13/6/19: Russian International Reserves and Government Debt

Earlier today, an esteemed colleague of mine tweeted out the following concerning Russian foreign reserves:

Which is hardly surprising, as Russia has been beefing up its reserves for some time now, following the crisis of 2014-2016 and in response to the continued pressures of Western sanctions. I wrote about this before here: https://trueeconomics.blogspot.com/2019/04/10419-russian-foreign-exchange-reserves.html.

It is interesting in the light of the above news to look at Russian Government 'net worth' or 'net debt' (note: this is not the total external debt of Russia, nor Government external debt, but the total Russian Government debt comparative). Here is the chart based on the OECD data, with added estimate for Russia for 1Q 2019 based on IMF data and the latest data from CBR:

Based on my estimates and on OECD data itself, Russian Government has the largest positive net worth (lowest net debt) of any country in top 10 countries in the world (measured using nominal GDP adjusted for Purchasing Power Parity), and it is in this position by a wide margin.

The caveat is that India, China and Indonesia are not reported in the OECD data. China's Government net worth is virtually impossible to assess, because the country debt statistics are incomplete and measuring the gross wealth of the Chinese Government is also impossible. India and Indonesia are easier to gauge - both have positive net debt (negative net worth). IMF WEO database shows estimated General Government Net Debt for Indonesia at 25.5 percent of GDP in 2018. India has substantial gross Government debt of ca 70% of GDP (2018 figures), and the Government holds minor level resources, with country's sovereign wealth fund totalling at around 5 billion USD.

Another caveat is where the debt is held (Central Banks holdings of debt are arguably low risk) and whether or not assets held by the Governments are liquid enough to matter in these calculations (for example, Russian gold reserves are liquid, while some of the Russian funds investments in local enterprises are not). These caveats apply to all of the above economies.

On the net, this means that Russian Government is financially in a strongest leveraging position of all major economies in the world.

12/6/19: Irish Self-Employment Data: What It Says About the Entrepreneurial Nation

Official Ireland is quick to promote Irish indigenous entrepreneurship as evidence of a diversified economy, with domestic risk-takers bent on capturing international markets with new, innovation-intensive and modern goods and services. The reality, of course, is somewhat different. In 2017, based on the IMF estimate, sales of iPhones (not physically manufactured in Ireland at all) accounted for 25% of the state's GDP growth. And, on the other side, domestic self-employment, the cradle of entrepreneurship, has been on a decline.

Here are the latest statistics and trends:

Share of Irish labour force participants in employment that were engaged in self-employment has declined, on trend, from the late 1990, as did the share of those in self-employment with employees has been down-trending since around 2000-2001.  Some might think that the trend is driven by the self-employed construction workers, but that is not the case, since they bump in share of all self-employed run below the trend line in 2003-2006, and many of these workers exited employment in the crisis.

What about self-employed as the share of overall relevant (age 15 and older) population? Similar trends:

Current total self-employment share in overall population is on-trend, and that trend is down, not up. Self employment with employees trend is similar.

So about that entrepreneurship, and about the claims that the younger generations are becoming even more entrepreneurial, and about all those universities and ITs offering vast arrays of entrepreneurship programs, and about the preaching of entrepreneurial ethos and values... ahem...

12/6/19: Credit Markets vs Banks Loans: Europe vs US

Related to the earlier post on investment markets composition by intermediary (see: https://trueeconomics.blogspot.com/2019/06/12619-investment-intermediaries-europe.html), here is more evidence, via @jerrycap of the massive share of intermediated debt / banks dependency in European markets:

A caveat worth noting: European data includes the UK, where equity markets and hybrid financing are both more advanced than in the Continental Europe, which suggests that the share on non-bank share of debt markets is even smaller than the 25% currently estimated.

12/6/19: Japanifying the World

Heard on the sidelines of the QE: "Honey, we've Japanified the World..."

Chart via Wells Fargo Research team.

12/6/19: All's Well in the Euro Paradise

All is well in the Euro [economy] Paradise...

Via @FT, Germany's latest 10 year bunds auction got off a great start as "the country auctioned 10-year Bunds at a yield of minus 0.24 per cent, according to Germany’s finance agency. The yield was well below the minus 0.07 per cent at the previous 10-year auction in late May. The previous trough of minus 0.11 per cent was recorded in 2016. Notably, demand in Wednesday’s auction was the weakest since late January, with investors placing bids for 1.6-times more than the €22bn that was issued."

Because while the "Euro is forever", economic growth (and the possibility of monetary normalisation) is for never... 

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.