5/3/18: Rational Valuations Meet a Parody Cowboy

There is one word that explains the latest Bloomberg musings on the markets pricing in the impact of Trump's aluminium & steel tariffs: ambiguity. Here is the original article:
"The good Donald, the bad Donald and the ugly market" https://www.bloomberg.com/gadfly/articles/2018-03-02/tariffs-the-good-donald-the-bad-donald-and-the-ugly-market via @gadfly

With its cool imagery:

And here is my analysis: tariffs pricing by the markets reflects three VUCA factors. Factor 1: Ambiguity. This relates to ambiguous nature of Trump's policies, with tariffs seemingly laying waste to the idea that Trump Administration can be deemed to be 'maturing' into the office. Factor 2: Complexity. This relates to the nature of the global economy and its dependence on international cooperation agreements and frameworks, the very same institutions that Factor 1 puts into question without providing any certainty as to the exact direction of future change or, indeed, the metrics by which policy successes will be measured. Factor 3: Second Order Ambiguity. This arises from the interaction between Factors 1 and 2 above: as Trump Administration bites chunks out of international structures and treaties, ambiguity and complexity arise not only within the context of the Administration tenure itself. Trump's actions drive unpredictable, uncertain and ambiguous changes into the post-Trump era responses from the future U.S. Presidents. If you are running a business or investing in a company, you need to think beyond November 2020 (which is just over 2.5 years away) and that thinking is virtually impossible under current policy volatility and uncertainty.

In Hollywood, falling out of the second story window, while showering the town around you in bullets is a fun game. In the real world, you just might end up being killed. Companies and investments are not run like an Indiana Jones' movie set. Even when a 'Western' parody cowboy is sitting in the White House.

5/3/18: S&P upgrade and Russian markets reaction

Belatedly, on the S&P upgrade for Russian Sovereign Debt, here is a good primer from Bloomberg: https://www.bloomberg.com/gadfly/articles/2018-02-23/russia-bonds-are-poised-to-come-off-the-junk-heap.

Markets repricing was quick on the news, when S&P did upgrade country bonds from BB+ to BBB: Russian dollar- and euro-denominated bonds rose across the maturity curve. Russia’s 2043 eurobond was up 1.4 cents to 115 cents in the dollar the day after the upgrade, while 2026 issue was up 0.69 cents to 105 cents, and the 2027 issue was up 0.72 cents to 101 cents. 5 year CDS fell 5 bps to 103 bps.

This was not a watershed, however, as Russian bonds been rallying (with some volatility) for quite some time prior, shaking off completely end of January extension of the U.S. sanctions.

A neat chart via BOFIT shows the improvement in the state of Russian fiscal position:

Russia spent 3 years in 'junk rating' lock up, much of it down to the U.S. and EU sanctions, rather than to any adverse dynamic in Russian sovereign default risks.

As BOFIT noted, "S&P Global Ratings noted that Russia’s macroeconomic policy has allowed the economy to adjust to lower commodity prices and international sanctions. The outlook for the Russian economy is stable. S&P’s rating for Russian sovereign foreign bonds now matches that
of Fitch, while Moody’s continues to apply a junk rating (Ba1). ... The Russian government currently faces no compelling need to borrow from abroad as the current fiscal outlook is rather good thanks to the rise of oil prices and fiscal discipline."

In 2017, Russia witnessed an 18 percent rise in Federal revenues, and an 8 percent increase in allocations to the Social Reserve Funds (spending from the funds rose 6 percent).

Russia retains the position, rather rare for any country, to be able to pay off its entire external Government debt from its sovereign reserves.

5/2/18: Italy Smacks into VUCA Wall

VUCA wins. In Italy.

Italian elections results are coming in and several key VUCA components are now clearly at play in Europe's third largest economy: https://www.theguardian.com/world/ng-interactive/2018/mar/05/italian-elections-2018-full-results-renzi-berlusconi.

Now, what does this mean?

Italian Parliament:
234 seats for M5S
122 seats for Lega
105 seats for PDs
96 seats for FI

Italian Senate:
115 seats for M5S
55 seats for Lega
53 seats for FI
50 seats for PD

M5S - the 'Five Star Movement' has consolidated and expanded its launching position of 2013, despite virtually all analysts declaring the party to be 'falling' in support, especially after 2017 local elections. Welcome to the world of VUCA, where the more 'accomplished' the analyst, the less accurate are her/his predictions, because our traditional analytical tools miss the C & A bits of VUCA (complexity & ambiguity).

Renzi & mainstream politics have lost. His PDs are decimated. They have only themselves to blame: centre-left ideology is of nil distinction from centre and centre-right these days. Not only in Italy, but elsewhere too: just observe the U.S. Democrats sparing with the U.S. Republicans on virtually everything, save actual policies. The squabbling that the lack of ideological core implies is intense within the centre-left in Italy. Just as it is intense elsewhere (e.g. the U.S., where the centre-left's only differentiation from the centre-right is who to blame for the country problems, save blaming themselves).

Centre-right (Berlusconi) failed to capture anyone's hearts and minds, so the Lega Nord has taken its votes. Which makes Lega a major winner in the election: the party went from its cyclical low of 4 percent in 2013 election to its historical peak of around 18 percent in this election. The change of leadership in 2013 (to Salvini) has paid off.

Key takeaway from all of this is that in the modern, highly volatile, uncertain, complex and ambiguous political environment, writing off populist parties at the extreme o political spectrum is a dangerous game. We think of these parties as being driven to successes and subsequent failures by individual personalities of their leaders. That does not appear to be the case. Complexity overrides trends.

Meanwhile, in Brussels, power-fixing mode was on. As reported in the Guardian: "The [EU] commission’s chief spokesman, Margaritis Schinas, told reporters its president, Jean-Claude Juncker, wanted to see a “stable government in Italy” and “regarding the potential impact and so on and so forth... ‘Keep calm and carry on’”. In other words, get Renzi back by all possible means and do not challenge centrism. That is just another manifestation of VUCA for you: the ossified elites dependent on status quo ante will only recognise VUCA effects after they drive the system to a point of no return.

28/2/18: San Francisco Fed Research: Secular Stagnation Confirmed

This blog has been consistently warning about the continued pressures on the U.S. (and global) economy. In fact, bringing together two strands of research my a range of economists, I defined the term 'twin secular stagnations' to describe a trend of structural long term decline in the potential growth rates on

• The supply side of the U.S. economy (productivity growth and technological progress slowdowns, along with monopolization trends in the economy, or the supply side secular stagnation), and 
• The demand side  (excessive leverage, growing asymmetry in distribution of productive capital ownership, and ageing-induced changes in savings, consumption and investment, or the demand side secular stagnation).

The topic has not gone away, even though media commentariate in the U.S. and elsewhere have been fully consumed by the waves of optimism stemming from the tale of a 'robust growth' cycle.

Well, guess what: the 'spectacular' or 'tremendous' (using White House terminology) growth is largely a cyclical phenomena, as the latest research from the U.S. Federal Reserve Bank of San Francisco indicates.  You can read the full note here: https://www.frbsf.org/economic-research/files/el2018-04.pdf. The core is in this chart:

You can see the flattening out and the decline in the cyclically-adjusted growth rate (the blue line).  This line shows us the rates of growth smoothing out the effects of growth-and-recessions cycles. Secular stagnation is still here: "As expected, the cyclical adjustment removes the sharp drop in actual output associated with the recession. But since then, the trajectory of the blue line is nowhere close to a straight line projection from the 2007 peak. Rather, cyclically adjusted output per person rose slowly after 2007 and then plateaued in recent years."

The authors link this worrying development to supply-side slowdown in productivity growth, and they clearly state that this slowdown in productivity growth pre-dates the Great Recession. In other words, the collapse in productivity growth is structural, not cyclical.

"The seeds of the disappointing growth in output were sown before the recession in the form of slow productivity growth and a declining labor force participation rate. Quantitatively, relative to the recoveries of the 1980s, 1990s, and early 2000s, cyclically adjusted output per person has grown about 1¾ percentage points per year more slowly since 2009. According to our analysis, about a percentage point of this is explained by the shortfall in productivity growth and about ¾ percentage

point is explained by the shortfall in labor force participation."

The latter is shocking!

So no, folks, the U.S. economy has not been doing 'ugely' well since 2009. It has not been doing better, either, than in the pre-crisis period. In fact, the U.S. economy has lost a lot of its long run economic growth potential. And so far, there is absolutely nothing anyone in Washington is willing to do about changing that long-term decline, because doing so will require deep reforms and rebalancing of the economy away from oligopolistic and monopolistic competition, away from rent seeking, away from rewarding physical capital at the expense of human capital, as well as reducing massive drags on demand side, including healthcare and education costs, debt overhang in households (especially younger cohorts), abating skyrocketing rents & property inflation in key urban locations, and so on. 

Care to suggest any party in Washington willing to tackle these?..

27/2/18: Volatility & Uncertainty are Back with a Bang

My recent article on markets volatility for the Sunday Business Post https://www.businesspost.ie/business/volatility-uncertainty-back-bang-408742

27/2/18: FocusEconomics Top Blogs in Economics and Finance, 2018

FocusEconomics top economics and finance blogs roll list for 2018 is out https://www.focus-economics.com/blog/top-economics-finance-blogs-of-2018, with TrueEconomics taking a spot on the list once again:

27/2/18: RePEc Rankings 2018

T'is a season for rankings, so delighted to be 34th on RePEc's reputable list of Twitter-respectables in economics...

26/2/18: South Korea Avoids Sunk Cost Fallacy

As shown consistently by economists, Olympic Games are a vanity project that wastes public resources, scarce public resources. In this case, South Korea's swift decision to demolish (https://www.aol.com/article/news/2018/02/22/south-korea-plans-to-demolish-newly-built-olympic-stadium/23368450/) its flagship Olympic stadium is a welcome case of cutting the future costs of maintaining the White Elephant. Or, in terminology of VUCA management: an act of avoiding the sunk cost fallacy.

You can read on economics of Olympic Games (err... Olympic waste) by following links from here: http://trueeconomics.blogspot.com/2014/02/922014-economics-of-olympic-games-part.html and http://trueeconomics.blogspot.com/2012/08/282012-bit-of-olympic-bubble.html and here: http://trueeconomics.blogspot.ie/2012/10/18102012-some-tough-love-from-stats-for.html. Have fun.

In the mean time, make sure you know your stance should your city/country attempt to bid for the next Olympic Waste.

25/2/18: Syria: a Web of VUCA

In his column this week, Tyler Cowen, of Bloomberg View, sums up the VUCA nature of the ongoing conflict in Syria. In fact, his article is more fundamental than that. He paints a coherent picture of how Syria conflict serves as a fertile ground for growth of Black Swan-type tail risks (risks of large scale impact events with low or zero historical predictability).

In simple terms, in Syria, the U.S. and Russia (and their auxiliary proxies) combine three key VUCA factors:

• Ambiguity: represented by the inability to distinguish and delineate clearly the adversarial actors involved in each individual incident: Russian proxies are met with American proxies, amidst a veritable soup of various other actors;
• Uncertainty: represented by lack of clear, stated in advance, and transparently enforced objectives by major actors, most commonly the U.S., but also Russia and Iran;
• Complexity: captured by a complex web of interests, internal-to-Syria and global objectives, etc. 

As Cowen correctly warns, incidents like the alleged Russian proxies-led attack on the U.S. and Kurdish compound can create a potential for a large scale risk materialization or blow-out. Or, put into more academic language,  VUCA environment is self-sustaining: ambiguity, uncertainty and complexity interact to produce a cyclical reinforcement of Volatility (risk). The vicious cycle repeats, amplifying the extent to which VUCA impact (size of the potential forthcoming systemic shock), likelihood (probability of a systemic forthcoming shock), proximity (timing of the systemic shock) and velocity (speed with which the forthcoming shock arrives) rise.


Read Cowen's article in full here: https://www.bloomberg.com/view/articles/2018-02-23/us-s-killing-of-russians-in-syria-is-harbinger-of-more-violence and read these excellent descriptors of how complexity of Syrian conflict is evolving: https://taskandpurpose.com/complexity-syrias-war-catching-us/ and here: http://www.periscopic.com/news/removing-confusion-from-complexity.

25/2/2018: Tax Havens and Financial Secrecy ca 2018

The notion of what defines a tax haven is a complex one and does not easily lend itself to a precise definition. This presents numerous problems. As a personal example is an academic paper that I am currently working on with three other co-authors in which we had to use several different definitions of tax havens, primarily because the official (OECD) designations were so deeply politicized as to exclude a wide range of countries.

Tax Justice Network this week published its Financial Secrecy Index (https://www.financialsecrecyindex.com/). The Index is based on 20 tax policy-specific indicators, which are described here (https://www.financialsecrecyindex.com/introduction/method-and-concepts) and in broad terms provides a view of just how open the country is to facilitating tax avoidance or tax evasion through its financial laws, regulations and systems. The 20 indicators are:

• Banking secrecy
• Wealth Ownership disclosures, covering: existence of a public Trust and Foundations Register, Recording of Company Ownership disclosures, and Other Wealth Ownership
• Limited Partnership Transparency, Public Company Ownership, Public Company Accounts
• Country-by-Country Reporting, and Corporate Tax Disclosure, Legal Entity Identifier, and Tax Administration Capacity
• Consistent Personal Income Tax
• Does the jurisdiction facilitate tax avoidance and encourage tax competition with its treatment of capital income in local income tax law? Is there tax court secrecy, and are there harmful tax structures, e.g. bearer shares; use of large banknotes, existence of trusts with flee clauses, etc
• Public Statistics disclosures about international financial, trade, investment and tax position
• Anti - Money Laundering regime 
• Automatic Information Exchange, Bilateral Treaties, and International Legal Cooperation

Using the methodology described in the above link, the Tax Justice Network arrive at the country rankings in terms of how open the country system is to facilitation of tax avoidance and evasion, including through provision of financial secrecy and non-disclosure facilities that help international companies and investors avoid tax payments in their jurisdictions of origin.

The results are surprising, because they stand in a stark contrast to politically sanitized version of tax avoidance lists published by the likes of the toothless and politically controlled OECD:

Here's the top shocker: the U.S. - a country that routinely bullies other jurisdictions when it comes to extracting tax data that serves the American own purposes is number two most active tax avoidance facilitation countries in the world.  Germany, another stalwart of anti-tax avoidance rhetoric and co-sponsor of the OECD's BEPS anti-tax avoidance process alongside the U.S. is ranked number 7. Japan is number 13. Canada is number 21. And so on.

Another surprise, Ireland - previously ranked 37th in 2015 Index, with a secrecy score of 40 (see https://www.financialsecrecyindex.com/Archive2015/CountryReports/Ireland.pdf), the country is now ranked 26th, with a secrecy score of 51 (this year's country report here: https://www.financialsecrecyindex.com/PDF/Ireland.pdf). In other words, things are not quite improving for Ireland.

A third surprise is Lichtenstein. This country has been commonly accused of being a major secrecy tax haven for financial flows, quite often, without any serious consideration of the more recent reforms in the country's financial services sector. Yet, Lichtenstein ranks lowly 46th in the index, just below Norway. IN the same vein, Cyprus - that has been effectively labeled a dirty money Island for Russian mobsters during 2011 financial restructuring episode - ranks reasonably low at 24th place, well better than Germany - a country from which these accusations originated.

These, and other considerations, arising from the Index results should remind us of the complexity involved in assessing the extent of financial and tax systems facilitation of illicit and ethically questionable activities. Tax havens come in all forms and shapes, some benign, others damaging to the socio-economic environments, many having an adverse impact only in the long run.

It is quite easy for the media to label a jurisdiction a safe haven for crime. It is much harder to establish an empirical basis to either support or reject such a label.

23/2/18: Ireland's Migration Policies are Working Well

How to do immigration policy right? Ireland's CSO has published some new data on educational attainment in Ireland, covering 2017 results. The data is available here: http://www.cso.ie/en/releasesandpublications/er/eda/educationalattainmentthematicreport2017/. One table stands out on the issue of migration:

Click on the image to enlarge

Despite the report itself focusing on 3rd level attainment as a 'catch all' category, what really matters in terms of future quality of the workforce is more advanced education. And in this area, Irish migration system shines. Both, EU15 ex-Ireland & UK and non-EU migration pathways are working to enhance the stock of human capital in the country when it comes to honours tertiary degrees and post-tertiary education.

This is amazing, because the two pathways are distinct in terms of regulations covering mobility (access for immigrants). And both seem to be working well.

Of course, other factors contribute, beyond policy / regulatory facilitation, including Ireland's amazingly open society, welcoming people and social networks that support easy integration of those who want to integrate. But Ireland's policymakers and civil servants, who often act as the early contributors to this mobility also deserve credit. While problems and bottlenecks remain and need addressing, credit should be given where credit is due.

21/2/18: Cryptos Fans Checkmating Themselves on Petro

Venezuela launched the Petro, an oil-backed cryptocurrency that is supposed to augment (strike that: replace) the totally debased fiat currency the country has. And the launch is a pure gas, surrounded by bombastic claims from crypto-fans who can't be bothered to read the script.

Behold the following bits from the priceless writeup by the Bloomberg (https://www.bloomberg.com/news/articles/2018-02-20/venezuela-is-jumping-into-the-crypto-craze):

Apparently, Dubai has an asset-backed or commodity-backed currency. It does not.

Apparently, currency is what makes Dubai Dubai. It does not.

Apparently, all that differentiates Dubai from Venezuela is... err... I am not sure what it might be in the eyes of the cryptos experts, but here is a tangible metric of difference:

One ranks 179th in the world in Economic Freedom Index, another ranks 10th. And similar rankings differences apply across all reputable measures of economic, social, legal and political institutions quality, and country risk measures.

But, not to be outdone by their own ignorance, the crypto-fans brigade soldiers on:

Free markets led by some of the most corrupt, venally politicized Government officials in the world.

Check mating oneself publicly is, apparently, a required condition for being a crypto expert these days.