, technically-speaking, the Trump Administration has managed to 'exit' what the U.S. has not 'entered' into in the first place. Let me explain, briefly: the Paris climate agreement (the Paris COP21 Agreement) was "adopted" via a Presidential executive order on September 2016. This raised a range of questions - at the time barely-covered by the media - as to the validity of such an order. Unlike normal executive orders, the Treaty adoption was committing the U.S. to an agreement with a four-year breaking clause period, thus de facto binding the one-over Presidential Administration to Obama Administration order. In contrast to the U.S., all other signatories to the agreement required ratification by their legislatures or via other constitutionally-stipulated procedures. The U.S. was unique, to-date, in not seeking domestic ratification. 

A constitutional position - that the Paris treaty should not be treated as an ordinary 'executive order' agreement was expressed by some legal scholars who view the Paris agreement as more than a simple executive agreement. Bodansky (2016) points to the fact that COP21 adoption via an executive order belongs to a category of commitments that "have a long, heretofore undiscovered [constitutional] pedigree." In other words, the actual act of 'adoption' of the Paris agreement by the U.S. can be legally shaky and it is shaky especially given that there is clearly not a chance that the COP21 can be ratified by the current Congress. 

As the result, Trump Administration did not claw back on U.S. international commitment, but it did renege on President Obama's international commitment. The U.S. is not equivalent to President Obama, unless we get comfortable with an idea of Presidents residing above the Constitution. Which, given the current White House resident, might be the case of 'watch what you wish for'.

2) President Trump has committed to withdrawing from the agreement some time in late 2020, and potentially, given the questionable constitutionality of the agreement validity in the first place, some time after that or never. The Paris Agreement allows withdrawal only following a four year delay period, after the agreement coming into power. If the U.S. adoption of the agreement requires approval by the Congress, the actual date of the treaty coming into power can be set as the date of such an approval. And the four year delay period will have to start from that date. I am not a legal scholar, so I am speculating on this, but it might just be the case that the U.S. might technically remain within Paris agreement past 2020 election and into the next Administration. 

3) Now, consider the gargantuan misrepresentation of the nature of the Paris agreement by the Trump Administration. The President made repeated statements that Paris agreement imposes severe burdens on the U.S. economy, with potential for costing some 2.7 million American jobs. In reality, the agreement is a non-binding and non-enforceable commitment. If the U.S. faced with severe damages to its economy from Paris commitments, instead of withdrawing from the accord, the Washington could simply reduce promised deliverables and let its emissions reduction targets lapse. There would have been no repercussions for the U.S., beyond bad PR (the same bad PR that is already forthcoming). In fact, one of the reasons that Nicaragua (one of only two non-signatories, alongside Syria) refused to join the agreement was that the SOP21 lacked meaningful enforcement and had no commitment obligations with respect to targets. 

In other words, Trump Administration 'exited' an accord that had, materially, no legally binding power to change anything. Which also flies in the face of the President claiming he can re-negotiate U.S. position in the Paris agreement. Why would you need to renegotiate that which can be changed unilaterally at will?

As the Paris Agreement is a non-binding and non-enforceable, calling the U.S. participation in it an example of U.S. 'leadership' is nonsense. Calling the U.S. withdrawal from it a 'tragedy' is a case of hysterical overreaction. And, equally, calling it 'draconian' in terms of its potential impact on the U.S. is pure demagoguery. 

Policies, not Non-binding Treaties, Matter

What really is of concern here is not the U.S. participation or non-participation in the Paris COP21 Agreement, but the Administration's policies on the environment, including matters relating to President Trump's desire to 'resurrect' the U.S. coal industry, and his push for more oil and gas production, as well as his attitudes to the EPA, the plans to open up commercial and mining / extraction development on protected Federal lands, etc, etc, etc. 

These policies are worth criticising and fretting about. COP21 is only tangentially material to them. 

In fact, President Trump's obsession with making 'coal great again' is worrying not only from environmental perspective, but also from economic development perspective, and it exemplifies the Administration's bizarre view of the U.S. economy. For a number of reasons, which I don't have room to discuss here at length, but are worth mentioning in passing. 

Much of the decline in coal's fortunes from 2012 on is accounted for by non-environmental policy factors. As the report shows, growth in energy supply from natural gas accounted for 49 percent of the total market share loss accruing to coal. Further 26 percent of coal's decline was down to a drop in overall demand, and 18 percent was accounted for by renewables. Only 3-5 percent of coal's market share decline was down to Obama Administration's environmental regulations.

Someone has told President Trump a porky: clawing back on Obama's environmental regulations would have saved, at most, only 2,900 coal miners jobs out of 58,000 lost during the 2012-2016 period. Though even that figure is highly questionable, as research linked above suggests that the true number of jobs saved would be closer to 1,700. 

Here's a chart from the above-linked study estimating jobs impact of the President Trump's policies favouring coal:

The U.S. leadership on the environment comes through with all its shoddy 'glory' in coal's fortunes history. High coal prices in the first decade of the century were driven by the demand for energy from China and, arguably, by sky high global price of oil. As Chinese demand fell, starting, in 2011, the U.S. environmental leadership turned out to have little to do with globally collapsing demand for coal and coal prices or with an ongoing substitution away from more CO2-intensive fossil fuels in the global energy production mix. Active Chinese shift away from coal to other sources of energy plus decline in the rate of growth on Chinese energy demand drove down global prices, accounting for almost half of the entire decline in the U.S. (and global) coal's fortunes.

In simple terms, coal hardly makes any sense as a target for either investment, or jobs creation, or economic value added creation. Not because the U.S. is leading the world on the environmental policies, but because China is shifting its energy mix toward cleaner alternatives. Worse, improving coal demand outlook makes even less sense for an Administration that actively promotes more gas production and exports. President Trump is missing the main point of changing global economy: no one wants coal anymore. Nor do many want more supplies of oil and gas, as clearly evidenced by collapse in worldwide prices of these sources of energy. 

Another point shows that the alleged U.S. leadership on environmental policies has been bogus at best, even during the 'environmentally conscious' Obama era. The very reason why the COP21 Agreement was left without an enforceable commitment mechanism and with a unilaterally adjustable targets is... the U.S. push for these features of the agreement. During the treaty negotiations, it was the U.S. that insisted on undermining the treaty strengths in order to increase the number of signatories. And although the U.S. was one of the countries that insisted on public monitoring of the Paris Agreement progress, such insistence was little more than rhetorical, given the fact that global research into CO2 emissions would have provided de facto public disclosure of countries' progress.

COP21: A Problem Was Always Bigger than the Solution

Confused, yet? You shouldn't be. The problem with the Paris agreement is the same as the problem with the U.S. 'leadership' on the environment and is identical to the broader problem of so-called global 'leadership' on the environment: there is no material will on behalf of core countries (including the U.S., but excluding Europe) to do anything serious about setting, achieving and enforcing robust and meaningful environmental targets. 

Paris agreement in and by itself is a fig leaf of decorum. Being a part of it or being outside of it are rhetorical positions, more designed to shore up symbolism of 'something being done', than actually doing what would be needed to address a wide-ranging case of environmental degradation and depletion of the natural capital. Note: environmental problems vastly exceed carbon emissions, alone, despite the fact that media and politicians are hell-bent on talking primarily about carbon.

Which brings us to another mystery, worth mentioning in passim, again due to space constraints. What constituency does President Trump serve in withdrawing from the agreement? Not getting drawn into speculating about the right- v left- wing opportunism, here are the simple facts: the Paris Agreement is more popular than the President himself. November 2016 survey by the Yale University showed broad-based support for the treaty and the U.S. participation in it. Some snapshots from the survey:

• 69% of registered voters said "the U.S. should participate in the international agreement to limit climate change (the Paris COP21 agreement), compared with only 13% who say the U.S. should not";

• 66% of registered voters "say the U.S. should reduce its greenhouse gas emissions, regardless of what other countries do", aka independent of the COP21; 

• "A majority of registered voters want President-elect Trump (62%) and Congress (63%) to do more to address global warming";

• "A majority of registered voters say corporations and industry should do more to address global warming (72% of all registered voters; 87% of Democrats, 66% of Independents, and 53% of Republicans)". Which means that, based on party affiliation, in each party, including the Republican party, majority of voters support greater action on global warming;

• When it comes to 'making coal great again', 70% of U.S. registered voters "support setting strict carbon dioxide emission limits on existing coal-fired power plants to reduce global warming and improve public health, even if the cost of electricity to consumers and companies would likely increase – a core component of the EPA’s Clean Power Plan. Democrats (85%), Independents (62%) and Republicans (52%) all support setting strict limits on these emissions". Again, we have majority support even amongst the Republicans;

• "A large majority of registered voters say the Federal government should prepare for the impacts of global warming, prioritizing impacts on public water supplies (76%), agriculture (75%), people’s health (74%), and the electricity system (71%)".

1. Carbon intensity of the global economy will continue to fall, irrespective of whether the U.S. presidential administration likes it or not. The reasons for this go beyond simple carbon accounting, and deeper into the issues of public health, quality of life and changing energy intensities of production. The transfer is happening not from the U.S. to foreign destinations, but from the U.S. carbon-intensive economy to the U.S. carbon-reducing economy. The same transfer is happening in other economies. Here's an OECD report on the trend and potential for such transfers. More partisan on the issue NDRC had this report on jobs generation in the alternative energy sector.

1. Reductions in carbon intensity of production are not a zero sum game, but rather create opportunities for innovation, increasing value added, deepening the customer base and improving efficiencies in production and investment. Environmental market worldwide is estimated at USD 1.4 trillion in just 'advanced energy' segment, of which the U.S. domestic market accounts for just 1/7th. Cleantech market size is USD 6.4 trillion, and so on. An example of the opportunity space open for business investment and development in the environmental services, energy and manufacturing sectors is so significant that days after President Trump's decision to exit COP21, the State of California signed a long-term agreement with China to engage in joint development of "climate-positive" technologies and emissions trading. Ironically, few years back, Chinese carbon permits system drove the global carbon markets off the cliff. Today, Beijing is trying to position itself as a positive player in rebooting these markets.

1. Environmental protection (and policies aimed at alleviating the adverse impact of global warming) is more than a market for new goods and services. From both economic and (more importantly) social perspectives, it is also about improving quality of air, quality of water (e.g. here and here), public health (for example, here) and food security (e.g. here and here). In the end, treating environment as part of our productive, long-term investable, tangible capital, is more about preventing future social suffering and unrest than about earning profits. But, even for those politicians solely concerned with jobs and financial or economic bottomline, the case for environmental protection-led economic development is very strong.

x

So the really puzzling matter for the Trump Administration and the U.S. political elites (namely the Republicans' dominated Congress) is: what on Earth are they doing in dismantling the environmental policies in a wholesale fashion? 

President Trump, and a range of his advisers, appear to believe that environmental policies are zero-sum game, transferring income, wealth and jobs from 'traditional' (carbon-intensive) sectors of the U.S. economy to foreign competitors. Which is simply false. For a number of reasons, again worth touching here:

Incidentally, China's commitments (or pledges) prior to the COP21 clearly show that its leadership sees all three of the above points as salient for the country future. Back in 2014, the Chinese government has promised to peak its emission by or before 2030, first time ever setting a deadline for peak emissions. It also promised to increase the renewables share in its energy mix to 20% by the same date. Doing this will require China to instal some 800-1000 gigawatts of carbon-free energy generation capacity, or more than its current coal capacity and close to the total current market size for electricity generation in the U.S. The Obama Administration claimed credit for 'bringing China' to agree on these environmental targets, but reality is quite different: Beijing is desperate to clean up its urban environment, claw back on severe pollution of its water sources and secure some sort of sustainable agriculture and food production. Of course, not is well on the Chinese front either. As a side note, those who are worried about China taking the leadership jersey from the U.S. on environment, should read this report: like the U.S., China is producing more rhetoric than action.

In short, the problem of addressing huge gaps between political rhetoric and the reality of our deteriorating global environment remains insurmountable to our political leaders. President Trump's extreme position on COP21 is just an outlier to the cluster of politicians worldwide who are strong on promises and media soundbites, yet unable and unwilling to develop a global policy framework that can deliver measurable, enforceable and transparent commitments on the environment. The problem of finding a solution to continued depletion of our natural capital around the world remains larger than COP21. With the U.S. 'leadership' in it, or without.

26/5/17: Defense Stocks Valuations: U.S. Budgets and Military Conflicts Engagements

Our new paper on U.S. Defense Budgets, military conflicts engagements and their impact on defense industry equity valuations is now available on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2975368.

23/5/17: U.S. Mint Gold Coins Sales 1Q 2017

Updating, with a lag, my data for U.S. Mint sales of gold coins, here is 1Q 2017 in its full glory.

Total sales of U.S. Mint gold coins stood at 221,500 oz in 1Q 2017, down from 363,000 oz in 4Q 2016 and down on 305,500 oz in 1Q 2016. However, 1Q 2017 sales were better than 1Q sales in both 2014 and 2015.

Total number of coins sold by the U.S. Mint stood at 438,000 in 1Q 2017, down on 647,500 in 1Q 2016. In terms of number of coins sold, 1Q 2017 was the slowest of all 1Q periods since 1Q 2012.

Average weight per coin sold was 0.5057 oz/coin, stronger than in 1Q 2016 (0.4718 oz/coin) and stronger than 1Q average coin weight for 2014 and 2015.

Monthly data, plotted alongside historical and period averages shows that more recent months (especially April) posted weak sales performance.

Meanwhile, a look at quarterly aggregates indicates that while 1Q was weaker than 4Q 2016, it is still in line with the generally upward trend that has been present (with some serious volatility) since the end of 2013.

Both, the monthly series and the quarterly aggregates indicate relatively stable and strong negative correlations between the price of gold and the demand for U.S. Mint coinage over the last 6 months within the range of -0.62 and -0.84.

23/5/17: Eurocoin: Growth Momentum Slips Marginally in April

A quick update to the old-running series: Eurocoin, the leading economic growth indicator for the euro area, published by CEPR and Banca d'Italia posted another (second in a row) moderation, falling from 0.7 in March 2017 to 0.67 in April. The indicator remains at the upper range of growth for the current upside cycle, and within lower range of growth compared to previous upside cycle:

On the drivers side, stock markets valuations helped to push growth forecast higher, while a slowdown in industrial activity pushed growth expectations lower. In other words, absent the financial assets impact, growth indicator would be much lower.

While euro area overall HICP was at 1.9% in April (bang at the upper range of ECB's target), 12mo trailing average inflation rose to 0.8% from 0.7% in March. Which means the ECB has moved out of the 'policy corner' and is now positioned to start unwinding assets purchasing programs. It will proceed gradually and at a later date, due to political, not monetary reasons.

Meanwhile, although Eurocoin averaged 0.72 in 1Q 2017, actual growth came in at (first estimate) 0.5%. This marks the largest gap between Eurocoin and actual growth since 2Q 2014. This is hardly surprising. In general, the gap between leading indicator-implied growth forecast and actual growth outrun is usually wider during periods of elevated uncertainty about the economy, and especially when financial economy takes over as a major contributor to overall economic growth outlook.

22/5/17: Eurogroup and Greece: Wrestling Defeat from the Claws of Victory

Today's Eurogroup meeting on Greece ended in no agreement and extends the current tranche negotiations into June 15, the date of the next Eurogroup meeting.

For the background:

• Greece is an economy brought to its knees by the Eurogroup and the ESM, as detailed in a range of facts well-summed up here: http://blogs.lse.ac.uk/eurocrisispress/2017/05/01/greece-any-better-times-or-more-pitfalls-ahead/; and
• Greece is now back in a recession, with dire consequences for both, the economy and the Greek society, and for fiscal targets and programs previously agreed by the Eurogroup: http://trueeconomics.blogspot.com/2017/05/18717-greece-in-recession-again.html.

The key sticking point so far is the scheduling of future primary surpluses (budgetary surplus before the debt servicing costs are factored in). The Eurogroup insists on these surpluses running at 3.5% of Greek GDP for the first 5 years following 2018, declining to 2% or 2.2% (depending on the version of the draft agreement) for 2023-2060. 

In very simple terms, such commitments are absolutely bogus (and dangerous). They are bogus because there is absolutely no way anyone can project growth rates out to 2060 from today that can be in any way reasonably accurate to predict primary surpluses. They are dangerous, because they will shackle Greek governments to running buffer funds to compensate for possible recessionary and non-cyclical shocks to the primary surpluses. These buffers will imply underinvestment within the Greek economy (public investment) over the long term. Which, of course, will damage the Greek economy and increase the risk of non-compliance with the deficit rules.

Here is how unrealistic the current proposed targets are. Consider, first, IMF projections (April 2017 data) for primary surpluses over the next 5 years (2018-2022). Remember, Greek target (grey line) is 3.5% for that period:

With exception of Italy, no other advanced euro area economy comes even close to the proposed target. And no one is making a case that Italy running these surpluses is somehow consistent with structurally strong growth expectations over the period.

Now, consider past and present performance, based on 10 years windows. For 10 years window, Greek target surplus is 2.85% per annum:

The view is a bit brighter. 

In the 1990s, two countries managed to run surpluses at or above the target set for Greece forward: Belgium and Ireland. Both countries were recovering from substantial fiscal crises of the late 1980s-early 1990s.  But, unlike Greece today, both countries benefited from exogenous shocks that boosted significantly their surpluses and growth: Belgium gained substantial income transfers from growth of the EU institutions, and Ireland gained from a large scale FDI boom. Neither country needed to run large scale public investment programmes financed from own (internally-generated) funds. 

In the 2000s, Belgium continued to run large surpluses and it was joined in this by Finland. Belgium surpluses drivers remained the same, while Finland carried out substantial fiscal consolidation in the wake of the early 1990s crisis timed perfectly to coincide with rapid economic growth in the economy. 

In simple terms, no advanced euro area economy has managed to run surpluses expected of Greece at the times of adverse economic growth conditions or immediately after a major recession.

As I noted in the earlier post on the Greek economy (see http://trueeconomics.blogspot.com/2017/05/18717-greece-in-recession-again.html), the state of Greek economy has been so highly uncertain over the last few years, that any projections 3-4 years out from today are simply an example of a delirious wish-for-thinking. In this environment, setting targets out to 2060 is absurd, and dangerous, for it commits Greece to targets that may or may not be to the benefit of the Greek economy and sets up the euro area fiscal policy architecture for a failure at the altar of extreme conviction in technocratic targeting.