1/8/18: Dynamic patterns in BTCUSD pricing: is there a new down cycle afoot?

Bitcoin Cycles Analysis in one chart:

As the above suggests, BTCUSD dynamics are signalling continued structural pressures on Bitcoin prices and the start of the new double-top down cycle. The Great Unknown remains with the behaviour of the buy-and-hold investors who dominate longer-term BTC markets. Increase in market breadth with arrival of more active traders from the start of 2018 has not been kind to Bitcoin. More institutional investment flowing into the cryptos market has been, on average, a net negative for the crypto.

31/7/18: 65 years of profligacy and few more yet to come: U.S. Government Deficits

The history and the future of the U.S. Federal Government deficits in one chart:

Which shows, amongst other things, that

1. The post-2000 regime of deficits has shifted to a completely new trend of massively accelerating excessive spending relative to receipts;
2. The legacy of the Global Financial Crisis and the Great Recession far exceeds traditional cyclical increases in deficits;
3. The more recent vintage of the Obama Administration deficits has been more moderate compared to the peak crises years;
4. The ongoing trend in the Trump Administration deficits is dynamically exactly matching the worst years of Obama Administration deficits, despite the fact that the underlying economic conditions today are much more benign than they were during the peak crises period under the Obama Administration; and
5. Based on the most current projections, by the end of the year 2023, the U.S. is on track to increase cumulated deficit from USD 12.227 trillion at the end of 2016 to USD 20.466 trillion.  This would imply an average annual uplift of USD 1.177 trillion, which is significantly higher than the average annual increase in deficits of USD 838.3 billion recorded over the 2009-2016 period.

The good news is, fiscally responsible,  financially conservative, taxpayer interests-focused Republican Party has given full support to the Trump Administration on what in fact amounts to a restoration of the peak crises period trends in deficits accumulation.

30/7/18: Broader Unemployment vs Official Unemployment: Ireland

In the first post (see above) looking at the broader measures of unemployment and dependency ratios, recall that CSO publishes several extended series for broader unemployment rates. 

The official unemployment rate at 1Q 2018 stood at 6.4 percent (well within the pre-crisis historical range of the average of 5.31 percent and the 99% confidence interval of (3.70%, 6.92%). In more simple terms, statistically, the current official unemployment rate is indistinguishable from the average rate prevailing in 1Q 1998 - 4Q 2007. Which is the good thing, implying that in official terms, Irelands economy has recovered from the crisis at last. In fact, the recovery in official terms has been attained in 4Q 2017.

However, the CSO also reports the PLS2 measure of broader unemployment. The Above analysis was based on reported PLS1 data, covering unemployed plus discouraged workers, as a percentage of the labour force. Adding to the PLS1 those in potential additional labour force (basically able bodied adults who are neither employed nor unemployed, nor discouraged, and are not in studies or formal training), the CSO gets PLS2 measure of broader unemployment. In 1Q 208 this number read 10.2% of the Labour Force, plus Potential Additional Labour Force, which was statistically higher than the pre-Crisis average of 6.1% (falling into the 99% confidence interval range of (4.39%, 7.81%). In other words, the economy has not yet recovered from the Crisis based on PLS2 broader unemployment measure.

Extending PLS2 to cover all unemployed, plus those who want a job and not seeking for reasons other than being in education or training, in 1Q 2018 the broader PLS3 unemployment measure stood at 14.2 percent, unchanged on 4Q 2017. As with PLS2, the 1Q 2018 reading for PLS3 falls well beyond the range of the pre-crisis historical average of 8.36% (with 99% confidence interval of (6.52%, 10.20%).

As noted above, by two broader unemployment measures: PS2 and PLS3, Irish economy has not recovered from the crisis, even if we take a relatively benign recovery measure of the economy reaching the pre-crisis 1Q 1998 - 4Q 2007 average rate of unemployment. 

Worse, taking 4 year moving average and a 4 year rolling standard deviation in PS3 rates, 1Q 2018 PLS3 rate of 14.2% is closer to the upper margin of the 99% confidence interval for 1Q 2018 based on prior 4 years of data (the CI is given by (9.81%, 15.63%) range). Which means that 1Q 2018 data shows no statistically significant break-out from the PLS3 broader unemployment dynamics of the past 4 years. The same holds for the 5 years MA and rolling STDEV. 

So while the official unemployment readings are showing a very robust recovery, broader measures of unemployment continue to trend in line with the economy still carrying the hefty legacy of the recent crises. 

30/7/18: Ireland's employment data: Official Stats vs Full Time equivalents

Based on the most current data for Irish employment and working hours, I have calculated the difference between the two key time series, the Full Time Equivalent employment (FTE employment) and the officially reported employment.

Let’s take some definitions on board first:

• Defining those in official employment: I used CSO data for “Persons aged 15 years and over in Employment (Thousand) by Quarter, Sex, and Usual Hours Worked”
• Defining FTE employment, is used data on hours per week worked, using 40-44 hours category as the defining point for FTE. 
• A note of caution, FTE is an estimated figures, based on mid-points of working time intervals reported by the CSO.

Based on these definitions, in 1Q 2018, there were 2.2205 million people in official employment in Ireland. However, 51,800 of these worked on average between 1 and 9 hours per week, and another 147,300 worked between 10 and 19 hours per week. And so on. Adjusting for working hours differences, my estimated Full Time Equivalent number of employees in Ireland in 1Q 2018 stood at 1.94223 million, or 278,271 FTE employees less than the official employment statistics suggested. The gap between the FTE employment and officially reported number of employees was 12.53%.

I defined the above gap as “Employment Hours Gap” (EHG): a percentage difference between those in FTE and those in official employment. A negative gap close to zero implies FTE employment is close to the official employment, which indicates that only a small proportion of those in employment are working less then full-time hours.

All the data is plotted in the chart below

Per chart above, the following facts are worth noting:

1. In terms of official employment numbers, Ireland’s economy has not fully recovered from the crisis. The pre-Crisis peak official employment stands at 2.2522 million in 3Q 2007. The bad news is: as of 1Q 2018, the same measure stands at 2.2205 million.
2. In terms of FTE employment, the peak pre-Crisis levels of employment stood at 1.9261 million in 3Q 2017. This was regained in 3Q 2017 at 1.9444 million. So the good news is that the current recovery is at least complete now, after a full decade of misery, when it comes to estimated FTE employment.

The improved quality of employment as reflected in better mix of FT and  >FT employees in the total numbers employed, generated in the recent recovery, is highlighted in the chart as well, as the gap has been drawing closer to zero.

One more thing worth noting here. The above data is based on inclusion of the category of employees with “Variable Hours”, which per CSO include “persons for whom no usual hours of work are available”. In other words, zero-hours contract workers who effective do not work at all are included with those workers who might work one week 45 hours and another week 25 hours. So I adjust my FTE estimated employment to exclude from both official and FTE employment figures workers on Variable Hours. The resulting change in the EHG gap is striking:

Per above, while the recovery has been associated with a modestly improving working hours conditions, it is now clear that excluding workers on Variable Hours’ put the current level of EHG still below the conditions prevailing in the early 2000s. More interestingly, we can see a persistent trend in terms of rising / worsening gap from the end of the 1990s through to the end of the pre-Crisis boom at the end of 2007, and into the collapse of the Irish economy through 2012. The post-Crisis improvement in Employment Hours Gap has been driven by the outflows of workers from the Variable Hours’ to other categories, but when one controls for this category of workers (a category that is effectively ‘catch-all-others’ for CSO) the improvements become less dramatic.

Overall, FTE estimates indicate some problems remaining in the Irish economy when it comes to the dependency ratios. Many analysts gauge dependency ratios as a function of total population ratio to those in official employment. The problem, of course, is that the economic capacity of someone working close to 40 hours per week or above is not the same as that of someone working less than 20 hours per week.

Note: More on dependency ratios next. 

30/7/18: Egg Misses the Face at the Atlantic Council: Dodgy Banks, Dodgy Reports

Buzzfeed report throws unwanted light onto the tight rope walking at the Atlantic Council, where some august fellows are earning cash on the sidelines of private sector clients with questionable reputation:

A Report On Money Laundering At Latvian Banks Raises Questions About Conflict Of Interest At The Atlantic Council

Buzzfeed link here: https://www.buzzfeednews.com/article/ingaspringe/report-on-money-laundering-at-latvian-banks-raises.

Buried at the end of the report is this quote from Damon Wilson, the council’s executive vice president: "Every Latvian politician has worked with and knows us..." Which does lift the proverbial rug just a notch over the proverbial pile of history compiled underneath the Council: the organization has been a de facto go-to shop for framing politics of Eastern Europe. The real scandal, of course, is right there. Just imagine the screams from the media if a private initiative, say called Cambridge Analytica, uttered a similar statement in public? And yet, the AC can make such a statement in defence of its activities. Smell the salts?

30/7/18: Impact of Terrorist Events on European Equity Markets

Our recent paper on the impact of terrorist events on equity markets valuations in Europe has been published in the Quarterly Review of Economics and Finance (November 2017): https://www.sciencedirect.com/science/journal/10629769

30/7/18: Annotated History of the U.S. Treasury Yield Curve

Courtesy of the forgotten source (apologies) a neat summary chart plotting the timeline of the 10 year U.S. Treasury yield:

For referencing purposes… 

30/7/18: Corruption Perceptions: Tax Havens vs U.S. and Ireland

Transparency International recently released its annual Corruption Perceptions Index, a measure of the degree of public concerns with corruption, covering 180 countries. 

The Index is quite revealing. Not a single large economy is represented in the top 10 countries in terms of low perceptions of corruption. Worse, for a whole range of the much ‘talked about’ tax havens and tax optimising states, corruption seems to be not a problem. Switzerland ranks 3rd in the world in public perceptions of corruption, Luxembourg ranks 8th, along with the Netherlands, and the world’s leading ‘financial secrecy’ jurisdictions, the UK. Hong Kong is ranked 13th. Ireland is in a relatively poor spot at 19th place. 

American exceptionalism, meanwhile, continues to shine. The U.S. occupies a mediocre (for its anti-corruption rhetoric and the chest-thumping pursuits of corrupt regimes around the world) 16th place in the Corruption Perception Index, just one place above Ireland, and in the same place as Belgium and Austria (the former being a well-known centre for business corruption, while the latter sports highly secretive and creative, when it comes to attracting foreign cash, financial system). UAE (21st), Uruguay (23rd), Barbados (25th), Bhutan (26th) and more, are within the statistical confidence interval of the U.S. score. 

And consider Europe. While most of the Nordic and ‘Germanic’ Europe, plus the UK and Ireland, are  in top 20, the rest of the EU rank below the U.S. All non-EU Western European countries, meanwhile, are in the top 15. 

Now, in terms of dynamics, using TI’s data that traces comparable indices back to 2012:

- The U.S. performance in terms of corruption remains effectively poor. The country scored 73 on CPI in 2012-2013, and since then, the score roughy remained bounded between 74 and 75. Ireland, however, managed to improve significantly, relative to the past. In 2012, Irish CPI score was 69. Since then, it rose to a peak of 75 in 2015 and is currently standing at 74. So in terms of both 2012 to peak, and peak to 2017 dynamics, Ireland is doing reasonably well, even though we are still suffering from the low starting base. 

Hey, anyone heard of any corruption convictions at the Four Courts recently?

30/7/18: Burden Sharing, Reforms and Greece

Much has been said in recent years about European reforms, recovery, burden-sharing and Greece. Most of it draws links of causality along the following lines:

• Greek crisis has been resolved on the basis of the country adoption of European and IMF-structured reforms, and no burden-sharing is needed to make things right;
• European recovery has been organically linked to European reforms, which include future burden-sharing mechanism; and
• No burden-sharing mechanism has been deployed during the European recovery period anywhere.

In other words, both, Greece and Europe at large are enjoying an ongoing recovery that has been underpinned by reforms, not by burden-sharing arrangements of any sort.

And yet, contrasting experts reports, Greece continues to provide evidence to the contrary:

1. European recovery has been asymmetric to the Greek situation, where lack of tangible recovery is keeping the country constantly on the edge of slipping back into 'assisted living' via official external lenders;
2. The above happened despite the fact that Greece has adopted more 'reforms' than any other European economy; and
3. The above has happened during the extended period of asymmetric and massive-scale burden-sharing carried out by the ECB via its QE (Greece received no QE benefits, while the rest of the Euro area enjoys huge fiscal support subsidies from Frankfurt).

How do we know this? Why, look at the latest fiasco with Greek bonds (not covered by ECB's QE) in contrast with Italian bonds (covered by QE):

So, about the effectiveness of those reforms,  and no-burden-sharing, then...

16/7/18: Wither Free Market America

Prior to the 1990's, “U.S. markets were more competitive than European markets”, with the U.S. having a lead-start on the EU of some decades, if not centuries, when it comes to the anti-trust laws and anti-true enforcement. In fact, as noted by Germán Gutiérrez and Thomas Philippon in their new paper “HOW EU MARKETS BECAME MORE COMPETITIVE THAN US MARKETS: A STUDY OF INSTITUTIONAL DRIFT” (NBER Working Paper 24700 http://www.nber.org/papers/w24700 June 2018), it was Europe that largely copied the U.S.  legal and regulatory frameworks for dealing with excessive concentration of the market power. Thus, given the “initial conditions, one would have predicted that U.S. markets would remain more competitive than European (EU) markets.” Except they did not. As Gutiérrez and Philippon show, the U.S. “experienced a continuous rise in concentration and profit margins starting in the late 1990s. And, perhaps more surprisingly, EU markets did not experience these trends so that, today, they appear more competitive than their American counter-parts.”

“Figure 1 illustrates these facts by showing that profit rates and concentration measures have increased in the US yet remained stable in Europe. In addition, note that the U.S the increased integration among EU economies essentially shifts the appropriate measure of concentration from the red dotted line towards the blue line with triangles – which further strengthens the trend."

Figure 1: Profit Rates and Concentration Ratios: US vs. EU

Source:  Gutiérrez and Philippon (2018)

So, in summary, today, “European markets have lower concentration, lower excess profits, and lower regulatory barriers to entry.” even looking at specific industries “with significant increases in concentration in the U.S., such as Telecom and Airlines, and show that these same industries have not experienced similar evolutions in Europe, even though they use the same technology and are exposed to the same foreign competition” (see chart below).

Source:  Gutiérrez and Philippon (2018)

Of course, the point of reduced degree of competition in the U.S. markets is hardly new. I wrote about this on numerous occasions, including covering evidence on the U.S. markets monopolization, oligopolization and markets concentration risks (see links here: http://trueeconomics.blogspot.com/2018/05/24518-america-medici-cycle-and.html) and I wrote about these phenomena in the context of the growing trend toward de-democratization of the U.S. politics (see: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033949).  Hence, the main issue with this evidence is: “what explains the U.S. trend in contrast to the EU?”

Gutiérrez and Philippon (2018) argue that politicians care about consumer welfare but also enjoy retaining control over industrial policy. We show that politicians from different countries who set up a common regulator will make it more independent and more pro-competition than the national ones it replaces.” In other words, once politicians surrender control to a multinational institution (e.g. the EU or ‘Brussels’ or, in the case of Switzerland, to the umbrella-type Federal Government), they tend to favour such new institutional arrangement to be more independent from national politics.

Hence, as Gutiérrez and Philippon (2018) more, “European institutions are more independent than their American counterparts, and they enforce pro-competition policies more strongly than any individual country ever did. Countries with ex-ante weak institutions benefit more from the delegation of antitrust enforcement to the EU level. “ These dynamics are reflected in the switch from the ’average of the nation states’ red dotted line in the chart above, toward a unified EU-wide measure reflected by the blue line.

This theoretical view produces three treatable hypotheses: if Gutiérrez and Philippon (2018) are correct, then:
1. EU countries agree to set up an anti-trust regulator that is tougher and more independent than their old national regulators (and the US)
2. US firms spend more on lobbying US politicians and regulators than EU firms.
3. Countries with weaker ex-ante institutions benefit more from supra-national regulation.

For Hypothesis 1, the authors look at merger and non-merger reviews and remedies that form “an EU-level competency”. Gutiérrez and Philippon (2018) “show that DG Comp is more independent and more pro-competition than any of the national regulators, including the U.S.” Furthermore, “enforcement has remained stable (or even tightened) in Europe while it has become laxer in the U.S.” More ominously (for the consumption-based economy like the U.S.), product market regulations, usually a shared competency between the member state and the EU, the authors “find that the EU has become relatively more pro-competition than the U.S. over the past 15 years. Product market regulations have decreased in Europe, while they have remained stable or increased in the U.S.”

For Hypothesis 2: Gutiérrez and Philippon (2018) look at political expenditures, and show that “U.S. firms spend substantially more on lobbying and campaign contributions, and are far more likely to succeed than European firms/lobbyists.”

For Hypothesis 3: Gutiérrez and Philippon (2018) show that “EU countries with initially weak institutions have experienced large improvements in antitrust and product market regulation. Moreover, we find that the relative improvement is larger for EU countries than for non-EU countries with similar initial institutions.”

There is, of course, a remaining issue left unaddressed by the three hypotheses above: does more enforcement by more independent regulators inhibit innovation and competition? In other words, is European advantage over the U.S. a de facto Trojan Horse by which inhibiting regulation enters the markets? Gutiérrez and Philippon (2018) “find no evidence of excessive enforcement in Europe: enforcement leads to lower concentration and profits but we find no evidence of a negative impact on innovation. If anything, (relative) enforcement is associated with faster future (relative) productivity growth, although the effects are small.”

So, put simply, part of the increasing market concentration and power in the U.S. can be explained by the tangible politicization of the American regulatory environment. Of course, as noted in my own posts on the subject (see link above), this political channel for monopolization reinforces industry structure channel (ICT ‘disruption’ channel) and other channels that support increased market power for dominant firms. All of this, taken together, means one thing: the U.S. is falling dangerously behind in terms of the degree of its economy openness to challengers to the dominant firms, resulting in barriers to entrepreneurs, innovators and smaller enterprises. The costs of this ‘Google Syndrome’ are mounting, ranging from depressed wages, to jobs insecurity, to lack of investment and productivity growth, to growing voters unease with the status quo.

The premise of the Free Markets America no longer holds. Worse, Social(list) Europe is now beating the U.S. in its own game.

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble

Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

• Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
• The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
• Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
• As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.

As noted by BIS: “...financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".

Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see http://trueeconomics.blogspot.com/2018/07/14718-second-longest-recovery.html).

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...

14/7/18: The Second Longest Recovery

One chart never ceased to amaze me - the one that shows just how unimpressive the current 'second longest in modern history' recovery (and only 9 months shy of it being the 'first longest') has been, and just how sticky the adverse shocks impacts can be in modern crises that can be best described by the VUCA (volatility, uncertainty, complexity and ambiguity) environment:

The fact that the current recovery cycle has been weak is only one part of the story, however, that would be less worrying if not for the second part. Namely, that almost every successive recovery cycle in the past three decades has been weaker than the previous one.

Here is a handy summary of the recovery cycles in the last four recessions based on annual data, for real GDP and real GDP PPP-adjusted: