12/6/19: Investment Intermediaries: Europe vs U.S.

Investment markets intermediaries by type and origin (via @schuldensuehner):

Caveat: In the case of Ireland and Switzerland, the data is not representative of the domestic markets.

Loads of interesting insights, but one macro-level important is the role of the non-banking investment players, especially domestic ones, in the economies of the U.S. and Germany, Italy, Spain and France. This highlights the huge role of direct investment channels (equity, debt, hybrids) in the U.S. market and the corresponding weight of intermediated bank debt in Europe. We highlight this anomaly and the failures of the EU to diversify capital funding channels

• In our paper here: Gurdgiev, Constantin and Lyon, Tracy Lee and Cohen, Alexandra and Poda, Margaret and Salyer, Matthew, Capital Markets Union: An Action Plan of Unfinished Reforms (March 21, 2019). with Tracy Lee Lyon, Alexandra Cohen, Margaret Poda and Matthew Salyer (Middlebury Institute of International Studies at Monterey (MIIS); GUE/NGL Group, European Parliament, Policy Analysis Paper, March 2019. Available at SSRN: https://ssrn.com/abstract=3357380 and 
• In a recent article for the LSE Business Review here: https://trueeconomics.blogspot.com/2019/05/27519-lse-business-review-capital.html. 

3/6/19: Average Duration of Unemployment in the U.S.: Still High by Historical Comparatives

Remember my 'scary chart' from the day back? The one plotting the persistently high - relative to the business cycle - duration of unemployment in the U.S.?

I have not updated this chart for some years now. So here is a new version based on the latest data:

Two things worth noting:

1. Declines in unemployment and rises in employment in recent years have been accompanied by a rather dramatic decline in the average duration of unemployment claims in the U.S. This is reflect in the drop in the cyclically-adjusted average duration of claims evidenced in the chart.
2. However, by all historical comparatives, the current business expansion cycle continues to be associated with significantly higher average duration of unemployment, compared to the pre-recession average.

In other words, not all is rosy in the labor markets.

3/6/19: Three Periods in labor Force Participation Rate Evolution and Secular Stagnations

The state of the global labor markets is reflected not only in the record lows in official unemployment statistics, but also in the low labor force participation rates:

In fact, chart above shows three distinct periods of evolution of the labor force participation rates in the advanced economies, three regimes: the 1970s into 1989 period that is marked by high participation rates, the period of 1990-2004 that is marked by the steadily declining participation rates, and the period since 2005 that is associated with low and steady participation rates.

This is hardly consistent with the story of the labor markets spectacular recovery that is presented by the official unemployment rates. In fact, the evidence in the above chart points to the continued importance of the twin secular stagnations hypothesis that I have been documenting on this blog.

3/6/19: What Customs and Border Protection Data Says About Illegal Migration and Crime

The Customs and Border Protection, a U.S. agency responsible for border protection, publishes handy stats on its enforcement actions "related to arrests of criminal aliens for Fiscal Years 2016 - 2018, and FY 2019 TD (to date) (October 1, 2018 - April 30, 2019)". Here is a link to the reported data: https://www.cbp.gov/newsroom/stats/cbp-enforcement-statistics/criminal-alien-statistics. A summary of all annual reports available so far is provided in the table below:

Here are some takeaways from the data (subject to many caveats):

1. There is no 'criminals at the border' crisis anywhere in sight. In fact, total number of recorded crimes committed by illegal aliens has dropped from an average 20,047 in 2015-2016 to 7,208 in 2018-2019 (using annualized figure for 2019 to-date). That is a decline of 64 percent. 
2. The reductions in crimes are broadly-based. Homicides and manslaughter crimes dropped 85 percent, although the numbers were extremely small to begin with. The second largest drop between 2015-2016 average and 2018-2019 average was recorded in Burglary, robbery, larceny, theft, fraud category, where the decline was 76 percent. The smallest decline of 57 percent was recorded in illegal entry and re-entry category, numbers of which have declined from 9.614 in 2015 to 3,175 in 2019 (annualized).
3. The reductions did not increase during the Trump Administration crackdown on migration. As the table above shows, largest (in percentage terms) declines took place under the Obama administration in five out of nine categories of crimes, and three largest drops took place during the transitionary period (when Obama policies continued to apply over the longer part of the year). Trump administration can claim the top rate of reductions at most in only one category reductions 'Other' category. In six out of nine categories of crime, Trump administration efforts to reduce migrants-related crime have been responsible for the lowest rates of reductions for any year between 2015 and 2019. 
4. In terms of overall crimes recorded, Obama's 2015-2016 and 'largely Obama's' 2016-2017 fiscal years recorded crime reductions of 33 percent and 32.9 percent respectively. Trump Administration years (2018 and 2019) generated reductions of 22.9 percent and 26.9 percent, respectively - both significantly lower than Obama administration period records.

In summary, no, there is no emergency of crime at the border (at least not in the CBP data), and no, Trump administration's policies and executive orders are not effective at reducing crime beyond the past historical trends. In fact, they are not even sustaining past trends.

31/5/19: Generational Gap in Self-reported Satisfaction with Life is at Whooping 28 percentage points

Commonly discussed in the media and amongst economists, generational gap in quality of life and socio-economic environments is also evident in the self-reported satisfaction with life surveys. Here is the recent data from Gallup (link: https://news.gallup.com/poll/246326/six-seven-americans-satisfied-personal-lives.aspx) released back in February 2019:

In 2017, 57% of Americans of all ages were very satisfied and 30% somewhat satisfied with their lives. This remained relatively stable in 2019 poll (56% and 30%, respectively). However, over the same period of time percentage of those in the age group of 18-29 year old reporting their status as "very satisfied" with their lives dropped from 56% to 40%, and for the group of those aged 30-49 years, the corresponding decline was from 58% to 55%. In 2007 through 2011, generational gap was at a maximum point 8 percentage points wide. This rose to 16 percentage points in 2013, before blowing up to a massive 28 percentage point by 2019.

28/5/19: Why some long trend estimates start looking shaky for Ireland's property markets

There are many ways for analysing the long-term trends in real estate prices. One way is to use dynamics for the periods when price appreciation was consistent with underlying economic growth fundamentals and project price levels forward at the rates, on average, compatible with these periods.

And some exercises in assessing Irish house prices relative to trend are starting to sound like an early alarm bell going off.

In Ireland's case, organic growth-based period of the Celtic Tiger can be traced to, roughly, 1992/1993 through 1998. In terms of real estate prices (housing), this period corresponds to the post-1987 recovery of 1988-1990, followed by a house price 'recession' of 1991-1993 and onto the period of recovery and economic growth-aligned appreciation of 1994-1996. During this period, average price inflation in Irish house prices was 3.94% per annum.

Using the data from 1970 through 2018 based on the time series from the BIS and CSO, we can compare current price indices to those that would have prevailed were the 1988-1996 trend growth to continue through 2018. Chart below shows the results:

Several things worth noting:

1.  At the end of 2018, Irish house price index stood some 5.7 percent below where it would have been if the longer term trend prevailed from 1997 on.
2. Taking into the account moderating house price growth of 2016-2018 and projecting house prices forward from 2018 levels onto 2022 shows that by the end of 1Q 2020, Irish house prices can be expected to catch up with the longer-term trend.
3. The longer-term trend does capture quite well the effect of the massive price bubble of 1998-2007: the trend line hits almost exactly the 2009-2018 index average at 2010-2011. 
4. The pre-crisis peak levels of house prices can be expected to reach (on-trend) by 2022 implying that the house price bubble of 1998-2007 has, in effect, accelerated house price inflation by roughly 15 years, or 50-62 percent of the 25-30 year mortgage duration, which is consistent with the peak-to-trough decline in Irish house prices (53.3 percent) during the crisis.
5. The drop in Irish house prices during the crisis overshot the long-term trend by roughly 31 percent - a steep price to pay for massive excesses of the Celtic Garfield era of 2003-2007.
6. At the start of 2004, Irish house prices were 50 percent above their long term trend line, which is pretty much bang on with my estimate back in 2004 that I published here: https://trueeconomics.blogspot.com/2016/01/10116-my-2004-article-on-irish-property.html as a warning to Irish policymakers - a warning, as we all know well - that was ignored.
7. Referencing 2018 data, while the price dynamics so far appear to be catching up with the longer run trend, there is an increasing risk of a new price bubble forming, should price inflation continue unabated. For example, at an average rate of house price inflation of 11.34 percent (2014-2018 average), by the end of 2022, Irish house prices can exceed long-term trend by more than 15 percent.

Of course, a warning is due: this exercise is just one of many way to assess longer term sustainability trends in house price dynamics.  

For example, historical average rate of growth in house prices across 24 countries reported by BIS for 1970-2006 period is 2.34 percent per annum. Were we to take this rate of growth from 1998 through 2018 as the longer term trend indicator, Irish house prices would stand 32.7 percent above the long-run trend levels in 2018, implying that 

• Irish house prices reached long run equilibrium around 1Q 2015, and
• At the end of 2018, we were close more than 1/4 of the way toward the next bubble peak, in which case, by the end of 2021 we should be half way there.

Numbers are not simple. But numbers are starting to warrant some concerns. 

27/5/19: LSE Business Review: Capital Markets Union: An Assessment

Our article for the LSE Business Review blog on the research paper covering the European Capital Markets Union reforms is available here: https://blogs.lse.ac.uk/businessreview/2019/05/23/the-unfinished-business-of-the-eus-capital-markets-union/.

Link to the full paper here: https://trueeconomics.blogspot.com/2019/04/2419-capital-markets-union-action-plan.html. 

27/5/19: Which part of the Federal spending poses a greater fiscal threat?

An interesting chart via Cato on the number of Federal state aid programs in the U.S.

The grand total of these programs in terms of annual spending is roughly US$697 billion. The issue here is that these programs are continuing to increase in scale and scope despite the so-called 'strongest economy, ever' (excluding the recent changes under the Trump Administration that propose significant cuts to some of these programs on the social welfare, public health and education sides for Budget 2020) .

Here is the summary of the main program headlines and outlays:

Source for both charts: https://object.cato.org/sites/cato.org/files/pubs/pdf/pa868.pdf

Nonetheless, whether or not the state supports and welfare entitlement programs can be afforded into the future (yes, demographics of ageing are driving up the demand for many of these programs, while also making them more politically feasible with older voters, yet reducing the capacity of the economy to carry these increases), the major issue that is left un-addressed by the American analysts is the overall composition of the U.S. Federal spending.

As discussed in this article: https://bit.ly/2VU39Hj, current 2020 budgetary outlook envisions a massive increases in military spending, offset by the reductions in assistance to the low income families, education and public health. Here is the summary slide on this from my new course slides on the subject of the Twin Secular Stagnations:

The key quote from the above: "In fact, the proposed FY2020 military and war budget makes up $989 billion of the Federal Government’s $1,426 billion Discretionary Budget. This represents a staggering 69 percent of the total Federal Discretionary Budget for FY2020!"

No matter how concerned we might be with the sustainability of the Federal fiscal policies, transfers to the States from Washington are, de facto, a form of local monetization of the Fed monetary policies, some of which is being cycled into state-level investments in public infrastructure and education, as well as public health. Pentagon's spending, in contrast, carries virtually no investment-like benefit for the rest of the society, and much of the 'securing our nation' argument in favor of spending almost a trillion dollars on weaponry and military personnel is bogus as well (unless you still, for some unfathomable reason, believe that demolishing Libya or Syria are of some benefit to the actual American society or that the likes of Iraq and Iran pose a truly existential threat to America).

23/5/19: Winning the Trade War: Easily and Bigly

NY Fed just published some interesting numbers on President Trump's Trade War with China. Available here: https://libertystreeteconomics.newyorkfed.org/2019/05/new-china-tariffs-increase-costs-to-us-households.html, the Fed note states that per recent study "the 2018 tariffs imposed an annual cost of $419 for the typical household. This cost comprises two components: the first, an added tax burden faced by consumers, and the second, a deadweight or efficiency loss... the tariffs that the United States imposed in 2018 have had complete passthrough into domestic prices of imports, which means that Chinese exporters did not reduce their prices. Hence, U.S. domestic prices at the border have risen one‑for-one with the tariffs levied in that year. Our study also found that a 10 percent tariff reduced import demand by 43 percent."

Thus, in simple terms, China is not paying the tariffs, American consumers are paying the tariffs. Just as Mexico is not paying for the Wall, and just as Mr. Trump is probably not paying his taxes in full (legally or not - a different matter). Same as the Trump Organization is not employing the greatest bestest American workers, preferring to employ cheaper legal and illegal migrants. And same as the Trump Organization is not paying their employees 'tremendous' salaries. And... well, you get the drift.

The Fed note states that, of course, the net loss to the U.S. economy is mitigated by the fact that the tariffs revenue is collected by the Federal Government and "could , in principle, be rebated". Alas, this is of little help to ordinary American households, because the U.S. Federal Government is not particularly know to be efficient spender of the money it collects. One can't really argue that taking $419 from an average household and pumping the cash into, say, new missiles and bombs to be dropped in Yemen is an equivalent economic activity. Or, for that matter, spending the same $419 on fighting in Afghanistan, or subsidizing loss-making perpetually insolvent boatbuilding docks in the U.S. that are already reliant on the atavistic Jones Act to sustain any pretence at building something. And so on... you get the drift.

The Fed researchers go on: "Some firms may also reorganize their supply chains in order to purchase their products from other, cheaper sources. For example, the 10 percent tariffs on Chinese imports might cause some firms to switch their sourcing of products from a Chinese firm offering goods for $100 a unit to a less efficient Vietnamese firm offering the product for $109. In this case, the cost to the importer has risen by nine dollars, but there is no offsetting tariff revenue being paid to the government. This tariff-induced shift in supply chains is therefore called a deadweight or efficiency loss." And the deadweight loss is fully, even in theory - forget practice - carried by the households.

Worse, "economic theory tells us that deadweight losses tend to rise more than proportionally as tariffs rise because importers are induced to shift to ever more expensive sources of supply as the tariffs rise."

How does that work? Marvellously, of course.

"... Compare the estimates of the costs of the 2018 tariffs with those of the recently announced higher tariffs on $200 billion of Chinese products. ...in November 2018, purchasers of imports were paying $3 billion per month in added tax costs and experiencing another $1.4 billion in deadweight losses. Thus, the total bill for U.S. importers was $4.4 billion per month. If we annualize these numbers, they amount to a cost of $52.8 billion, or $414 per household. Of this cost, $282 per household per year was flowing into government coffers as a tax increase and could theoretically be rebated. ... However, deadweight losses accounted for an additional $132 to households per annum and represent a net loss to the U.S. economy that is in excess of any tariff revenue collected by the government."

And the Fed analysis shows the effect of the rising deadweight loss on the U.S. households under the latest bout of tariffs hikes: under 2018 tariffs, deadweight loss was $132 per household per annum, and the total loss to the household was $414 per annum. Under 2019 tariffs, the deadweight loss is estimated to rise to $620 per annum per household and the loss to household budget of $831 per annum.

Now, the Fed study does not take into the account that higher prices charged on consumers as the result of tariffs are also subject to sales taxes imposed at the State level. Which means that for a 7% sales tax state, actual out of pocket losses for 2018-2019 tariffs war for an average household will be in the region of $889 per annum.

Based on the most recent data from the Tax Policy Center, "the middle one-fifth of income earners [in the U.S.] got an average tax cut of $1,090 — about $20 per biweekly paycheck" as a result of 2017 2017 Tax and Jobs Act (TCJA or Trump tax cuts). Transfers from corporate tax cuts to average salaried employee amounted to additional $233 per annum pre-tax. So an average household with two working parents gained somewhere in the neighborhood of $1,330 per annum from the 'massive tax cuts'.

You get $1,330, we take $889 back, and we call it 'America winning the trade war. Easily. And bigly!'

21/5/19: 'Popping up everywhere' or not? Entrepreneurship and start ups

Much has been written, taught and said about the New Age of Entrepreneurship and the new generations of entrepreneurs, allegedly springing up across the modern economies. The problem is, for all the marketing hype and academic programs enthusiasm, entrepreneurship (new business formation) is actually running pretty low.

Here is the U.S. data on new business formation:

While other data, e.g. Kauffman Foundation, shows relatively stable and even higher rates of entrepreneurship over recent years, much of this data aggregates both incorporated and non-incorporated businesses, including sole traders and self-employed. This is reflected in the fact that entrepreneurship rates in recent years have been sustained solely by a massive increase in entrepreneurship uptake by individuals with less than high school education and of older age cohorts:

Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf

Over the same time, cohorts with higher education have seen a decrease in their entrepreneurship rates, driven in part by their rising share of population, their rising numbers, and, well, yes, lower incentives to undertake entrepreneurial risks.

Now, as to the age of entrepreneurs we have.

Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf 

In  summary, the above table shows that the rates of entrepreneurship amongst the Millennials have declined, the rates for GenX-ers (35-44 cohort) have risen, but are quite volatile, with significant increases (2009-2010) associated with greater involuntary entrepreneurship (high unemployment), while overall increases in entrepreneurship have ben sustained by entrepreneurs of ages 45 and older.

So, to that often repeated popular and academist 'truism' of the New Age of Entrepreneurship and the great entrepreneurial spirit of the younger generations... errr, not quite.

Note: caveats notwithstanding, good data on the subject is available here: https://www.kauffman.org/currents/2019/02/indicators-provides-early-stage-entrepreneurship-data.

19/519: FocusEconomics 75 Top Economics Influencers List

Delighted to make @FocusEconomics top 75 Economics Influencers to Follow list:

Honoured to be in the company of some really inspiring people talking about economics, economic policy and research!

See the full list here: https://www.focus-economics.com/blog/top-economics-influencers-to-follow.

16/5/19: Identifying Debt Bubble 4.0

Having just posted on the debt supercycle-related comments from Gundlach (https://trueeconomics.blogspot.com/2019/05/16519-gundlach-on-us-economy-and-debt.html), here is a chart identifying these super-cycles in the U.S. economy:

The periods of significant leverage in the U.S. economy have been identified as follows:

• First, I took nominal GDP growth rates (q/q) snd nominal total non-financial debt growth rates (also q/q) for the entire period of data coverage for which all data points are available (since 1Q 1966). 
• Second, I adjusted nominal non-financial debt growth rates to reflect the evolving ratio of debt to U.S. GDP.
• Third, I subtracted adjusted debt growth rates from nominal GDP growth rates to arrive at change in leverage risk direction. This is the difference figure shown in the chart below. Positive numbers reflect quarters when GDP growth rate exceeded growth in GDP-ratio-adjusted debt and are periods of deleveraging in the economy, and negative periods correspond to the situation where GDP growth rate was exceeded by GDP-ratio-adjusted growth rate in debt.
• Fourth, I calculated 99% confidence interval for historical average difference (shown in the chart below).
• Fifth, I identified three regimes of debt evolution: Regime 1 = "Deleveraging" corresponds to the Difference variable being non-negative (periods where the gap between growth rate in GDP and growth rate in debt is non-negative); Regime 2 = "Non-significant leveraging up" corresponds to periods where the gap (difference) between GDP growth rate and debt growth rate is between zero and the lower bound of the confidence interval for historical average difference; and Regime 3 = "Significant Leveraging up" corresponds to the periods where statistically-speaking, the negative gap between growth in GDP and growth in debt is statistically significantly below the historical average.

I highlighted in the above chart four periods of significant, persistent leveraging up, identified as Debt Bubbles 1-4. There is absolutely zero (statistical) doubt that the current period of economic recovery is yet another manifestation of a Debt Bubble. And, given the composition of the debt increases since the end of the Global Financial Crisis, this latest Bubble is evident across all three components of non-financial debt: the households, corporates and the U.S. Federal Government.