2/7/19: Earnings and Market Valuations: Equity PEs

While P/E ratios are gamable and informationally highly restrictive, the metric is still a useful one when considering as to how expensive/cheap equity can be. Here is the latest chart via @topdowncharts showing P/E ratios based on 10 year average earnings (smoother series, but the long average is even less informationally rich than pure P/Es):

Which makes:

1. U.S. markets overvalued in excess of 2006-2007 peaks, but less than in the blowout bubble of the dot.com era;
2. Developed markets (ex-US) and Emerging markets relatively moderately priced.

Given the fact that U.S. equities earnings are probably the most susceptible to strategic manipulation, e,.g. shares buybacks, M&As and earnings/cash management, the U.S. markets are in heading for trouble.

29/6/19: Why Moody’s is wrong to keep Cyprus on junk status

Euromoney on Cypriot economy: "Why Moody’s is wrong to keep Cyprus on junk status" https://www.euromoney.com/article/b1g125jl1wvf0v/why-moodys-is-wrong-to-keep-cyprus-on-junk-status with a comment from myself.

24/6/19: Markets Expect the Next QE Soon...

Adding to the previous post on the negative yielding debt, here is a recent post from @TracyAlloway showing Goldman Sachs' chart on implied probability of the U.S. Fed rate cuts over the next 12 months:

Source of chart: https://twitter.com/tracyalloway/status/1141895516801732608/photo/1.

The rate of increases in the probability of at least 1 rate cut is staggering (as annotated by me in the chart). These dynamics directly relate to falling sovereign debt yields (and associated declines in corporate debt yields) covered here: https://trueeconomics.blogspot.com/2019/06/24619-negative-yielding-debt-monetary.html.

Notably, as the markets are now 90% convinced a new QE is coming, their conviction about the scale of the new QE (expectations as to > 3 cuts) is off the chart and rising faster in 2Q 2019 than in the previous quarters.

24/6/19: Negative Yielding Debt: Monetary Contagion Spreads

Negative yielding Government debt (the case where investors pay the sovereign lenders for the privilege of lending them funds) has hit all-time record (based on Bloomberg database) last week, at 13 trillion.

Source of charts: https://www.bloomberg.com/amp/news/articles/2019-06-21/the-world-now-has-13-trillion-of-debt-with-below-zero-yields.

Quarter of all investment grade corporate debt is now also yielding negative payouts (note: bond returns include capital gains, so as yields fall, capital gains rise for those investors who do not hold bonds out to maturity).

In effect, negative yields are a form of a financialized tax: investors are paying a premium for risk management that the bonds provide, including the risk of future decreases in interest rates and the risk of declining value of cash due to expected future money supply increases. In other words, a eleven years after the Global Financial Crisis, the macro-experiment of monetary policies 'innovations' under the QE has been a failure: negative yields resurgence simply prices in the fact that inflationary expectations, growth expectations and financial stability expectations have all tanked, despite a gargantuan injection of funds into the financial markets and financial economies since 2008.

In 2007, total assets held by Bank of Japan, ECB and the U.S. Fed amounted to roughly $3.2 trillion. These peaked at just around $14.5 trillion in early 2018 and are currently running at $14.3 trillion as of May 2019. Counting in China's PBOC, 2008 stock of assets held by the Big 4 Central Banks amounted to $6.1 trillion. As of May 2019, this number was $19.5 trillion. Global GDP is forecast to reach $87.265 trillion by the end of this year in the latest IMF WEO update, which means that the Big-4 Central Banks currently hold assets amounting to 22.35% of the global nominal GDP.

Negative yields, and ultra-low yields on Government debt in general imply lack of incentives for Governments to efficiently allocate public spending and investment funds. This, in turn, implies lack of incentives to properly plan the use of scarce resources, such as factors of production. Given that one year investment commitments by the public sector usually involve creation of permanent or long-term subsequent and related commitments, unwinding today's excesses will be extremely painful economically, and virtually impossible politically. So while negative yields on Government debt make such projects financing feasible in the current economic environment, any exogenous or endogenous shocks to the economy in the future will be associated with these today's commitments becoming economic, social and political destabilization factors in the future.

20/6/19: Say Goodbye to the Trump Bump in Corporate Investment

Trump's investment boom... is vapour now.

And that is despite the fact that tariffs on China, threats of tariffs against Mexico, mini trade war with Canada and threats of a trade war with Europe - all supporting domestic investment all along... 

20/6/19: The 'Mental' Bits of Economic Fundamentals

My article on the statistical mishaps in the U.S. and Irish economic data for the Manning Financial: https://cfc.ie/2019/06/11/economic-outlook-by-dr-constantin-gurdgiev/.

19/6/19: In an Alternate Ireland, Captain Leary...

Big congratulations to my friend and co-author (on economics and finance matters), Prof. Brian M. Lucey @brianmlucey on his debut in fiction writing... unlike in our usual finance papers, suspenseful dulness of stats and econometric has been suspended by him to narrate the tale of Captain Leary (not, not the one of the Ryanair empire, who in "an alternate Ireland... battles to save the Emperor [not Bertie], save the space elevator [not in an Anglo-funded building], dodge the assassins [not the Russian variety, I am assuming], thwart English terrorists [Brexit forecasts?]" and deliver "flowers for the girl". Oh, yes... it is available right here: https://www.amazon.com/dp/B07TC8LNFS/ref=mp_s_a_1_1?keywords=learys+empire&qid=1560951929&s=gateway&sr=8-1

18/6/19: In May, 12 month forward probability of a U.S. recession has jumped up

The NY Fed estimated risk of recession (12 months forward) has hit another business cycle high of 29.62% for May 2020, up from 27.49% for April 2020, marking seventh consecutive monthly increase.

Historically, probability of a recession 9-15mo ahead of the actual recession realisation has been at 18.45%, which is significantly below the current running 3 months average of 28.06%.

To put these levels into perspective, here is the chart of the time series:

The current levels of the index are clearly in line with the historical trends for the 9-12 months recession expectations. More so, they are actually in line with 3-6 months recession expectations. In fact, we have to go back to 1967-1968 to find the only episode in the entire history of the data series where current levels of the index were not coincident with an actual recession or with 3-6 months-lagged realisation of a recession.

May 2020 reading is the ninth highest probability estimate for the probability of a recession in history for any period outside and actual recession + 6 months prior and 3 months after.

18/6/19: OECD-led Tax Reforms: A Prescription for a Less Competitive Economy

I have just posted a draft of my paper on the OECD BEPS proposals from May-June 2019 here: Gurdgiev, Constantin, OECD-led Tax Reforms: A Prescription for a Less Competitive Economy (June 18, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3406260. 

18/6/19: Obama v Trump: Jobs Creation

Who had the more impressive numbers in terms of jobs creation: President Obama or President Trump? This question is non-trivial. For a number of reason.

Take first the superficially-simple comparative:

• On a y/y basis, average monthly change in total non-farm payrolls under the last 28 months of President Obama Administration was 2,704,000 using non-seasonally-adjusted data. For the first 28 months of the Trump Administration, the same figure was 2,394,000. So by this metric, things were better under Obama Administration last 28 months in office.
• The caveat to the above is that as jobs numbers grow, each consecutive period, new additions of jobs should be harder and harder to come up with, especially during the mature period of the expansion cycle. In other words, after some number of quarters of economic recovery, creating more new jobs gets harder, primarily because the pool of potential employees to be hired into jobs shrinks. So, adjusting Obama figures and Trump figures for this, we can use rate of change in 28 months averages. This is not easy to do, because we do not have consecutive 28 months periods of first rising, then falling jobs additions averages for any period, except for the 1990s. Back then, jobs creation first run at 483,000 monthly average in 1991-1993, 3,124,000 in 1993-1995, 2,889,000 in 1996-1998 and 3,080,000 in 1998-2000. So within upside cycle, the net decline in jobs creation was between 1.74% and 7.2%. Applying these to Obama Administration’s peak jobs creation rate over any 28 months period gives us the rate of Obama Administration cycle-adjusted jobs creation of between 2,509,150 and 2,656,775 - both of these figures are higher than the raw numbers for the Trump Administration’s first 28 months in office. 
• In monthly average jobs creation measured on m/m basis, Obama Administration’s last 28 months in offer yielded 128,000 monthly jobs additions on average. The Trump Administration’s comparable figure is 294,000, vastly outpacing Obama Administration’s record. This means that, in total,  during the Obama Administration last 28 months in office, the U.S. economy has created net 2,527,000. In Trump’s Administration 28 months in office, the economy generated 7,206,000 jobs. 
• The above figures, however, is heavily weighted against the last 28 Obama Administration period due to the final two months of the period coinciding with heavily seasonality-related effects (December and January effects). Controlling for seasonality effects, Obama Administration comparable net jobs creation over that period was 7,139,000 against Trump’s 7,206,000.
• Finally, looking at the entire jobs cycle, as illustrated in the chart below:

Note, I consider the period of Obama Administration with sustained jobs creation - a sort of
‘jobs creation upside cycle’ that started in March 2011. Based on this comparative, Obama Administration did outperform Trump Administration so far into the latter tenure in office (see steeper slope in the trend line for Obama Administration, and flatter slope for Trump Administration.


Draw your own conclusions out of all of this, but there are my top level ones:

1. Whilst it is other daft to argue whether one Administration was able to ‘create’ more jobs than the other - the comparatives are a bit too sensitive to differences in economic environments and yearly cycles, overall, Obama Administration’s last 28 months in office seem to have been creating comparable number of jobs to the Trump Administration’s first 28 months in office.
2. Trump Administration has seen more substantial monthly increases than Obama Administration did, but annually, Obama Administration outperformed Trump Administration in this comparative.
3. In overall terms, jobs creation remained similar across both Administrations to-date, once we adjust for skewed seasonality effects, but Obama Administration appears to have outperformed the Trump Administration over the cycle of jobs expansion.

17/6/19: Lose-Lose-and-Lose-Some-More Trade War: Trumpism in Action

Recently, I have posted on the latest Fed research covering the impact of the President Trump's trade war with China, showing that the tariffs collected by the U.S. Federal Government are not being paid for by the Chinese producers, but are fully covered out of the American consumers' and firms' pockets.

Here is an interesting note via CFR on the balance of tariffs and farms subsidies dolled out as a compensation for the Trump trade wars: https://www.cfr.org/blog/130-percent-trumps-china-tariff-revenue-now-going-angry-farmers.

via @CFR_org

The point is that tariff revenues are a tax on American economy (households and firms), and these tax revenues collected by the U.S. Federal Government are not enough to cover compensation to the U.S. farmers for their losses due to China's retaliatory tariffs. Agrifood commodities are a buyers market: soybeans are sourced globally, traded globally and their prices are set globally. When China imposes tariffs on imports of soybeans from the U.S., the Chinese consumers do not pay the tax on their purchases of these, instead they substitute by purchasing readily available soybeans from other parts of the world. On this, see: https://trueeconomics.blogspot.com/2019/05/14519-agent-trumpovich-fails-to-deliver.html. Brazilian farmers win, American farmer lose. Uncle Sam subsidises U.S. farmers to compensate, using tax revenues it collected from the American consumers of Chinese goods.

But farming lobby is strong in the U.S. Thus, total quantity of compensation awarded to the farmers in now in excess of total tax revenues collected from the American consumers. It's a lose-lose-and-lose-some-more proposition of economics of trade.

14/6/19: Rising Concentration Risk in S&P500 Earnings and Revenues

S&P 500 companies earnings and revenues are heading for another round of de-diversification (increasing concentration of earnings and revenues toward the U.S. markets), per Factset latest data: