9/9/18: The end of the clam before the storm

My article on the shifting landscape for monetary policies: U.S. and Euro area for Sunday Business Post https://www.businesspost.ie/business/end-calm-storm-424321

9/9/2018: Corporate Power, Charity, and Social & Policy Impacts

In an important discussion, titled "Tax-exempt lobbying: Corporate philanthropy as a tool for political influence", Marianne Bertrand, Matilde Bombardini, Raymond Fisman, and Francesco Trebbi (02 September 2018, https://voxeu.org/article/corporate-philanthropy-tool-political-influence) argue that as "special interests use donations to influence the political process", "...philanthropic efforts in the US are targeted, at least in part, to influence legislators. Districts with influential politicians receive more donations, as do non-profits with politicians on their boards. This is problematic because, unlike PAC contributions and lobbying, influence by charity is hard for the public to observe." The resulting conclusion by the authors is that the case of corporate-charity interlinks "amounts to a taxpayer subsidy of corporations expressing their political voice". In other words, concentration of market power causes concentration push in lobbying and, thus, potentially forces policy formation to more closely reflect the interests of the corporate donors at the expense of the taxpayers and ordinary voters.

This is a very important issue in any analysis of the functioning of our democratic processes. But it also raises another 'adjoining' issue, not covered in the paper: American corporations are increasingly relying on other channels to alter social (and related policy) outcomes today. This channel is the companies increasing financial and other commitments to Corporate Social Responsibility and Social Impact (or even broader ESG) targeting. Whilst benign in its core values and ethos, the channel can be open to potential abuse by corporate powers. In addition, like charity status channel, the CSR and SI/ESG channel also avails of public funding link ups to corporate balance sheets (via tax incentives, subsidies, co-financing of projects, etc). The question worth asking, therefore, is the following one: To what extent do modern SI/ESG and CSR strategies of major corporations align with their lobbying objectives? In other words, do corporates use SI/ESG/CSR strategies to promote self-interest beyond purely societal interest?

Surprisingly, very little research in the Social Impact or ESG analysis has been devoted to the potential for corporations to 'game the system' in their favour.

9/9/18: Populism, Middle Class and Asset Bubbles

The range of total returns (unadjusted for differential FX rates) for some key assets categories since 2009 via Goldman Sachs Research:

The above highlights the pivot toward financial assets inflation under the tidal wave of Quantitative Easing programmes by the major Central Banks. The financial sector repression is taking the bite out of the consumer / household finances through widening profit margins, reflective of the economy's move toward higher financial intensity of output. Put differently, the CPI gap to corporate costs inflation is widening, and with it, the asset price inflation is drifting toward financial assets:

This is the 'beggar-thy-household' economy, folks. Not surprisingly, while the proportion of total population classifiable as middle-class might be stabilising (after a massive decline from the 1970s and 1980s levels):

 Incomes of the middle class are stagnant (and for lower earners, falling):

And post-QE squeeze (higher interest rates and higher cost of credit intermediation) is coming for the already stretched households. Any wonder that political populism/opportunism is also on the rise?

3/9/18: Bakkt: One New Exchange, Two Old Exchanges, Same Crypto Story?

My comment on the new #cryptocurrency exchange project involving Intercontinental Exchange (ICE), the New York Stock Exchange (NYSE), Microsoft, Starbucks, and Boston Consulting Group: https://blokt.com/news/bakkts-cryptocurrency-exchange-is-coming-but-will-institutional-investors-follow. In the nutshell, hold the hype, but watch it develop...

24/8/18: Moscow's Fiscal Resilience in the Headwinds

Back in September 2017, Fitch (with Russia rating BBB-) estimated that the U.S. sanctions were costing Russia ‘one notch’ in terms of sovereign ratings, with ex-sanctions risk conditions for the Russian sovereign debt at BBB. Last week, Fitch retained long term debt rating for Russia at BBB- with positive outlook, noting the Russian economy’s relative resilience to sanctions.

Budgetary Resilience

Per Fitch, and confirmed by the Russian Finance Ministry analysis, Russia is looking at recording a budgetary surplus in 2018:

Fitch analysis projects the budget surplus to average 0.1% of GDP in 2018 and 0.3% in 2019, from deficits of 1.0% and 0.5%, respectively. This, alongside Russia’s strong performance in monetary policy have been noted by Fitch as core markers of the Russian economy’s resilience to external shocks, including the sanctions acceleration announced back in April 2018.

Looking forward, President Putin's RUB 8.0 trillion (ca USD127 bn) new spending priorities announced back in May will amount to roughly 7.0% of GDP over the next six years. These funds will go to support higher wages and pensions for the recipients of Federal and Local funding, as well as public investment uplift in education and core infrastructure. Per Fitch: “Due to a stronger fiscal position and a robust oil price outlook, the planned measures will not threaten the country's future budget surpluses. The government will also increase available funds by enforcing a tax overhaul and increasing [domestic] borrowing.” (see Chart below)

Policies Resilience

Resilience-inducing policies, when it comes to macroeconomic management of risks arising from sanctions regimes face by Russia include:

• Increase the Value-added Tax (VAT) rate from 18.0% to 20.0% starting in 2019, which will provide (based on Moscow estimates) ca RUB 600bn (USD 9.5bn) per annum. Social and aggregate demand impacts of VAT increases were mitigated by keeping 10% rate on certain foods, children’s goods, printed publications and pharmaceuticals, or roughly 25% of all goods and services. Some transport services will continue benefiting from 0% VAT rate.
• A phased reduction of the export duty on oil and petroleum products from 30.0% to zero and a concurrent increase in the tax on the extraction of minerals by 2024
• The combined tax rate on wages for mandatory social contributions will remain at 22%. 
• The tax on the physical capital of companies (capped at 2%), will no longer apply to moveable assets (the tax will remain for fixed capital, e.g. for buildings).
• Russia will also establish special administrative zones on Russky Island next to Vladivostok and on Oktyabrsky Island, which is part of the Kaliningrad enclave. Both will act as offshore centres where foreign-registered firms owned by Russian nationals can “redomicile” their assets. Tax advantages granted in these zones will cover taxes on profits, dividend income and different types of property.
• A recent increase in the pensionable age (men from 60 to 65, women from 55 to 63) system will lower the burden of an ageing population and a shrinking labour force, “propping up the state Pension Fund's income”

Impact on Debt Markets

Net outrun is that even faced with escalating sanctions, and having unveiled a rather sizeable macro stimulus program, Moscow's finances remain brutally healthy. Fitch research foresees “a contained uptick in government debt levels over the coming years, with the debt burden rising from 17.4% of GDP in 2017 (IMF statistics) to about 18.3% GDP by 2020.” As share of Russian debt held by external funders continues to decline, these forecasts imply increased sustainability of overall debt levels.

In it’s recent assessment of the potential impact of the ‘Super-sanctions’ (The Defending American Security from Kremlin Aggression Act of 2018 (DASKAA)) planned by Washington, the worst case scenario of all U.S.-affiliated investors dumping Russian bonds implies 8-10% decline in foreign holdings of Russian Sovereign debt, which will likely raise yields on long-dated Russian Ruble-denominated debt by 0.5-0.8 percentage points. Based on August 6 analysis from Oxford Economics, Russia will have no trouble replacing exiting Western debt holders with Ruble-denominated debt issuance.

Key Weaknesses Elsewhere

The key weakness for Russia is in structurally lower economic growth that set on around 2010-2011 and is likely to persist into 2022-2023 period (see IMF projections below):

Russian GDP growth rose from 1.3% y/y in the 1Q 2018 to 1.8% in the 2Q, with 1H growth reading 1.6% y/y. The uptick was led by faster industrial output growth (rising almost 4% y/y in 2Q) and manufacturing (up 4.6% y/y in 2Q). These are preliminary estimates, subject to revisions and, based on the recent past revisions, it is quite likely that we will see higher growth rates in final reading. 1H 2018 fixed investment rose 3% y/y. Real wages rose 8% y/y in real terms, but household disposable real income was up only 2% at the end of 2Q 2018 due to slower growth in the 'grey economy' and in non-wage income. Despite the rising household credit uptake (up 19% y/y at the end of 2Q 2018), retail sales were up only 2.5%, broadly in-line with real income growth.

All of these trends are consistent with what we have been observing in recent years and are indicative of the structurally weaker economic conditions prevailing in the wake of the post-GFC economic recession and the energy prices shocks of 2014-2017.

24/8/18: The Fed Bites the Bullet on Secular Stagnation

And just like... Federal Reserve Chair confirms the Twin Secular Stagnation Hypotheses in one paragraph of his speech:

Per Powell, "the U.S. economy faces a number of longer-term structural challenges ... For example, real wages, particularly for medium- and low-income workers, have grown quite slowly in recent decades. Economic mobility in the United States has declined and is now lower than in most other advanced economies.2 Addressing the federal budget deficit, which has long been on an unsustainable path, becomes increasingly important as a larger share of the population retires. Finally, it is difficult to say when or whether the economy will break out of its low-productivity mode of the past decade or more, as it must if incomes are to rise meaningfully over time."

For those who might want to read about an even more fundamental (and causally linked to the Powell's challenges) structural decline in the Cayman Financial Review here: http://trueeconomics.blogspot.com/2018/08/18818-monpolization-trends-in-advanced.html.

What is note worthy in Powell's passage is the words "in recent decades". Powell is correct (and I pointed this fact out on a number of occasions) that the adverse trends in the U.S. economy have been present for much longer than the post-Global Financial Crisis shocks residual effects. The economic stagnation (expressed in the abysmally low growth rates of economic prosperity for the lower 90 percent of the American population; in woefully slow expansion in productivity, compared to historical trends; in structurally less competitive nature of the economy and growing monopolization and oligopolization of the U.S. markets; in reduced physical and social mobility; in falling pensions savings provisions for the majority of the U.S. population; and so on) has pre-dated the GFC and its roots rest much deeper than the financial disruption of the 2007-2010 crisis.

22/8/18: Emerging Markets Risks and International Reserves

Emerging markets are at the point of risk contagion these days, with a potential spillover into advanced economies. This brings us back to the memories of the past EM crises, such as the currencies crises of the late 1990s in the year (and month) that marks the 20th anniversary of Russian Sovereign Default.

Here is an interesting chart that shows just how far Russia has traveled from the past in terms of its macroeconomic management:

What the chart omits, of course, is a simple fact: of all these economies, Russia is the only one that (rightly or wrongly or both) is trading under severe financial and economic sanctions imposed by its major trading and investment partners. Which makes this performance even more impressive.

When it comes to a 'higher altitude' view of the Russian economy within historical and current geopolitical perspective, which is discussed here: http://trueeconomics.blogspot.com/2018/01/6118-spent-putins-call-means-growing.html.

18/8/18: Monopolization trends in Advanced Economies: my column for CFR

My column for the Cayman Financial Review on the topic of structural monopolization of the global economy and the declining competitiveness. https://www.caymanfinancialreview.com/2018/08/14/breaking-the-medici-vicious-circle-monopolization-trends-in-advanced-economies/.

18/8/18: Kiplinger quotes on equity markets

Kiplinger quotes myself on Deutsche Bank, PG&E, and General Electric
https://www.kiplinger.com/slideshow/investing/T052-S001-10-roughed-up-stocks-to-buy-for-a-recovery-rally/index.html.

18/08/18: Euromoney on Italian Banking Risks and Turkey Crisis

Euromoney article on the latent Italian crisis, relative to the ongoing Turkish one: https://www.euromoney.com/article/b19k3zjb7v811r/italian-banks-a-bigger-risk-than-turkey.

9/8/18: BRIC PMIs trace Global economy's slowdown at the start of 3Q

Recent PMIs for BRIC show a weaker start to 3Q 2018, in line with moderating growth outlook for the global economy:

In summary, Composite PMIs for July show Russia, China and Brazil underperforming global composite index, with India being the only BRIC economy trending in line with the global economy.  Much of this dynamic was down to Manufacturing sector, with Services supporting global economy to the upside:

The biggest downside momentum came from Russia's sub-50 reading in Manufacturing, followed by significant decline in growth activity in the sector in Brazil, and a more moderate slowdown in China:

For Russia, weaknesses in Manufacturing sector, for now offset by strengths in Services, are unpleasant reminders that the economy is still fundamentally on near-zero growth path, despite early 2018 hopes for 1.9-2 percent growth projections. For China, there are growing signs of the adverse impact of Trade War with the U.S. taking their toll on growth and cost dynamics.

4/8/18: Collapsed Labor Share of Economy 1947-2016

The frightening fate of the U.S. labor is best highlighted by the share of labor in economic output. Fred database only provides the data through 2014, and then stops. BLS provides data through 3Q 2016, and then stops. No one bothers to measure the contribution of the largest factor of production to the economy any more. Here is the BLS data:

The share of labor contribution in total economic output has, basically, collapsed. The slide started with the technological revolutions of the 1960s and 1970s, followed by computerization and supply chain management revolutions of the 1980s and 1990s. But the real collapse took place starting with 2002 post-dot.Com bust. Despite the tight labor markets and very low unemployment, labor share never really recovered from this decimation.

If this chart offers a stark cross-reference to socio-political environment we are living in today, such cross-referencing is not ad hoc. Labor is what we, people, have to supply in return for the life's necessities and luxuries. For the majority of us, it is ALL that we can supply.  Even our assets, such as homes and pensions savings are, ultimately, tied to labor, not to capital, because their performance is linked to our peers' labor-paid demand. A middle class house is an asset to other middle class households. It is not an asset to the jet-set shopping for homes in the Hamptons. When that demand collapses, as is currently happening in a number of rapidly ageing economies, real assets we hold turn out to be if not completely worthless (https://www.businessinsider.com/italian-town-free-homes-residents-2018-1), at least severely depressed in value (https://www.soa.org/Files/.../lit-review-popl-aging-asset-values-impact-pension.pdf).

So a decline in economic value added share accruing to labor is a transfer of income (and therefore wealth) from those who work for living to those who invest for living (invest in technology and/or financial assets). This game is a zero sum game even after we account for pensions funds and household investments: someone loses (labor), someone gains (investors). It is made even worse by higher taxes on labor and by transfers via monetary policy (Quantitative Easing).

The only way to offset such transfers is to vest labor with claims to financial returns. In other words, by providing workers with shares in the financial markets. Simply taxing and shifting income from higher earners to lower earners won't do the trick, because some higher earners are generating their income through labor (and human capital), while others are doing so through inherited and acquired financial assets. Taxing income of the latter implies taxing incomes of the former, which, in turn, depresses returns to investment in human capital (or, ultimately, returns to investment in labor).

Basic income structure of the future will have to achieve exactly that: create broad share ownership of financial instruments linked to financial and technological capital amongst those supplying labor.