5/1/20: EU's Latest Financial Transactions Tax Agreement

My article on the proposed EU-10 plan for the Financial Transaction Tax via The Currency:

Link: https://www.thecurrency.news/articles/5471/a-potential-risk-growth-hormone-what-the-financial-transaction-tax-would-mean-for-ireland-irish-banks-and-irish-investors or https://bit.ly/2QnVDjN.

Key takeaways:

"Following years of EU-wide in-fighting over various FTT proposals, ten European Union member states are finally approaching a binding agreement on the subject... Ireland, The Netherlands, Luxembourg, Malta and Cyprus – the five countries known for aggressively competing for higher value-added services employers and tax optimising multinationals – are not interested."

"The rate will be set at 0.2 per cent and apply to the sales of shares in companies with market capitalisation in excess of €1 billion. This will cover also equity sales in European banks." Pension funds, trading in bonds and derivatives, and new rights issuance will be exempt.

One major fall out is that FTT "can result in higher volumes of sales at the times of markets corrections, sharper flash crashes and deeper markets sell-offs. In other words, lower short-term volatility from reduced speculation can be traded for higher longer-term volatility, and especially pronounced volatility during the crises. ... FTT is also likely to push more equities trading off-exchange, into the ‘dark pools’ and proprietary venues set up offshore, thereby further reducing pricing transparency and efficiency in the public markets."

19/12/19: Irish Planning Permissions 3Q 2019: Some Goods, Some Bads

The latest Irish data for Planning Permissions approvals is a mix of some good news, some bad news and some ugly trends. Here is the summary of them for 3Q 2019:

1. Overall, planning permissions numbers for housing applications are up 4.02% y/y - this is the good news. Better news: cumulative 1Q-3Q 2019 numbers are up 7.12%  on the same period in 2018.
2. New dwelling planning permissions are up 6.01% y/y - this too is the good news. Also exciting: cumulative 9 months permissions are up 6.33% y/y.
3. Other new construction ex-dwellings permissions are up 6.29% - another bit of good news.
4. Extensions and alterations-related planning permissions are up only 1.42%. But this is offset by the cumulative 9 months gain of 7.65% y/y. Which is a nice number.
5. Bad news: private homes permissions are up only 1.13% y/y in 3Q 2019, and worse news: the same are down massive 5.57% y/y on a cumulative basis for the first 9 months of 2019.
6. Great news: apartments permissions (for units, not aggregated over schemes) are up massive 80.15% in 3Q 2019 y/y and are cumulatively up 86.81% y/y for the first nine months of 2019.
7. Average area of the houses for which new permissions are grated is up 0.82% in 3Q 2019 compared to 3Q 2018, but average area of the apartments with new permissions granted is down big time: down 14% y/y in 3Q 2019 and on average down 7.1% in the first 9 months of 2019.

So we are planning more apartments (good), not as significantly more homes (bad), but our apartments planned are getting smaller (bad). 

Now for some other bad news, or trends, rather. 

Given the demographic demand and the state of construction industry in the post-crisis period, we are continuing to under-supply new housing to the markets. Based on the assumed demand for 25,000 new homes annually, cumulative undersupply of new permissions to build residential units since 1Q 2010 currently stands at around 81,900 units and although this number is finally declining (since 4Q 2017), at the current rate of new planning permissions approvals (Q1-Q3 2019 figure), it would take almost 6.5 years to clear the backlog. That is, assuming in the mean time, there is no new recession to knock out the wind from the building and construction sector, and/or no significant inward / return migration to boost demand. Accounting for depreciation at ca 4100 units per annum (https://www.savills.com/insight-and-opinion/savills-news/273944/john-mccartney--housing-obsolescence-commonly-overestimated--and-depreciation-heavily-concentrated-in-rural-ireland) extends this horizon to 10.3 years. 

18/12/19: Winning Trade [Price] Wars: Updated Data

With the recent announcement of the so-called Phase 1 'Trade Deal' with China, the U.S. President has claimed that his Administration is winning the trade war with Beijing and that the U.S. economy is gaining from the rounds and rounds of tariffs and trade restrictions imposed on its bilateral trade with China.

Here is a tangible set of metrics showing the cost indices for U.S. trade (exports and imports) over the period of President Trump's tenure, compared to the track record of his predecessors:

In basic terms, the adverse movements in imports prices have been more than offset by the positive movements in export prices since the start of the Trump presidency. However, two caveats to this warrant more cautious analysis of this data:

1. Mr. Trump's presidency has not been associated with statistically distinct imports prices performance, compared to the Obama administration (see averages and levels for import price indices in the above), while Mr. Trump's tenure has been associated with markedly lower export prices for the U.S. exporters (the blue line above); and
2. The gap between export prices and import prices (positive and larger gap signals higher relative prices of exports compared to imports - a net positive for the external balance), under Trump administration remains well below previous administration's track record (see chart next).

There is preciously little if any evidence in the trade prices indices to suggest that the Trump administration is either winning any trade wars or improving U.S. exporters' environment. If anything, there is more evidence that the U.S. economy is facing similar supportive tailwinds from global imports prices deflation to those experienced by its counterparts, and these are broadly in line with the tailwinds experienced by China:

16/12/19: There is no Inflation, folks... none...

There is no inflation, folks. This is what the Fed been telling us for some time now. And the CPI figures, on aggregate, say the same.

Unless it is if you need health services or health insurance, or if you happen to *want* education. These discretionary items of spending, avoidable by choice of a prudent consumer, are, of course, exceptions to the rule...

Note, of course, the standard inflation measurements of price changes in healthcare are a bit obscure too, as they average-out effects of private insurance inflation by adding old-age and low-income insurance purchases by the state:

But, never mind, as I said above, these are purely discretionary spending items, so we should not let them cloud out the net official results that show 'no inflation'.

15/12/19: Under the Hood of Irish National Accounts: 3Q 2019 Data

CSO have released the latest (3Q 2019) data for the National Accounts. The headlines are covered in the release here: https://www.cso.ie/en/releasesandpublications/er/na/quarterlynationalaccountsquarter32019/ and are worth checking. There was a massive q/q increase in GNP (+8.9%) and a strong rise in GDP (+1.7%).

Official value added q/q growth figures were quite impressive too:

• Financial & Insurance Activities value added was +5.7 percent in volume, all of which, judging by the state of the Irish banks came probably from the IFSC and insurance premiums hikes
• Professional, Administrative & Support Services +5.1 percent (this sector is now heavily dominated by the multinationals)
• Public Administration, Education and Health sector lagged with a +1.5 percent 
• Arts & Entertainment +1.8 percent
• Construction grew by much more modest +1.3 percent 
• Industry (ex-Construction) fared worse at +1.1 percent 
• Information & Communication increased by 0.8 percent over the same period
• Meanwhile, more domestic-focused Agriculture recorded a decline of 3.2 percent 
• Distribution, Transport, Hotels & Restaurants posted a decline of 1.0 percent.

On the expenditure side of accounts:

• Personal Consumption Expenditure increased by 0.9 percent q/q
• Government expenditure increased 1.2 percent.

Not exactly the gap we want to see, especially during the expansionary cycle, but public consumption has been running below private consumption in level terms ever since the onset of the recovery.

With this in mind, here is what is not discussed in-depth in the CSO release. CSO reports a measure of economic activity that attempts to strip out some (but not all) of the more egregious effects of the tax optimising multinational enterprises' on our national accounts. The official name for it is 'Modified Domestic Demand', "an indicator of domestic demand that excludes the impact of trade in aircraft by aircraft leasing companies and trade in R&D service imports of intellectual property". Alas, the figures do include intangibles inflows, especially IP on-shoring, income from domiciled intangible assets, and transfer pricing activities. Appreciating CSO's difficulties, it is virtually impossible to make a judgement as to what of these three components is real (in so far as it may be actually physically material to Irish enterprises and MNCs trading from here) and what relates to pure tax optimisation.

With liberty not permitted to CSO, let's take the two categories out of the aggregate modified demand figures.

So, this good news first: Modified Total Domestic Demand is growing and this growth (y/y) is improving since hitting the recovery period low in 3Q 2018. 

Bad news: growth in modified domestic demand remains extremely volatile - a feature of the Irish economy since mid-2014 when the first big splashes of the Leprechaun Economics started manifesting themselves (also see last chart below).

Not great news, again, is that domestic growth is not associated with increases in investment (first chart above, blue line). 

More good news: in levels terms, adjusting for inflation, Ireland's Modified Domestic Demand has been running well-above pre-crisis period peak average levels for quite some time (chart below). Even better news, it appears that much of the recent support for growth in demand has been genuinely domestic.

Next chart shows y/y growth rates in the headline Modified Total Domestic Demand as reported by the CSO (blue line) and the same, less transfer pricing, stocks flows and IP flows (grey line). 

Starting with mid-2014, there is a massive variation in growth rates between the domestic economy growth rates as reported by the CSO and the same, adjusting for MNCs-dominated IP and transfer pricing flows, as well as one-off effects of changes in stocks (inventories). There is also tremendous volatility in the MNCs-led activities overall. Historically, standard deviation in the y/y growth rates in official modified domestic demand is 5.68, and for the period from 3Q 2014 this is running at 5.09. For modified demand ex-transfer pricing, IP and stocks flows, the same numbers are 6.12 and 1.62. 

Overall, growth data for Ireland has been quite misleading in terms of capturing the actual tangible activities on the ground in prior years. But since mid-2014, we have entered an entirely new dimension of accounting shenanigans by the multinationals. Much of this is driven by two factors:

1. Changes in tax optimisation strategies driven by the international reforms to taxation regimes and the resulting push by the Irish authorities to alter the more egregious loopholes of the past by replacing them with new (IP-related and intangible capital-favouring) regime; and
2. Changes in the ays in which MNCs prioritise specific investment inflows into Ireland, namely the drive by the MNCs to artificially or superficially increase tangible footprint in the Irish economy (investment in buildings, facilities and on-shored employment) to provide cover for more tax-driven FDI.

Time will tell if these changes will lead to more or less actual growth in the real economy, but it is notable that the likes of the IMF have recently focused their efforts at detecting tax optimising activities at national levels away from income flows (OECD approach to tax reforms) to FDI stocks and firm-level capital activities. By these (IMF's) metrics, Ireland has now been formally identified as a corporate tax haven. How soon before the OECD notices?..

14/12/19: Governance and Government Debt

What I am reading this week: a new paper via EFMA, titled "Governance and Government Debt" by João Imaginário and Maria João Guedes, available here: https://efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2019-Azores/papers/EFMA2019_0184_fullpaper.pdf.

The paper looks at "the relationship between Worldwide Governance Indicators [a proxy for governance quality] and Government Debt in 164 countries for the period between 2002 and 2015." Using fixed effects (FE) and generalized method of moments (GMM) models the authors show that "governance quality is negatively and statistically related with government debt. For Low Income countries was found evidence that better governance environment is associated with lower public debt levels."

More specifically, "for a set of 164 countries on a period between 2002 and 2015, ... estimation results for FE model suggest that Control of Corruption (CC) and Voice and Accountability (VA) indexes are negative and statistically significant on influencing government debt. In part, this result confirms our Hypothesis 1 that better governance quality is associated with lower levels of public
debt." But the study also shows that these 'global' effects are predominantly driven by the presence of low income countries in the full sample. The authors find that "the link between good governance quality and government debt reduction is more evident for Low Income countries."

As a caveat, the authors do find that overall higher score in the World Governance Indicators Index (as opposed to specific sub scores) has a negative and statistically significant impact on the levels of government debt, so that overall higher measure of governance quality is associated with lower government debt for the High Income economies. The magnitude of this effect was reasonably large, as well.

13/12/19: World Bank and WEF reports highlight relatively poor competitiveness rankings for Ireland

The latest World Bank "Doing Business" report rankings and the WEF's "Global Competitiveness Report" rankings show Ireland in a mid-tier 1 position (24th ranked in both tables) in terms of competitiveness - hardly an enviable position.

Ireland's position marks a deterioration from 23rd rank in WEF table, driven by relatively poor performance in ICT adoption (hmmm... Silicon Docks economy is ranked 49th in the World), macroeconomic stability (ranked 34th), product markets competitiveness (35th), and financial system (42nd).

Full WEF report here: http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf and full WB report here: https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf WB country profile for Ireland: https://www.doingbusiness.org/content/dam/doingBusiness/country/i/ireland/IRL.pdf.

A summary chart for Ireland from WB report:

Which, again shows poor performance in the area of credit supply, as well as trading across the border (correlated to the effective market size),  but also in access to electricity, registering property, dealing with construction permits, and enforcing contracts.

13/12/19: UK Vote and Younger Voters

On foot of the UK General Elections results, here is a telling sign of the changing generational effects on voting with some questions for the U.S. 2020 election:

Given the above numbers, the 'younger voters tide of change' expected in 2020 in the U.S. elections is a function of two factors: turnouts and demographic concentrations. We are, of course, yet to get this data from the UK polls.

Worth thinking about these, if you are a political analyst.

Note: some data on voter turnout as of 627 MPs elections completed.

• Turnout was about 67%; circa two-points lower than in 2017, signalling no upswell in political activism by the voters. Given that younger cohorts of eligible voters increased in numbers, while older cohorts diminished due to time lapse, this suggests that younger voters were not as energised to show up at the polls as media hype suggested.
• Per Brunel University analysis: "youth turnout lagged well behind that of their elders. If we look at the 20 constituencies with the highest proportion of 18-35 year olds, the average turnout yesterday was 63%; the turnout for the 20 constituencies with the fewest 18-35 year olds was 72%." See: https://www.brunel.ac.uk/news-and-events/news/articles/Labour's-car-crash-result-by-age-group. Again, evidence that the younger, more 'Remain', voters were not sufficiently fired up to show up at the polls. 
• Per same source: "The decline in turnout since 2017 was also slightly greater – at 1.5 points lower – in those constituencies with more young adults than those with the fewest – where it was 0.8 points lower." Again, a signal of younger voter apathy?
• Younger voters did go for Labour: "Labour held onto every one of the constituencies with the highest number of 18-35 year olds that it won in 2017."

Here is a really damning conclusion, emphasis mine: "What is clear is that, once again, claims of a youthquake – a sharp rise in turnout among young voters that would benefit the Labour party – have proven well short of the mark. At no point in the campaign have the opinion polls suggested that a youth turnout surge would materialise, but there was a great deal of excitement surrounding the surge in voter registrations among the under-35s – 2.8 million between October and December of this year, more than half a million more than in the same period before the 2017 election – which fuelled claims that a youthquake was on the horizon."

12/12/19: Ireland's Jobs Creation Track Record: Raising Some Questions

Doing some research on the state of precariat in modern labor markets, I came across some interesting data from the 'poster country' of the post-GFC recovery: Ireland.

Ireland's economy and its recovery from the crisis are both characterised by the huge role played by the internationally-trading multinational corporations. In recent years, these companies have been gearing up for the upcoming OECD-led BEPS reforms (more on this coming up next month in my usual contribution to the Manning Financial publication, but you can read academic-level analysis o the BEPS here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3406260). The strategic shift this entails involves MNCs domiciling into Ireland intangible property and new business functions to create a larger 'footprint' in the economy. With this, employment in MNCs operations in Dublin and elsewhere boomed.

Why is this important? Because the main story of the Celtic Tiger revival has been about the aforementioned jobs creation and accompanying dramatic drop in official unemployment. Less covered in the media and politicians' statements, over the same period of time as 'jobs creation' was allegedly booming, Irish labour force participation remained well below pre-crisis levels (meaning there were more discouraged unemployed who stopped being counted as unemployed). Even less attention has been paid to the quality of jobs creation.

The above chart partially reflects the latter concern. It shows that full-time employment as a a share of total working age population has improved from the bottom of the series at the peak of the recession, but the rebound has been largely incomplete. Similarly (not shown in the chart) the percentage of those in part-time employment as a share of total number of those in employment has remained above pre-crisis levels. Over 1998 through the first half of 2008 (the pre-crisis period), that share averaged 17.5 percent. This rose to above 23 percent in the years of the crisis (2H 2008 - 2013). It remained at around 23 percent through 4Q 2016, and has declined to around 20.3-20.5 percent since then. This too signals that the quality of jobs being added even in the mature stage of the recovery is still lagging the quality of jobs in the pre-crisis period.

Now, imagine what these figures would have been were it not for the MNCs latest tax shenanigans...

11/12/19: Private Sector Leads Electrification of Transport in Ireland

Ireland's uptake of electric vehicles has risen dramatically in 2019 (to-date, data through November), according to the data release from CSO.

Based on annualized numbers, Ireland is on track to add 3,790 new electric vehicles in 2019, of which 3,998 are expected to be private vehicles. In general, across all years we have data for, private sector (households) leads uptake of electric vehicles, with public sector lagging.

In 2019, new electric vehicles will account for ca 3% of the total new vehicles registered in Ireland. In the private sector, electric vehicles will account for 2.53% and in the public sector the share of electric vehicles in all new vehicles registered will rise to 1.07%. This marks major increases over 2015-2018 cumulative additions share of 0.44% total, 0.53% private and 0.32% public.

10/12/19: Irish Banks: Part 2

Continuing with the coverage of the Irish banks, in the second article for The Currency, available here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks, I cover the assets side of the banks' balancesheets.

The article argues that "The banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what does not make sense to investors does not make sense to society at large." In other words, strategic errors that have been forced onto the banks by deleveraging post-crisis have resulted in the Irish banks becoming a de facto peripheral play within the Euro area financial system, making them unattractive - from growth potential - to international markets.

The key conclusions are: "From investors’ perspective, neither of these parts of the Irish lenders’ story makes much sense as a long term investment proposition. From the Irish economy’s point of view, the banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what doesn’t make sense to investors doesn’t make sense to the society at large."

10/12/19: Irish Banks: Part 1

Returning back to the blog after a break, some updates on recent published work.

In the first article on Irish banking for The Currency, titled "Culture wars and poor financial performance: examining Ireland’s dysfunctional, beleaguered banking system", I argued that "The financial performance of the Irish banks has been abysmal. Not for the lack of profit margins, but due to strategic decisions to withdraw from lending in the potential growth segments of the domestic and European economies." The article shows the funding side of the Irish banks and the explicit subsidy they receive from the ECB through monetary easing policies - a subsidy not passed to the end credit users.

In simple terms, high profit margins are underpinned - in Irish banks case - by low cost of funding.

Conclusions: "The implications of the lower cost of banks equity, interbank loans, as well as deposits for the Irish banking sector are clear cut: since the start of the economic recovery, Irish banks have enjoyed an effectively free ride through the funding markets courtesy of the ECB and the blind eye of the Irish consumer protection regulators. Yet, despite sky-high profit margins extracted by the banks from the households and businesses, the Irish banking sector remains the weakest link in the entire Eurozone’s financial services sector, save for Greece and Cyprus. If the funding side of the equation is not the culprit for this woeful record of recovery, the other two sides of the banking business, namely assets and regulatory costs, must be."

Read the full article here: https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks.