28/4/18: The Great Recovery with No Savings: U.S. Households' Meet 'Exceptionalism'

Via @bySamRo, a chart from Deutsche Bank research:

Which, of course, illustrates the marvels of the current 'recovery' cycle - a steady rise in the proportion of U.S. households with no wealth. More than 30 percent of all U.S. households have zero or negative non-housing wealth.

To pair this with other data, here is the U.S. household saving rate:

And here are the median saving account levels by age:

Not scared yet? Ok, here's another fact: according to Bankrate's financial security index survey, released in January 2018, only 39 percent of Americans said they would be able to finance a $1,000 emergency spending using their savings. In 2016, a survey found that 69 percent of Americans had less than USD1,000 in savings, while 34 percent had zero savings.

A dental emergency, even with a dental insurance coverage, can knock a good half of 69 percent of the U.S. households into zero savings territory. Credit cards and personal loans are de facto shoring up the Great American Dream for the vast swathes of the middle classes. Some 'exceptionalism', folks...

27/4/18: The Goldilocks Economy of State Policies

My column for the current issue of the Cayman Financial Review is out: http://www.caymanfinancialreview.com/2018/04/19/the-goldilocks-economy-of-state-policies/.

27/4/18: Global growth and Ireland's prospects: 2018-2019

My article for last weekend's edition of Sunday Business Post on the implications of peak cycle in global growth for Ireland: https://www.businesspost.ie/business/risks-global-growth-cloud-irelands-future-414819.

25/4/18: 90 years of Volatility: VIX & S&P

A great chart from Goldman Sachs via @Schuldensuehner showing extreme events in markets volatility using overlay of VIX and realised volatility from 1928 on through March 2018:

For all risk / implied risk metrics wonks, this is cool.

25/4/18: Draining of the Washington Swamp Reveals Mulvaney

Quote of the month, if not of the year, belongs to yet another Trump Administration 'draing the swamp hero, Mick Mulvaney, currently the White House budget director and, according to some rumours, a prime candidate to be the next Chief of Staff. Speaking at the American Bankers Association, Muvaney, who previously served as a Congressman declared: "We had a hierarchy in my office in Congress. If you're a lobbyist who never gave us money, I didn't talk to you. If you're a lobbyist who gave us money, I might talk to you."

So here we have it, folks: top Trump official claiming on the record to have engaged in a cash-for-influence peddling, the very same offence that Trump campaign routinely accused the Clinton Foundation of.

That is some draining of the Washington swamp that President Trump accomplished. Right there, in swamp's prime dweller's own words.

Link to the quote: http://www.businessinsider.com/mick-mulvaney-tells-bankers-donate-to-congress-for-influence-2018-4.

As an aside, Pew Research data shows that the American people, by a large majority, are aware of the deep corruption in Washington. "Americans think that those who donate a lot of money to elected officials have more political influence than others. An overwhelming majority (77%) supports limits on the amount of money individuals and organizations can spend on political campaigns and issues. And nearly two-thirds of Americans (65%) say new laws could be effective in reducing the role of money in politics." (see http://assets.pewresearch.org/wp-content/uploads/sites/5/2018/04/26140617/4-26-2018-Democracy-release.pdf).

One the results: "Overall, nearly six-in-ten Americans (58%) say democracy in the United States is working very or somewhat well, though just 18% say it is working very well. Four-in-ten say it is working not too well or not at all well."

Any surprise, when the likes of Mulvaney are running public offices?

25/4/18: Dombret on the Future of Europe

An interesting speech by y Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, on the future of Europe, with direct referencing to the issues of systemic financial risks (although some of these should qualify as uncertainties) and resilience of the regulatory/governance systems (I wish he focused more on these, however).

https://www.bis.org/review/r180226b.pdf (Links to an external site.)

25/4/18: Tesla: Lessons in Severe and Paired Risks and Uncertainties

Tesla, the darling of environmentally-sensible professors around the academia and financially ignorant herd-following investors around the U.S. urban-suburban enclaves of Tech Roundabouts, Silicon Valleys and Alleys, and Social Media Cul-de-Sacs, has been a master of cash raisings, cash burnings, and target settings. To see this, read this cold-blooded analysis of Tesla's financials: https://www.forbes.com/sites/jimcollins/2018/04/25/a-brief-history-of-tesla-19-billion-raised-and-9-billion-of-negative-cash-flow/2/#3364211daf3d.

Tesla, however, isn't that great at building quality cars in sustainable and risk-resilient ways. To see that, consider this:

1. Tesla can't procure new parts that would be consistent with quality controls norms used in traditional automotive industry: https://www.thecarconnection.com/news/1116291_tesla-turns-to-local-machine-shops-to-fix-parts-before-theyre-installed-on-new-cars.
2. Tesla's SCM systems are so bad, it is storing faulty components at its factory. As if lean SCM strategies have some how bypassed the 21st century Silicon Valley: http://www.thedrive.com/news/20114/defective-tesla-parts-are-stacked-outside-of-california-machine-shop-report-shows.
3. It's luxury vehicles line is littered with recalls relating to major faults: https://www.wired.com/story/tesla-model-s-steering-bolt-recall/. Which makes one pause and think: if Tesla can't secure quality design and execution at premium price points, what will you get for $45,000 Model 3?
4. Tesla burns through billions of cash year on year, and yet it cannot deliver on volume & quality mix for its 'make-or-break' Model 3: http://www.thetruthaboutcars.com/2018/04/hitting-ramp-tesla-built-nearly-21-percent-first-quarter-model-3s-last-week/.
5. Tesla's push toward automation is an experiment within an experiment, and, as such, it is a nesting of one tail risk uncertainty within another tail risk uncertainty. We don't have many examples of such, but here is one: https://arstechnica.com/cars/2018/04/experts-say-tesla-has-repeated-car-industry-mistakes-from-the-1980s/ and it did not end too well. The reason why? Because uncertainty is hard to deal with on its own. When two sources of uncertainty correlate positively in terms of their adverse impact, likelihood, velocity of evolution and proximity, you have a powerful conventional explosive wrapped around a tightly packed enriched uranium core. The end result can be fugly.
6. Build quality is poor: https://cleantechnica.com/2018/02/03/munro-compares-tesla-model-3-build-quality-kia-90s/.  So poor, Tesla is running "reworking" and "remanufacturing" poor quality cars facilities, including a set-aside factory next to its main production facilities, which takes in faulty vehicles rolled off the main production lines: https://www.bloomberg.com/view/articles/2018-03-22/elon-musk-is-a-modern-henry-ford-that-s-bad.
7. Meanwhile, and this is really a black eye for Tesla-promoting arm-chair tenured environmentalists, there is a pesky issue with Tesla's predatory workforce practices, ranging from allegations of discrimination https://www.sfgate.com/business/article/Tesla-Racial-Bias-Suit-Tests-the-Rights-of-12827883.php, to problems with unfair pay practices https://www.technologyreview.com/the-download/610186/tesla-says-it-has-a-plan-to-improve-working-conditions/, and unions busting: http://inthesetimes.com/working/entry/21065/tesla-workers-elon-musk-factory-fremont-united-auto-workers.  To be ahead of the curve here, consider Tesla an Uber-light governance minefield. The State of California, for one, is looking into some of that already: https://gizmodo.com/california-is-investigating-tesla-following-a-damning-r-1825368102.
8. Adding insult to the injury outlined in (7) above, Tesla seems to be institutionally unable to cope with change. In 2017, Musk attempted to address working conditions issues by providing new targets for fixing these: https://techcrunch.com/2017/02/24/elon-musk-addresses-working-condition-claims-in-tesla-staff-wide-email/. The attempt was largely an exercise in ignoring the problems, stating they don't exist, and then promising to fix them. A year later, problems are still there and no fixes have been delivered: https://www.buzzfeed.com/carolineodonovan/tesla-fremont-factory-injuries?utm_term=.qa8EzdgEw#.dto7Dnp7A. Then again, if Tesla can't deliver on core production targets, why would anyone expect it to act differently on non-core governance issues?

Here's the problem, summed up in a tight quote:

Now, personally, I admire Musk's entrepreneurial spirit and ability. But I do not own Tesla stock and do not intend to buy its cars. Because when on strips out all the hype surrounding this company, it's 'disruption' model borrows heavily from governance paradigms set up by another Silicon Valley 'disruption darling' - Uber, its financial model borrows heavily from the dot.com era pioneers, and its management model is more proximate to the 20th century Detroit than to the 21st century Germany.

If you hold Tesla stock, you need to decide whether all of the 8 points above can be addressed successfully, alongside the problems of production targets ramp up, new models launches and other core manufacturing bottlenecks, within an uncertain time frame that avoids triggering severe financial distress? If your answer is 'yes' I would love to hear from you how that can be possible for a company that never in its history delivered on a major target set on time. If your answer is 'no', you should consider timing your exit.

19/4/18: Geopolitical Risk: Who Cares?..

Geo-political risks, geo-shmalitical risks... who cares... not the markets...

None of the geopolitical risks registered on S&P 500 companies reporting radar according to Factset in 1Q 2018 https://insight.factset.com/more-than-half-of-sp-500-companies-citing-positive-impact-from-fx-on-q1-earnings-calls.  This is not very surprising as majority of earnings for 1Q accumulated before any spikes in these, and as "Tariffs" category probably absorbed the 'China' effect. Notably, however, earnings were impacted adversely by trade conflict and cyber risks (total of 3/25 companies impacted).

15/4/18: US Trade Wars and the Global Economy

My interview for Icelandic TV on the threat of trade wars led by the U.S. :http://www.visir.is/section/MEDIA99&fileid=VTV094E2C7D-0F20-48CA-ADB4-8F8515C4B1E7

15/4/18: EuromoneyCountryRisk 1Q 2018 report

Euromoney Country Risk 1Q 2018 report (gated link) is out, quoting, amongst others, myself on geopolitical and macroeconomic headwinds to global economic growth:

Two interesting tables/charts:

My quote:

11/4/18: Social Mobility in the U.S.: Another Chunk of the Facade Goes Down

Via @QZ - share of young Americans living with parents and grandparents is now back to the WW2 levels:

Source: https://qz.com/1248081/the-share-of-americans-age-25-29-living-with-parents-is-the-highest-in-75-years/

No kidding. 33 trillion dollars of economic rescues/stimuli/QE etc and the Great Recovery, the Bull Economy, the Zero Unemployment Goldilocks Era, the MAGA thingy all are a straight line up to rising rates of inter-family subsidies.

11/4/18: Sand Castles of Local Government Regulations in U.S. Property Markets

A new paper, "Sand Castles Before the Tide? Affordable Housing in Expensive Cities" by Gabriel Metcalf in the Journal of Economic Perspectives (Volume 32, Number 1—Winter 2018—Pages 59–80, https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.32.1.59) looks at evolution of house prices in the major urban areas of the U.S. where "the demand for housing is growing at a much faster rate than the supply. These so-called “superstars” include New York City, Boston, Washington, DC, San Francisco, Los Angeles, Seattle, and Denver (Gyourko, Mayer, and Sinai 2013)."

These cities have "a seemingly permanent crisis of affordable housing," despite the fact that "...policymakers expend great amounts of energy trying to bring down housing costs with subsidies for affordable housing and sometimes with rent control. But these efforts are undermined by planning decisions that make housing for most people vastly more expensive than it has to be by restricting the supply of new units even in the face of growing demand."

The author provides an interesting data summary for these cities. Table 2 in the paper reports the proportion of housing units that are price-controlled or subsidised:

Of all cities areas covered, only one - Dallas - has unregulated rental market share of >50% of the total supply. Put differently, in all but one cities, subsidised and/or rent-controlled housing accounts for more than 50% of the total rental market. Only four out of 11 cities have owner-occupied housing share of the overall property market in excess of 50%.

The rest of the paper proceeds to tell us all the possible reasons as to why this capture of the property markets by price fixing and state ownership is just not enough.  Some of these reasons and arguments are not bad. Some are simply the dogmatic rehashing of the traditional Government-will-solve-everything mantra. That said, the section on the effects of poor regulation (not in quantity, but quality) of the housing markets is spot on and worth reading.

The author first tackles the issue of zoning regulations, arguing (correctly, imo) that zoning regulations both restrict supply and distort types of supply away from what is needed in addressing affordable housing shortages. The section is very brief.

The same applies to the housing approval process, that, according to the author, can result in "more uncertainty and greater risk" which result "a higher cost of capital. Longer approval processes translate into higher carrying costs for the land... Perhaps the greatest negative impact of an uncertain and hyperpoliticized entitlement process is that it functions as a barrier to entry for developers and investors into a market. The net effect is to reduce competition among developers."

"The fourth type of local regulation on housing development is financial: fees and exactions... if the rules are inherently unpredictable and changeable, it is nearly impossible to bid rationally on land, which inevitably drives up the cost of capital, and results in inefficient outcomes. ...the market price for housing has to remain high enough to cover the cost of the fees and exactions, so these function as a price floor that keeps housing more expensive than it otherwise would be."

In summary, and I find myself in agreement with author on this, "For the country as a whole, the restrictive housing policies of the cities in expensive metro areas leads to the segregation of the wealthy into zoned enclave communities; a reduced ability of lower-income people to move to areas of higher opportunity; a diversion of enormous wealth into rent-seeking behavior by landowners; and a decrease in economic productivity for the country as a whole, because labor is not able to be allocated to the most productive economic clusters".

The article provides a good summary and some good insights into potential solutions to the problems summarised above and to the phenomenon of the failure in collective action that occurs between city-level Government policies and those of the wider (commutable) metropolitan areas.

One thing that is, however, clear that housing affordability in major cities has not been meaningfully supported by the already extensive regulatory, price control and subsidy-providing systems. The idea that rent controls can offset bad regulatory and permissioning, as well as financial charging policies is simply not supported by the evidence provided for the largest and growing cities in the U.S.