9/2/20: Ireland: More of a [reformed] Tax Haven than Ever Before?..

With the demise of the last Government and the uncertain waters of Irish politics stirred by the latest election results, let me take a quick glance at the Government's tenure in terms of perhaps the most important international trend that truly threatens to shake the core foundations of the Irish economy: the global drive to severely restrict corporate tax havens.

In Ireland, thanks to the CSO's hard labours, there is an explicit measure of the role played by the international tax avoiding corporations in the country economy. It is a very imperfect measure, in so far as it significantly underestimates the true extent of the tax arbitrage that Ireland is facilitating. But it is a robust measure, nonetheless, because it accounts for the lore egregious schemes run in capital investment segments of the corporate tax strategies.

The measure is the gap between the official Irish GDP and the CSO-computed modified Gross National Income, or GNI*. The larger the gap, the greater is the role of the tax shifting multinationals in the Irish national accounts. The larger the gap, the more bogus is the GDP as a measure of the true economic activity in Ireland. The larger the gap, the poorer is Ireland in real economic terms as opposed to the internationally-used GDP terms. You get the notion.

So here are some numbers, using CSO data:

When Fine Gael came to power in 2011, Irish GNI* (the more real measure of the economy) was 26.03 percent lower than the Irish GDP, in nominal terms. This, effectively, meant that tax shenanigans of the multinational corporations were de facto running at at least 26% of the total Irish economic activity.

Fine Gael proceeded to unleash and/or promise major tax reforms aimed at reducing these activities that (as 2014 Budget, released in October 2013 claimed, were harmful to Ireland's reputation internationally. The Government 'closed' the most notorious tax avoidance scheme, the Double Irish, in 2014, and introduced a major new 'innovation', known as the Knowledge Development Box (aka, replacement for the egregious Double Irish) in 2016. In September 2018, the Government published an ambitious Roadmap on Corporation Tax Reform (an aspirational document aiming to appease US and European critics of Ireland's tax avoidance platform).

So one would expect that the gap between Irish GNI* and GDP should fall in size, as Ireland was cautiously being brought into the 21st century by the FG government. Well, by the time the clocks chimed the end of 2018, Irish GNI* was 39.06 percent below the Irish GDP. The gap did not close, but instead blew up.

Over the tenure of FG in office, the gap rose more than 50 percent! Based on 2018 data (the latest we have so far), for every EUR1 in GDP that Irish national accounts claim to be our officially-declared income, whooping EUR0.391 is a mis-statement that only exists in the imaginary world of fake corporate accounts, engineered to squirrel that money from other countries tax authorities. Remember the caveat - this is an underestimate of the true extent of corporate tax shifting that flows through Ireland. But you have an idea. In 2011, the number was EUR0.260, in 2007, on the cusp of the Celtic Garfield's Demise, it was EUR0.1605 and in 2000-2003, the years of the Celtic Garfield's birth when Charlie McCreevy hiked public expenditure by a whooping 48 percent, it was averaging EUR0.1509.

Think about this, folks: McCreevy never waged a battle to get Irish tax system's reputation up in the eyes of the critically-minded foreigners and yet, his tenure's end was associated with the tax optimisation intensity in the Irish economy being whooping 24 percentage points below that of the 'reformist' Fine Gael.

This is mind-bending.

8/2/20: Price-to-Sales Ratio Hits an All-Time High for S&P500

Stock are not overvalued, folks. Because, you know, stocks valuations are no longer making any sense...

Via @HondoTomasz, comes this nice chart, plotting the 18-year high in S&P500 PE ratios (gamable) and the all-time highs in Price-to-Sales ratio (less gamable). Do remember, folks, sales are a positive function of inflation and inflation has been pretty weak, of late. Which means that sales are facing two headwinds at the same time: low inflation pressures and low demand growth pressures. Yet, share prices are just keep climbing up in this new economic paradigm that looks like the old Dot.Com paradigm.

7/2/20: Someone, page Paul Krugman on this one: Irish Gross Value Added Data 3Q 2020

Remember that somewhat offensive, but also somewhat apt description of the Irish 2015 growth figures that Paul Krugman came up with? Well, le's call it the 'L-economics'. Now, the CSO recently published the latest figures (through 3Q 2019) on the gross value added in the Irish economy, as decomposed into 'Foreign-owned multinational enterprise dominated' sector and 'Other sectors excluding the foreign-owned multinational enterprise dominated sector'.  So here is a chart you do want to see, plotting the share of the 'Foreign-owned multinational enterprise dominated' sector of the total gross value added across all of the Irish economy:

Now, see that massive spike in 1Q 2014? Aha, that was Krugman's 'L-economics'. Back then, the share of the MNCs' [dominated sectors] in the Irish economy jumped from 2014 annual average of 26.4 percent to 2015 annual average of 38.36 percent. And then we thought, surely, things are going to calm down a bit at the Silicon Docks, right? Not quite. In 2018, the share averaged 42.4%. Boom! And in the first three quarters of 2019 it jumped to 44.1 percent. Double Boom!

Comically, or sarcastically, or may be... ah, neah... never mind. At the last 7 quarters growth rates, folks, by 2035, three quarters of the Irish economy will be... err... Krugmanited. So, OECD, G20 and the rest of the global tax justice worriers, there's nothing to see on the shores of the Liffey.

7/2/20: Mapping Real Economic Debt: BRICS

Some great charts on real economic debt, via IIF, with my highlighting of the BRICS economies:

First off, mapping corporate debt and government debt as a share of GDP:

 China is an outlier within the BRICS group when it comes to corporate debt.

 Chart above shows how dramatic has been deleveraging out of FX-denominated debt in Russia over the last decade. Much of this came from the reduction in US Dollar-denominated exposures.

Lastly, the chart above showing changes in the US Dollar-denominated debt quality (by corporate ratings). Again, Russia is a positive stand-alone in this, with more positive outlook than negative outlook corporates - a trend strikingly different from both the Emerging Markets overall, and for other BRIC economies.

7/2/20: Mapping Real Economic Debt 2019

A neat summary map of the real economic debt as a share of the national economies, via IIF, with my addition of Ireland's benchmark relative to its more accurate measure of the national income than GDP:

Yep, it is unflattering... albeit imperfect (there is some over-estimate here on the corporate debt side).

3/2/2020: Demographics and Support for the EU: Populism Base

Rising populism in politics, demographics and the financial crisis aftershocks are linked. Intuitively and empirically. And thus says a new study, published in the Journal of European Public Policy. The study by Fabian Lauterbach and Catherine e. De Vries, titled "Europe belongs to the young? Generational differences in public opinion towards the European Union during the Eurozone crisis" tackles the "...notion that younger people hold more favourable attitudes towards the European Union (EU) is prevalent in both academic and popular discourse." The authors shows that "Younger cohorts in debtor countries have become significantly more sceptical of the EU than their peers in creditor states" after the crisis. At the same time, "Older generations are more supportive of the EU in debtor countries compared to creditor states."

Marginal means by cohort, Euro-debtor, Euro-creditor and other EU member states

Full paper: https://www.tandfonline.com/doi/full/10.1080/13501763.2019.1701533. 

28/1/20: The Precariat of America's Workampers

Precariat is defined as "a social class formed by people suffering from precarity, which is a condition of existence without predictability or security, affecting material or psychological welfare. The term is a portmanteau obtained by merging precarious with proletariat." [Source]

Here is a very interesting article chronicling journalist's experience with the "Workampers", or a large number of Americans living in the world of campers, RVs and seasonal jobs: https://www.marketwatch.com/story/many-older-americans-are-living-a-desperate-nomadic-life-2017-11-06. Many are undoubtedly victims to the age discrimination that adversely impacts Americans after the age of 50, despite the pro forma legal bans against discrimination on the grounds of age.

28/1/2020: Federal Tax Revenues Over Time

Via the @SoberLook, WSJ's data / charts newsletter, a neat summary of changes in the U.S. federal taxation base over the years:

What does it tell us? In the 1940s-1960s, the share of excise, inheritance and other taxes, plus the share of corporation taxes in total federal tax revenues ranged above 30 percent, declining from around 45 percent in the 1940s to roughly 35-36 percent in the 1960s. Over the last decade, that share was around 14-15 percent. The burden of taxation, instead, has dramatically shifted onto labor income and personal income. This trend is forecast to worsen over the 2020s decade, with non-income taxes expecting to decline in their importance to around 12-13 percent of the total tax revenues.

It is worth noting that the benefits distribution has been also trending against current income earners, with a rising share of Government spending accruing to old-age support programs, social security payments and, of course, as usual - Pentagon.

Given these trends, it is hard to see how the politics of the younger electorate (growing role of the Millennials, GenXers and GenZers in voting) is going to be compatible with this situation. Likewise, given the likelihood for future shift in electoral politics against low corporation tax revenues share in total tax take in the U.S., it is hard to see how continued prosperity of the well-known corporate tax havens, including Ireland, Luxembourg, the Netherlands et al, can be sustained either.

28/1/20: What Doesn't Work in NYC Probably Won't Work in Dublin

As Irish politicians talk rent controls, here is some interesting evidence from NYC's recently passed rent control rules (since June 2019): https://reason.com/2020/01/27/totally-predictable-consequences-of-new-yorks-rent-regulations/.

Summary:

• Sales of apartment buildings in NYC fell by 36 percent in 2019, and that the total spend on purchases fell by 40 percent. Not all of this is down to rent controls changes - NYC is grossly over-supplied in the premium segment of the market and traditionally large-ticket buyers are staying out of the market (Russian and Middle Eastern money) or selling (Russian and Chinese) due to geopolitical and legal ownership threats.
• "The prices investors were paying for rent-stabilized units—where allowable rent increases are set by the government and usually capped at around 1 or 2 percent per year—fell by 7 percent." More direct evidence for less than 6 months of new rules being in force.
• "... landlords are reportedly cutting back on the money that they're putting into the buildings that they do own... [as] 69 percent of building owners have cut their spending on apartment upgrades by more than 75 percent since the passage of the state's rent regulations. Another 11 percent of the landlords in the survey decreased investments in their properties by more than 50 percent." More direct evidence things are not going in the desired direction.
• "The new law's limits on recouping the costs of renovating apartments mean it is often more  financially feasible to leave old apartments vacant."
• The lower end of the market is probably most hit: "The Commercial Observer reports that the new rent laws are encouraging small- and mid-sized landlords to exit the market entirely, writing that "many property owners have woken up to a world where their buildings are worth 30 to 50 percent less than they were a year ago."" 
• And another quote: "Middle-class and working-class neighborhoods, ... would be at particular risk."

Thoughts on why this should work any differently for Ireland are welcomed in the Irish mainstream-populist media.

27/1/20: The Value of History and the Shifting Winds of Public Policy

My latest contribution to the Manning Financial for January 2020 is out: https://issuu.com/publicationire/docs/mf_january_2020?fr=sZTk2MDI2MTg4NA.

21/1/20: Inflation and Growth: BRIC 2020

Via Danske Bank Research, an interesting chart showing 6-12 months forward expectations for inflation (CPI) and economic growth (GDP) for a number of countries, most notably, the BRIC economies:

Clearly suggests continued growth suppression in Russia and, at last, moderating inflationary pressures, returning the economy back toward a longer-term trend of ~2% growth and sub-3% inflation. Also shows continued problems is Brazil persisting into 2020 and only a moderate uptick in economic activity in India, where Modi 'reforms' have been largely washed out into slower growth over the recent quarters.

21/1/20: US Deficits, Growth and Money Markets Woes

My article for The Currency on the effects of the U.S. fiscal profligacy on global debt and money markets is out: https://www.thecurrency.news/articles/7371/the-us-deficit-has-topped-1-trillion-and-investors-should-be-worried.

Key takeaways:

"As the Trump administration continues along the path of deficits-financed economic expansion, the question that investors must start asking is at what point will debt supply start exceeding debt demand, even with the Fed continuing to throw more cash on the fiscal policies bonfire?"

"In the seven years prior to the crisis of 2008-2012, US economic growth outpaced US budget deficits by a cumulative of $1.56 trillion. This period of time covers two major wars and associated war time spending increases, as well as the beginnings of the property markets and banking crises in 2007.

"Over the last seven years since the end of the crisis, US economic growth lagged, on a cumulated basis, fiscal deficits by $928 billion, despite much smaller overseas military commitments and a substantially improved employment outlook.

"These comparatives are even more stark if we are to look at the last three years of the Obama Administration set against the first three years of the Trump Presidency. During the 2014-2016 period, under President Barack Obama, US deficits exceeded increases in the country’s GDP by a cumulative amount of $226 billion. Over the 2017-2019 period, under  Trump’s tenure in the White House, the same gap more than doubled to $525 billion.

"No matter how one spins the numbers, two things are now painfully clear for investors. One: irrespective of the stock market valuations metrics one chooses to consider, the most recent bull cycle in US equities has nothing to do with the US corporate sector being the main engine of the economic growth. Two: the official economic figures mask a dramatic shift in the US economy’s reliance on public sector deficits since the end of the crisis, and the corresponding decline in the importance of the private sector activity."