9/10/17: BRIC Manufacturing PMIs 3Q 2017: Lagging Global Growth

With Markit Economics finally releasing China data for Services and Composite PMIs, it is time to update 3Q figures for Manufacturing and Services sectors PMI indicators for BRIC economies.

Summary table:

As shown above, Manufacturing PMIs across the BRIC economies trended lower over 3Q 2017 in Brazil and India, when compared to 2Q 2017, while trending higher in Russia and China.

• Brazil posted second lowest performance for the sector in the BRIC group, barely managing to stay above the nominal 50.0 mark that defines the boundary between growth and contraction in the sector activity. Statistically, 50.6 reading posted in 3Q 2017 was not statistically different from 50.0 zero growth. And it represents a weakening in the sector recovery compared to 50.9 reading in 2Q 2017. Brazil's Manufacturing sector has now been statistically at zero or negative growth for 18 quarters in a row.
• Meanwhile, Russian Manufacturing PMI rose from 51.2 in 2Q 2017 to 52.1 in 3Q 2017, marking fifth consecutive quarter of expansion in the sector (nominally) and fourth consecutive quarter of above 50.0 (statistically). With this, Russia is now back at the top of Manufacturing sector growth league amongst the BRIC economies. However, 3Q 2017 reading was weaker than 4Q 2016 and 1Q 2017, suggesting that the post-recession recovery is not gaining speed.
• China Manufacturing PMI rose in 3Q 2017 to 51.2 from zero growth of 50.1 in 2Q 2017. The dynamics are weaker than in Russia, but similar in pattern, with 3Q growth being anaemic. In general, since moving above 50.0 mark in 3Q 2016, China Manufacturing PMIs never once rose above 51.3 marker, indicating very weak growth conditions in the sector.
• India's Manufacturing PMI tanked again in 3Q 2017 falling to 50.1 (statistically - zero growth) from 51.7 in 2Q 2017. Most recent peak in Manufacturing activity in India was back in 3Q 2016 and 4Q 2016 at 52.2 and 52.1 and these highs have not been regained since then. India's economy continues to suffer from extremely poor macroeconomic policies adopted by the country in recent years, including botched tax reforms and horrendous experimentation with 'cashless society' ideas. 

Overall, BRIC Manufacturing Index (computed using my methodology on the basis of Markit data) has risen to 51.0 in 3Q 2017 on foot of improved performance in Russia and China, up from 50.6 in 2Q 2017 and virtually matching 51.1 reading in 1Q 2017. At 51.0, the index barely exceed statistical significance bound of 50.9. This runs against the Global Manufacturing PMI of 52.9 in 3Q 2017, 52.6 in 2Q 2017 and 52.9 in 1Q 2017. In simple terms, the last quarter was yet another (18th consecutive) of BRIC Manufacturing PMI falling below Global Manufacturing PMI, highlighting a simple fact that world's largest emerging and middle-income economies are no longer serving as an engine for global growth.

Stay tuned for Services PMIs analysis.

6/10/17: Life-Cycle Wages and Trends: September US Wage Inflation in Perspective

Last month, I wrote an editorial for @MarketWatch on the declining fortunes of the American wage earners. And this week, the BLS released new data on wage growth in the U.S. economy. The new numbers are 'shiny'.

Per headlines reported in the media, the BLS reported that the annual increase in Average Weekly Earnings was an impressive 2.9%, which is:

• Well above the 2.5% rate of growth expected in prior estimates, 
• Well above the 2.5% reported last month, and
• The highest since the financial crisis

This is a great print. Except, it really is not all that exciting, when one reaches below the surface.

Take the following summary of recent growth rates (H/T @BySamRo): 

September 2017 wage increases are still below 2008-2009 averages for all wage earners, except for low-wage industries. The gains 'break out' drivers are in high-wage industries, where growth has risen 20% compared to much of the 2016-present trend. Overall, growth rate is well below 2008-2009 average of 3.4%.

To see how much more poor the current 'spectacular' print is compared to the past trends, look at longer time series:

Low-wage industries wages inflation is running close to pre-crisis average, since roughly the start of 2017. Good news. High and meddle-wage industries wages inflation is running below the pre-crisis average still. We have had roughly 8 years in the current trends, meaning that a large cohort of current workers have entered the workforce with little past gains in wages under their belt. This means a very brutal and simple arithmetic: many workers in today's economy have never experienced the gains of pre-crisis magnitudes. Wage increases are cumulative or compound in nature. Wage increases slowdown is also cumulative or compound in nature. Hence, workers who entered the workforce from around 2004 onwards have had shallower cumulative gains in wages than workers that preceded them. Guess what else do the former workers have that differentiates them from the latter? Why, yes: 1) higher student debt; 2) higher rent costs; 3) greater risk- and age-adjusted health insurance costs, and so on. In other words, for the later cohorts of workers currently in the workforce, lower wages increases came at a time of rampant increases in non-discretionary spending costs hikes.

To say that today's BLS wage inflation print is great news is to ignore these simple facts of economics: to restore wages to pre-crisis trends - the trends that would allow for the return of the Millennial generation to pre-crisis expectations (or to the cross-generational income and wealth growth patterns of previous decades), we need wages growth rates at 5-percent-plus not in one or two or three months, but in years ahead.  The 2.9% one month blip in data is not the great news. It might be a good news piece, but it is hardly impressive or convincing.

And that figure of 5%-plus hides yet another iceberg, big enough to sink the Titanic: given that the Millennials are carrying huge debts and are delaying household formation in record numbers, 5%-plus wage inflation will also hit them hard through higher interest rates and higher cost of debt carry.

This puts your average news headline relating to 2.9% annual increase in wages September figure into a correct, life-cycle perspective.

6/10/17: Italian Banks Tested EU Banking Reform. It Failed.

My article on the patent failures in the EU Banking Crisis resolution reforms exposed by the 2017 events surrounding Italian banking sector is out via @ManningFinancial http://issuu.com/publicationire/docs/mf_autumn_2017?e=16572344/54030271.

6/10/17: CA&G on Ireland's Tax, Banking Costs & Recovery

Occasionally, the Irish Comptroller and Auditor General (C&AG) office produces some remarkable, in their honesty, and the extent of their disclosures, reports. Last month gave us one of those moment.

There are three key findings by CA&G worth highlighting.

The first one relates to corporate taxation, and the second one to the net cost of banking crisis resolution. The third one comes on foot of tax optimisation-led economy that Ireland has developed since the 1990s, most recently dubbed the Leprechaun Economics by Paul Krugman that resulted in a dramatic increase in Irish contributions to the EU budget (computed as a share of GDP) just as the Irish authorities were forced to admit that MNCs’ chicanery, not real economic activity, accounted for 1/3 of the Irish economy. All three are linked:

• Irish banking crisis was enabled by the combination of a property bubble that was co-founded by tax optimisation running rampant across Irish economic development model since the 1990s; and by loose money / capital flows within the EU, which was part and parcel of our membership in the euro area. The same membership supported our FDI-focused competitive advantage.
• Irish recovery from the banking crisis was largely down to non-domestic factors, aka - tax optimisation-driven FDI and foreign companies activities, plus the loose money / capital flows within the EU enabled by the ECB.
• In a way, as Ireland paid a hefty price for European imbalances and own tax-driven economic development model in 2007-2012, so it is paying a price today for the same imbalances and the same development model-led recovery.

Let’s take the CA&G report through a summary and some comments.


1) Framing CA&G analysis, we had a recent study by World Bank and PwC that estimated Ireland’s effective rate of corporation tax at 12.4%, just 0.1 per cent below the statutory or headline rate of 12.5%. To put this into perspective, if 12.4% effective rate holds, Ireland is not the lowest tax jurisdiction in the OECD, as 12 OECD economies had an effective rate below 12.4% and 21 had an effective rate of corporation tax above 12.4%. For the record, based on 2015 data, France had the 2nd-highest statutory rate at 38% but the lowest effective rate at just 0.4%. I contrast, the U.S. had the highest statutory tax rate at 39% and the second highest effective rate at 28.1%. There is a lot of fog around Irish effective corporate tax rates, but CA&G The C&AG found that the top 100 in taxable income terms companies had a an average effective corporation tax rate at 9.3%, slightly less than the rate applying to all companies (9.8%).

The CA&G findings show some dramatic variation in the effective tax rates paid by the Ireland-based corporations. CA&G report is based on a set of top 100 companies trading from Ireland. Of these, 79 companies paid an effective corporate tax rate of 10-15 percent, and almost 2/3rds paid a rate of 12% and higher. However, 13 companies faced a tax rate of under 1 percent.

Irish corporate tax system is risk-loaded: per CA&G report, 37% of all corporate tax receipts collected by the Irish Exchequer come from just 10 companies, while top 100 firms supply 70% of total corporate tax receipts. This concentration is coincident with rising reliance of the Exchequer on corporate tax collections, as corporation tax contributions to the State rose 49% in 2015 to reach EUR6.9 billion. The Leprechaun Economics that triggered a massive transfer of foreign assets into Ireland in 2015-2016 has pushed corporate tax receipts to account for 15% of the total tax revenues. Worse, 70% of total corporate tax take in Ireland came from only three sectors: finance, manufacturing and ICT. Manufacturing, of course, includes pharma sector and biopharma, while ICT is dominated by services, like Google, Facebook, Airbnb et al. This reliance on corporate tax revenues is the 6th highest in the OECD, based on 2015 figures. Per CA&G report, “Corporation tax receipts are highly concentrated both in terms of sectors and by number of taxpayers”. In other words, the Leprechaun Economics model is wrought with risks of a sudden stop in Exchequer revenues, should global flows of funds and assets into Ireland reverse (e.g. due to EU disruption, such as policy shift or Brexit/geopolitical triggers, or due to the U.S.-led shock, such as radical changes in the U.S. corporate tax regime).

The above is worrying. Leprechaun Economics model - or as I suggested years ago, the Curse of Tax Optimisation model - for economic development, chosen by Ireland is not sustainable and it is open to severe risks of exogenous shocks. Such shocks can be sudden and deep. And were risks to the MNCs domiciling into Ireland to materialise, the Exchequer can see double digit deficits virtually over night.


2) CA&G report also attempts to compute the net expected cost of the banking crisis to the country. Per report, the expected cost of rescuing the banks stands at around EUR 40 billion as of the end of 2016, while on the long run timing, the cost is expected to be EUR56.4 billion. However, accounting for State assets (banks’ shares), Nama ‘surpluses’ and other receipts, the long term net cost falls just below EUR40 billion. At the end of 2016, per CA&G, the value of the State's share in AIB was EUR11.6bn, which was prior to the 29% stake sale in an IPO of the bank. As history tells us, EUR66.8 billion was used to recapitalise the Irish banks with another EUR14.8 billion paid out in debt servicing costs. The debt servicing bill currently runs at around EUR1 billion on average, and that is likely to rise dramatically once the ECB starts unwinding its QE which effectively subsidises Irish Exchequer.

CA&G report accounted for debt servicing costs in its calculation of the total expected cost of banks bailouts, but it failed to account for the fact that these debt costs are perpetual. Ireland does not retire debt when it retires bonds, but predominantly uses new borrowings to roll over debt. hence, debts incurred from banks recapitalisations are perpetual. CA&G report also fails to a account for the opportunity cost of NPRF funds that were used to refinance Irish banks. NPRF funds generated tangible long term returns that were foregone in the bailout. Any economic - as opposed to accounting - analysis of the true costs of Irish banks bailouts must account for opportunity costs and for perpetual debt finance costs.

As a reminder, the State still owns remaining investments in AIB (71% shareholding), Bank of Ireland (14%) and Permanent TSB (75%) which CA&G estimated to be worth EUR13.6 billion. One way this might go is up: if recovery is sustained into the next 3-5 years, the state shares will see appreciation in value. The other way it might turn a decline: these are sizeable shareholdings and disposing off them in the markets will trigger hefty discounts on market share prices. CA&G expects Nama to generate a surplus of EUR3 billion. This is uncertain, to put it mildly, because Nama might not window any time soon, but morph instead into something else, e.g. ’social housing developer’ or into a general “development finance’ vehicle - watch their jostling for a role in ‘resolving’ the housing crisis. If it does, the surplus will be forced, most likely, into some sort of a development finance structure and, although recorded on paper, will be used to pay continued Nama wages and costs.

In simple terms, the CA&G figure is an accounting underestimate of the true net cost of the bailouts and it is also a gross economic underestimate of the same.


3) As noted above, the third aspect of the CA&G report worth mentioning is the rapid acceleration in Ireland’s overpayment to the EU on foot of the rapid superficial GDP expansion of 2015-2016 period. According to CA&G, Ireland’s contributions to the EU rose to EUR2 billion - up 20% y/y - in 2016. This increase was largely driven by the fake growth in GDP that arises from the multinational companies shifting assets into Ireland for tax purposes. CA&G expects this figure to rise to EUR2.4 billion in 2017.

In simple terms, Ireland is overpaying for the EU membership to the tune of EUR1 billion - an overpayment necessitated by the MNCs-induced superficial expansion of the national accounts. This activity has zero impact on the ground, but it induces a real cost on Irish society. Of course, one can as easily make an argument that our beggar-thy-neighbour tax policies are conditional on us being within the EU, so we are paying extra for the privilege of housing all corporate tax optimisers in Ireland.


All in, the CA&G report is a solid attempt at making sense of the Kafkaesque economics of the Irish State. That it deserves some critical comments should not subtract from its value and the quality of effort.

5/10/17: Leverage Risk, Credit Quality & Debt Tax Shield

In our Risk & Resilience class @ MIIS, we cover the impact of various aspects of the VUCA environment on, amongst other things, the Weighted Average Cost of Capital. One key element of this analysis - the one we usually start with - is the leverage risk. In practical terms, we know that the U.S. (bonds --> intermediated bank debt) and Europe (intermediated debt --> bonds) are both addicted to corporate leverage, with lower cost of capital attributable to debt. We also know that this is down not to the recoverability risks or credit risks, but to the asymmetric treatment of debt and equity in tax systems. Specifically, leverage risk is driven predominantly by tax shields (tax deductibility) of debt.

In simple terms, tax system encourages, actively, accumulation of leverage risks on companies capital accounts. Not only that, tax preferences for debt imply distorted U-shaped relationship between credit ratings (credit risk profile of the company) and the cost of capital, whereby top-rated A+, A and A- have higher cost of capital (due to greater exposure to equity) than more risky BBB and BBB- corporates (who have higher share of tax0deductible debt in total capital structure).

Which brings us to one benefit of reducing tax shield value of debt (either by lowering corporate tax rate, which automatically lowers the value of tax shield) or by dropping tax deduction on debt (or both). Here is a chart showing that when tax deductibility of debt is eliminated, companies with lowest risk profile (A+ rated) enjoy lowest cost of capital. As it should be, were risk playing more significant role in determining the cost of company funding, instead of a tax shield.

Simples. com

5/10/11: The Swedish Crises of 1910s & 1990s: The Lessons Never Learned

Here is an interesting piece of evidence on the nature of real estate bubbles and financial crises these create. One of the largest fallouts from property-driven financial crises in modern European history relates to the early 1991-1992 blowout in Sweden that saw massive collapse in property prices triggering a systemic contagion to financial institutions, The resolution process and the recovery that followed were long. Just about 10 years - the time it took the real property prices to regain their pre-crisis peak.

Source: Zerohedge

But the bigger story is a hundred-years-long bust to recovery cycle that took Stockholm's property prices from 1910 peak until 2007.

What is, however, most telling is the fact that Stockholm's markets show conclusively and without any doubt that all the lessons supposedly 'learned' in the past crises have been un-learned in the aftermath of the 2007-2008 Global Financial Bust. Despite the painful recovery from the 1991-1992, and despite huge efforts put by the successive Governments into highlighting regulatory and market structure reforms that followed it, Swedish property markets have gone into another, this time completely unprecedented in the country history, craze. 

Stockholm is a city that has been so reformed post the 1990s, it makes more sense to live in a hotel, at least in some cases (http://www.businessinsider.com/stockholm-rents-are-so-high-its-often-cheaper-to-live-in-a-hotel-2017-8). It is, of course, worth remembering that Stockholm is the equivalent of 'warm dream' for all rent control enthusiasts worldwide and for all 'moar regulation will save us from ourselves' crowds.

3/10/17: Ambiguity Fun: Perceptions of Rationality?

Here is a very insightful and worth studying set of plots showing the perceived range of probabilities under subjective measure scenarios. Source: https://github.com/zonination/perceptions

The charts above speak volumes about both, our (human) behavioural biases in assessing probabilities of events and the nature of subjective distributions.

First on the former. As our students (in all of my courses, from Introductory Statistics, to Business Economics, to advanced courses of Behavioural Finance and Economics, Investment Analysis and Risk & Resilience) would have learned (to a varying degree of insight and complexity), the world of Rational expectations relies (amongst other assumptions) on the assumption that we, as decision-makers, are capable of perfectly assessing true probabilities of uncertain outcomes. And as we all have learned in these classes, we are not capable of doing this, in part due to informational asymmetries, in part due to behavioural biases and so on. 

The charts above clearly show this. There is a general trend in people assigning increasingly lower probabilities to less likely events, and increasingly larger probabilities to more likely ones. So far, good news for rationality. The range (spread) of assignments also becomes narrower as we move to the tails (lower and higher probabilities assigned), so the degree of confidence in assessment increases. Which is also good news for rationality. 

But at that, evidence of rationality falls. 

Firstly, note the S-shaped nature of distributions from higher assigned probabilities to lower. Clearly, our perceptions of probability are non-linear, with decline in the rate of likelihoods assignments being steeper in the middle of perceptions of probabilities than in the extremes. This is inconsistent with rationality, which implies linear trend. 

Secondly, there is a notable kick-back in the Assigned Probability distribution for Highly Unlikely and Chances Are Slight types of perceptions. This can be due to ambiguity in wording of these perceptions (order can be viewed differently, with Highly Unlikely being precedent to Almost No Chance ordering and Chances Are Slight being precedent to Highly Unlikely. Still, there is a lot of oscillations in other ordering pairs (e.g. Unlikely —> Probably Not —> Little Chance; and We Believe —> Probably. This also consistent with ambiguity - which is a violation of rationality.

Thirdly, not a single distribution of assigned probabilities by perception follows a bell-shaped ‘normal’ curve. Not for a single category of perceptions. All distributions are skewed, almost all have extreme value ‘bubbles’, majority have multiple local modes etc. This is yet another piece of evidence against rational expectations.

There are severe outliers in all perceptions categories. Some (e.g. in the case of ‘Probably Not’ category appear to be largely due to errors that can be induced by ambiguous ranking of the category or due to judgement errors. Others, e.g. in the case of “We Doubt” category appear to be systemic and influential. Dispersion of assignments seems to be following the ambiguity pattern, with higher ambiguity (tails) categories inducing greater dispersion. But, interestingly, there also appears to be stronger ambiguity in the lower range of perceptions (from “We Doubt” to “Highly Unlikely”) than in the upper range. This can be ‘natural’ or ‘rational’ if we think that less likely event signifier is more ambiguous. But the same holds for more likely events too (see range from “We Believe” to “Likely” and “Highly Likely”).

There are many more points worth discussing in the context of this exercise. But on the net, the data suggests that the rational expectations view of our ability to assess true probabilities of uncertain outcomes is faulty not only at the level of the tail events that are patently identifiable as ‘unlikely’, but also in the range of tail events that should be ‘nearly certain’. In other words, ambiguity is tangible in our decision making. 

Note: it is also worth noting that the above evidence suggests that we tend to treat inversely certainty (tails) and uncertainty (centre of perceptions and assignment choices) to what can be expected under rational expectations:

In rational setting, perceptions that carry indeterminate outruns should have greater dispersion of values for assigned probabilities: if something is is "almost evenly" distributed, it should be harder for us to form a consistent judgement as to how probable such an outrun can be. Especially compared to something that is either "highly unlikely" (aka, quite certain not to occur) and something that is "highly likely" (aka, quite certain to occur). The data above suggests the opposite.

1/10/17: The Old, The Young and Resources Leveraging

In our Economics class at MIIS, we have discussed last week - briefly - the dynamics of demographic change (ageing population and cohorts dominance) around the world, with a side-road to the twin secular stagnations theses. We mostly talked about the supply side of the secular stagnation and mentioned the context of long-term technological cycles. Here is an intelligent take on one of the multiple aspects of the issue, the different angle to technological cycles: https://www.bloomberg.com/view/articles/2017-06-13/the-old-are-eating-the-young. The connection between financial debt and environmental/resource capacity leveraging is a rich vein to explore.

30/9/17: Technological Revolution is Fizzling Out, as Ideas Get Harder to Find

Nicholas Bloom, Charles Jones, John Van Reenen, and Michael Webb’s latest paper has just landed in my mailbox and it is an interesting one. Titled “Are Ideas Getting Harder to Find?” (September 2017, NBER Working Paper No. w23782. http://www.nber.org/papers/w23782.pdf) the paper asks a hugely important question related to the supply side of the secular stagnation thesis that I have been writing about for some years now (see explainer here: http://trueeconomics.blogspot.com/2015/07/7615-secular-stagnation-double-threat.html and you can search my blog for key words “secular stagnation” to see a large number of papers and data points on the matter). Specifically, the new paper addresses the question of whether technological innovations are becoming more efficient - or put differently, if there is any evidence of productivity growth in innovation.

The reason this topic is important is two-fold. Firstly, as authors note: “In many growth models, economic growth arises from people creating ideas, and the long-run growth rate is the product of two terms: the effective number of researchers and their research productivity.” But, secondly, the issue is important because we have been talking in recent years about self-perpetuating virtuous cycles of innovation:

• Clusters of innovation engendering more innovation;
• Growth in ‘knowledge capital’ or ‘knowledge economies’ becoming self-sustaining; and
• Expansion of AI and other ‘learning’ fields leading to exponential growth in knowledge (remember, even the Big Data was supposed to trigger this).

So what do the authors find?

“We present a wide range of evidence from various industries, products, and firms showing that research effort is rising substantially while research productivity is declining sharply.” In other words, there is no evidence of self-sustained improvements in research productivity or in the knowledge economies.

Worse, there is a diminishing marginal returns in technology, just as there is the same for every industry or sector of the economy: “A good example is Moore's Law. The number of researchers required today to achieve the famous doubling every two years of the density of computer chips is more than 18 times larger than the number required in the early 1970s. Across a broad range of case studies at various levels of (dis)aggregation, we find that ideas — and in particular the exponential growth they imply — are getting harder and harder to find. Exponential growth results from the large increases in research effort that offset its declining productivity.”

We are on the extensive margin when it comes to knowledge creation and innovation, which - to put it differently - makes ‘innovation-based economies’ equivalent to ‘coal mining’ ones: to achieve the next unit of growth these economies require an ever increasing input of resources.

Computers are not the only sector where the authors find this bleak reality. “We consider detailed microeconomic evidence on idea production functions, focusing on places where we can get the best measures of both the output of ideas and the inputs used to produce them. In addition to Moore’s Law, our case studies include agricultural productivity (corn, soybeans, cotton, and wheat) and medical innovations. Research productivity for seed yields declines at about 5% per year. We find a similar rate of decline when studying the mortality improvements associated with cancer and heart disease.” And more: “We find substantial heterogeneity across firms, but research productivity is declining in more than 85% of our sample. Averaging across firms, research productivity declines at a rate of around 10% per year.”

This is really bad news. In recent years, we have seen declines in labor productivity and capital productivity, and TFP (the residual measuring technological productivity). Now, knowledge productivity is falling too. There is literally no input into production function one can think of that can be measured and is not showing a decline in productivity.

The ugly facts presented in the paper reach across the entire U.S. economy: “Perhaps research productivity is declining sharply within every particular case that we look at and yet not declining for the economy as a whole. While existing varieties run into diminishing returns, perhaps new varieties are always being invented to stave this off. We consider this possibility by taking it to the extreme. Suppose each variety has a productivity that cannot be improved at all, and instead aggregate growth proceeds entirely by inventing new varieties. To examine this case, we consider research productivity for the economy as a whole. We once again find that it is declining sharply: aggregate growth rates are relatively stable over time, while the number of researchers has risen enormously. In fact, this is simply another way of looking at the original point of Jones (1995), and for this reason, we present this application first to illustrate our methodology. We find that research productivity for the aggregate U.S. economy has declined by a factor of 41 since the 1930s, an average decrease of more than 5% per year.”

This evidence further confirms the supply side of the secular stagnation thesis. Technological revolution has been slowing down over recent decades (not recent years) and we are clearly past the peak of the TFP growth of the 1940s, and the local peak of the 1990s (the ‘fourth wave’ of technological revolution).

Update June 7, 2018: A new version of the paper is available at https://web.stanford.edu/~chadj/IdeaPF.pdf.

29/9/17: Eurocoin: Eurozone growth is still on the upside trend

The latest data from Eurocoin - an early growth indicator published by Banca d’Italia and CEPR - shows robust continued growth dynamics for the common currency GDP through August-September 2017. Rising from 0.67 in August to 0.71 in September, Eurocoin posted the highest reading since March 2017 and matched the 3Q 2017 GDP growth projection of 0,67.

The charts below show both the trends in Eurocoin and underlying GDP growth, as well as key policy constraints for the monetary policy forward.

The last chart above shows significant gains in both growth and inflation over the last 12 months, with the euro area economy moving closer to the ECB target zone for higher rates. In fact, current state of unemployment and growth suggests policy rates at around 2.4-3 percent, while inflation is implying ECB rate in the regions of 1.25-1.5 percent.

In summary, euro area recovery continues at relative strength, with growth trending above the post-crisis period average since January 2017, and rising. Inflationary expectations are starting to edge toward the ECB target / tolerance zone, so October ECB meeting should be critical. Signals so far suggests that the ECB will outline core modalities of monetary policy normalisation, which will be further expanded upon before the end of 2017, setting the stage for QE unwinding and some cautious policy rates uplift from the start of 2018.

28/9/17: Pimco on Russian Economy: My Take

An interesting post about the Russian economy, quite neatly summarising both the top-line challenges faced and the resilience exhibited to-date via Pimco: https://blog.pimco.com/en/2017/09/Russia%20Growth%20Up%20Inflation%20Down. Worth a read.

My view: couple of points are over- and under-played somewhat.

Sanctions: these are a thorny issue in Moscow and are putting pressure on Russian banks operations and strategic plans worldwide. While they do take secondary seat after other considerations in public eye, Moscow insiders are quite discomforted by the effective shutting down of the large swathes of European markets (energy and finance), and North American markets (finance, technology and personal safe havens). On the latter, it is worth noting that a number of high profile Russian figures, including in pro-Kremlin media, have in recent years been forced to shut down shell companies previously operating in the U.S. and divest out of real estate assets. Sanctions are also geopolitical thorns in terms of limiting Moscow's ability to navigate the European policy space.

Banks: this issue is overplayed. Bailouts and shutting down of banks are imposing low cost on the Russian economy and are bearable, as long as inflationary pressures remain subdued. Moscow can recapitalise the banks it wants to recapitalise, so all and any banks that do end up going to the wall, e.g. B&N and Otkrytie - cited in the post - are going to the wall for a different reason. That reason is consolidation of the banking sector in the hands of state-owned TBTF banks that fits both the Central Bank agenda and the Kremlin agenda. The CBR has been on an active campaign to clear out medium- and medium-large banks out of the way both from macroprudential point of view (these institutions have been woefully undercapitalised and exposed to serious risks on assets side), and the financial system stability point of view (majority of these banks are parts of conglomerates with inter-linked and networked systems of loans, funds transfers etc).

Yurga, another bank that was stripped of its license in late July - is the case in point, it was part of a real estate and oil empire. B&N is another example: the bank was a part of the Safmar group with $34 billion worth of assets, from oil and coal to pension funds.

The CBR knowingly tightened the screws on these types of banks back in January:

• The new rules placed a strict limit on bank’s exposure to its own shareholders - maximum of 20% of its capital, forcing the de-centralisation of equity holdings in banking sector; and
• Restricted loans to any single borrower or group of connected borrowers to no more than 25% of total lending.

I cannot imagine that analysts covering Russian markets did not understand back in January that these rules will spell the end of many so-called 'pocket' banks linked to oligarchs and their business empires.

The balance of the banking sector is feeling the pain, but this pain is largely contained within the sector. Investment in Russian economy, usually heavily dependent on the banks loans, has been sluggish for a number of years now, but the key catalyst to lifting investment will be VBR's monetary policy and not the state of the banking sector. 

Here is a chart from Reuters summarising movements in interbank debt levels across the top 20 banks:

The chart suggests that net borrowing is rising amongst the top-tier banks, alongside deposits gains (noted by Pimco), so the core of the system is picking up strength off the weaker banks and is providing liquidity. Per NYU's v-lab data, both Sberbank and VTB saw declines in systemic risk exposures in August, compared to July. So overall, the banking system is a problem, but the problem is largely contained within the mid-tier banks and the CBR is likely to have enough fire power to sustain more banks going through a resolution. 

28/7/17: Climbing the Deficit Mountains: Advanced Economies in the Age of Austerity

Just a stat: between 2001-2006 period, cumulative Government deficits across the Advanced Economies rose by SUD 5.135 trillion. Over the subsequent 6 years period (2007-2012) the same deficits clocked up USD 14.299 trillion and over the period 2013-2018 (using IMF forecasts for 2017 and 2018), the cumulated deficits will add up to USD 8.197 trillion. On an average annual basis, deficits across the Advanced Economies run at an annual rate of USD0.86 trillion over 2001-2006, USD 2.375 trillion over 2007-2012 and USD 1.385 trillion over 2013-2017 (excluding forecast year of 2018).

As a percentage of GDP, 2001-2006 saw Government deficits for the Advanced economies averaging 2.68% of GDP annually in pre-crisis era, rising to 5.42% of GDP in peak crisis years of 2007-2012, and running at 2.98% of GDP in 2013-2017 period. Looking at the post-crisis period, return to pre-crisis levels of Government spending would require

In simple terms, there is a mountain of deficits out there that has been sustained by cheap - Central Banks’ subsidised - funding, the cost of which is starting to go North. The cost of debt financing is a material risk consideration.