9/3/20: Irish February PMIs: Baseline for the Covid2019 Impact

With the start of March and with corona virus impacting the global economy, I have decided to restart coverage of Irish PMIs - something I did not do for some years now. So here are some of the 1Q 2020 results based on January-February data.

First off, Sector and Composite PMIs on a quarterly average basis. As reminder, Composite PMIs are computed by me based on Markit and CSO data as GDP share-weighted averages for each sub-component, namely Manufacturing, Services and Construction:

Services clearly lead the recovery from 4Q 2020 weakness, with both Manufacturing and Construction nominally in the expansion territory, but statistically too close to zero growth to be congratulatory.

Composite PMIs ex-Construction are statistically within long term average and consistent with subdued growth rates. Composite ex-Construction (based on just Manufacturing and Services) is at 52.86 against the upper bound for the 95% confidence interval around the historical mean of 52.74. Including Construction, the Composite PMI rises to 56.14.

Monthly PMIs against period averages:

None of this data reflects any major concerns with COVID2019, since no cases have been identified in Ireland in the period covered by data. The impact should be felt in March 2020 figures due at the start of April. So we can look at the above charts as the base for the upcoming COVID2019 impact.

8/3/20: Global Economy's Titanic: Meet Your Iceberg

Here's that iceberg that is drifting toward our economy's Titanic... and no, it ain't a virus, but it is our choice:

Via: @Schuldensuehner

Years of easy credit, easy money. The pile of debt from Baa to lower ratings is the real threat here, for its sustainability is heavily contingent on two highly correlated factors: cost of debt (interest rates) and availability of liquidity. The two factors are closely correlated, but are also somewhat distinct. And both are linked to the state of the global economy.

There are additional problems hidden within A and even Aa rated debt, since these ratings are vulnerable to downgrades, and current Aa rating shifting to Baa or Ba will entail a discrete jump in the cost of debt refinancing and carry.

8/3/20: COVID-19: Global Growth Trends

So far, one thing is clear: we are in an exponential growth (not linear) when it comes to #Covid-19, everywhere, except for Japan...

Here is the full data set through March 7th:

Two observations worth making: ex-China data is exponential. The doubling rate remains at around 4 days since February 24th, prior to that, it was at 6-7 days. Which indicates acceleration in the exponential trend. With China data included, the trend is a bit more complex: we have exponential sub-trends of different steepness, with the first period through February 8th, followed by the step-function (on average still exponential) through February 17th, a linear sub-trend over 18th-24th of February and a new exponential trend since February 25th.

Post-February 25th trend is dominated by global infections, as opposed to China-based infections.

Currently, 17 countries have in excess of 100 confirmed cases:

2/3/20: BRIC Manufacturing PMI: February 2020

A quick post: Manufacturing PMIs are out for the BRIC economies and, unsurprisingly, things are tanking in China and remain seriously under pressure in Russia:

This is the first snapshot of the effects of Coronavirus #COVID19 #CoronaOutbreak on Chinese top-level economic activity figures. The data plotted above is quarter-based averages of the monthly indicator published by Markit. The BRIC quarterly index is computed by me using relative economy size weights for each BRIC economy. In the preceding 3 quarters, BRICs led global manufacturing activity. In 1Q 2020 so far, the BRIC economies as a group have been a drag on global growth.

25/2/2020: No, 2019-nCov did not push forward PE ratios to 2002 levels

Markets are having a conniption these days and coronavirus is all the rage in the news flow.  Here is the 5 days chart for the major indices:

And it sure does look like a massive selloff.

Still, hysteria aside, no one is considering the simple fact: the markets have been so irrationally priced for months now, that even with the earnings being superficially inflated on per share basis by the years of rampant buybacks and non-GAAP artistry, the PE ratios are screaming 'bubble' from any angle you look at them.

Here is the Factset latest 20 years comparative chart for forward PEs:

You really don't need a PhD in Balck Swannery Studies to get the idea: we are trending at the levels last seen in 1H 2002. Every sector, save for energy and healthcare, is now in above 20 year average territory.  Factset folks say it as it is: "One year prior (February 20, 2019), the forward 12-month P/E ratio was 16.2. Over the following 12 months (February 20, 2019 to February 19, 2020), the price of the S&P 500 increased by 21.6%, while the forward 12-month EPS estimate increased by 4.1%. Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio over the past 12 months."

So, about that 'Dow is 5.8% down in just five days' panic: the real Black Swan is that it takes a coronavirus to point to the absurdity of our markets expectations.

23/2/20: Fake Data or Faking Data? Inflation Statistics

As economists and analysts, almost all of us are trying - at one point or another - make sense of the, all too often vast, gap between the reality and the economic statistics. I know, as I am guilty of this myself (here's a recent example: https://trueeconomics.blogspot.com/2020/02/18220-irish-statistics-fake-news-and.html).

An interesting and insightful paper from Oren Cass of the Manhattan Institute dissects the extent of and the reasons for the official inflation statistic failing to capture the reality of the true cost of living changes in the U.S. over recent years (actually, decades) here: https://www.manhattan-institute.org/reevaluating-prosperity-of-american-family). It is a must-read paper for economics students, analysts and policymakers.

His key argument is that: "Economists and families see three things differently:

• Quality Adjustment. Products and services that rise substantially in price but in proportion to measured quality improvements can become unaffordable, while having no effect on inflation.
• Risk-Sharing. New products and services can increase costs for the entire population yet deliver benefits to only a very small share, while having no effect on inflation.
• Social Norms. Society-wide changes in behaviors and expectations can alter the value or necessity of a good or service, while having no effect on inflation."

In other words, over time, official inflation starts to measure something entirely different than the real and comparable across time consumption expenditure. As the result, you can have a paradox of today: low inflation is associated with falling affordability of life. 

An example: "In 1985, ... it would require 30 weeks of the median weekly wage to afford a three-bedroom house at the 40th percentile of a local market’s prices, a family health-insurance premium, a semester of public college, and the operation of a vehicle. By 2018, ... a full-time job was insufficient to afford these items, let alone the others that a household needs."

To address some of the shortcomings of the inflation measures, Cass offers a different metric, called COTI - Cost of Thriving Index - which basically amounts to the number of weeks that a given line of expenditure requires in terms of median income. Or "Weeks of Income Needed to Cover Major Household Expenditures". Two charts below illustrate:

And here is a summary table:

Excluding food, other necessities and looking solely at Housing, Health Insurance, Transport and College Education, the number of weeks of work at an overall median wage required to cover the basics of the necessary expenditure is now in excess of 58.4 weeks. For female workers' median wage, the number is 65.6 weeks. 

Which means that even before you consider other necessities purchases, and before you consider taxes, you are either dipping massively into debt or require a second income to cover these. 

Note: these do not account for income taxes, state taxes, property taxes, dental insurance. These numbers do not cover payments for water, gas, electricity. There is no mandatory car insurance included. No allowances for deductibles coverage savings (e.g. HSAs). No childcare, no children expenditures, no food purchases, and so on.

And even with all these exclusions, median income cannot afford the basics of living in today's America. 

A word from Fed, anyone?

23/2/20: The 'Fundamentals' of the Financial Markets Are Hardly Changed by the COVID2019, So Far...

An informative chart via Holger Zschaepitz @Schuldensuehner on the Global equity markets impact of the continuously evolving threat of the nCov-2019 or #COVID2019 virus epidemic:

Looks not quite as dire as it might sound, folks.

• Global equities lost some $470 billion worth of market value this week. 
• Which is 0.537% of the market cap at the start of the week 
• The market is still up more than 3 percent year to date
• The market is massively up on 2020 to date lowest point (+3.7 percent)
• Most of the effect is in Asia Pacific - not to discount it, but it is material since AP region has much more capacity for a rebound (higher savings, investment and potential growth rates) from the crisis effects than slower moving advanced economies.

Looking at longer terms within the advanced economies, here is a summary of the major indices cumulative moves over the 1 week - 6 months time horizon in percent:

So far, no panic, but last week really does look ugly, unless one seriously thinks about the degree to which market pricing is divorced from economic fundamentals, as exemplified by the 6 months changes: 22.26 percent upside in Nasdaq? 15 percent in Germany? 13.43 percent in Japan?.. 

So let's ask two questions: Q1: Does anyone believe there are long term economic or socio-economic fundamentals behind the above numbers? and Q2: If the markets are pricing in monetary sugar buzz of Kiddies at Halloween  Bucket of Sweets proportion on the upside, how on earth can the same markets price some serious fundamentals on the downside? 

The markets gyrations are only tangentially - and only in the short run - relate to tangible news flows, like nCov-2019 statistics. And they sure a hell do not relate linearly to any data on GDP impacts of the epidemic. Because markets have not reacted to GDP figures since well-before the Global Financial Crisis hit. Worse, there is no logic that can explain why markets are reacting to nCov2019 promise of dropping interests rates and priming the global QE pump in an opposite direction to the markets reactions to all previous slowdowns in global growth. 

We are still dealing with the same 'clueless and buzzed' crowd of 'investors' who value Tesla at inverse of the company's manipulated core statistics, and Netflix at inverse of company's manipulated profitability metrics, and Apple at inverse of company's forward growth potential. We are still dealing with the same 'jittery herd' that slushes from one 'not QE' to another 'Abenomics breakthrough' to the fiscal policy moaning of the ECB, while stopping to slam some shots at the occasional 'take profit' Wild West saloon.  

Forget one week to next markets gyrations. The real impact of nCov epidemic won't be seen until we have the monetary policy reactions at an aggregate level. So watch this chart instead:

When this line heads North above 3-4 percent mark, the real markets data will come in. Indications are: https://www.marketwatch.com/story/all-star-economists-urge-fed-to-use-qe-and-new-tools-to-fight-next-recession-just-move-sooner-and-go-bigger-than-crisis-2020-02-21?mod=the-fed. 

19/2/20: Facebook becomes another Ireland Inc's reforms test case

First the 'anti-American'  EU Commission's moved against a wonderful U.S. company washing tens of billions of tax free money through Ireland (see: https://www.reuters.com/article/us-eu-apple-stateaid/apple-says-14-billion-eu-tax-order-defies-reality-and-common-sense-idUSKBN1W1195) and now, the U.S. IRS ('anti-American' as they are) have moved against another wonderful U.S. company washing billions of tax free money through Ireland.

The latest case is, of course, the anti-American IRS suing Facebook over its shenanigans in Ireland: https://www.reuters.com/article/us-facebook-tax/facebook-faces-tax-court-trial-over-ireland-offshore-deal-idUSKBN20C2CQ. Per report: "The IRS argues that Facebook understated the value of the intellectual property it sold to an Irish subsidiary in 2010 while building out global operations, a move common among U.S. multinationals."

It is worth noting that this intellectual property redomiciling to Ireland has dramatically increased since the irish Government 'tax reforms' of 2014. Whilst the CSO does not fully account for such transfers in its GNI* measure, the gap between Irish GDP and GNI* has accelerated to historically new levels in recent years, as highlighted here: https://trueeconomics.blogspot.com/2020/02/9220-ireland-more-of-reformed-tax-haven.html.

The case is yet another hammer blow to Ireland's reputation in international economic policy circles and a testament that Ireland's famed compliance with the OECD BEPS rules is a fig leaf of decorum, to be stripped publicly by the EU and the U.S. (and probably other G20) authorities in years to come.

19/2/20: Early effects of the 2020 Berlin rent controls changes

New research from Germany's ifo Institute and Immowelt looked at the effects of the new rent caps (rent controls) in Berlin. The findings are consistent with what we observe in other major cities with rent controls:

• "In Berlin, the rent for almost all apartments advertised on real estate portal immowelt.de (96.7 percent) is above the rent cap."
• "In 83.5 percent of cases, the rent exceeds the cap by over 20 percent."
• "Rent on apartments covered by the law has risen considerably more slowly since the cap was announced".
• But, "rent on apartments outside the scope of the cap is still rising strongly" (note: these are new construction units).
• As the new rent controls come into effect later this year, the ifo study predicts that "a large number of these apartments to be withdrawn from the rental market when they become vacant and sold as condominiums".
• Reduced supply of rental properties means that "people looking for accommodation in Berlin will be affected"
• Rent caps introduce a bifurcated rental market: "Since July 2019, the rent prices for regulated apartments have increased more slowly than in the 13 other German cities... [but] ...rent for unregulated apartments (new buildings built since 2014) rose faster..."

"As a result [of the rent controls introduction], the divide in the Berlin real estate market is widening: new buildings, which are often found in preferred locations, are becoming increasingly expensive while prices for existing housing are developing less strongly. This  weakens the incentives to develop these buildings. ... Such a development cannot be good for an urban society and contradicts the very purpose of the law."

Ifo's preferred solution to reduce economic inefficiency of rent controls: "Instead of interfering with the ownership rights of mostly private landlords and hindering investment in housing, policy should focus on creating subsidized housing where needed.”

Full paper: “Economic Effects of the Berlin Rent Cap” (in German) by Mathias Dolls, Clemens Fuest, Carla Krolage, Florian Neumeier, and Daniel Stoehlker, in ifo Schnelldienst 3/2020: https://www.ifo.de/en/publikationen/2020/aufsatz-zeitschrift/oekonomische-effekte-des-berliner-mietendeckels

18/2/20: Irish Statistics: Fake News and Housing Markets

My latest column for The Currency covers the less-public stats behind the Irish housing markets: https://www.thecurrency.news/articles/9754/fake-news-you-cant-fool-all-of-the-people-all-of-the-time-on-property-statistics.

Key takeaways:
"Irish voters cast a protest vote against the parties that led the government over the last eight years – a vote that just might be divorced from ideological preferences for overarching policy philosophy."

"The drivers of this protest vote have been predominantly based on voters’ understanding of the socio-economic reality that is totally at odds with the official statistics. In a way, Irish voters have chosen not to trust the so-called fake data coming out of the mainstream, pro-government analysis and media. The fact that this has happened during the time when the Irish economy is commonly presented as being in rude health, with low unemployment, rapid headline growth figures and healthy demographics is not the bug, but a central feature of Ireland’s political system."

Stay tuned for subsequent analysis of other economic statistics for Ireland in the next article.

14/2/20: Pandemics, Panics and the Markets

In my recent article for The Currency I wrote about the expected market effects of the 2019-nCov coronavirus outbreak: https://www.thecurrency.news/articles/8490/constantin-gurdgiev-pandemics-panics-and-the-markets.

While past pandemics are not a direct nor linear indicators of the future expected performance, the logic and the dynamics of the past events suggest that while the front end short term effects of pandemics on the economies and the markets can be significant, over time, rebounds post-pandemics tend to fully offset short run negative impacts.

Key conclusions from the article are:

• "...The market appears to worry little about public health risks, after their impact becomes more visible, although the onset of a pandemic can be associated with elevated markets volatility. This volatility is higher the faster the evolution of the health scare, but so is the market rebound from each crisis lows."
• "This is not say that investors have little to worry about in today’s markets. We are still trading in the heavily over-bought market, and concerns about global growth are not getting much of a reprieve from the newsflows. The good news is, to date, the latest global health crisis does not seem to be a trigger for a major and sustained sell off. The bad news is, we are yet to see its full impact."

13/2/20: Civil Services Effectiveness Index 2019 and Ireland

Analysis of public sector efficiencies and effectiveness is a hard and empirically imprecise exercise, with severe risks of running against the very powerful interest groups. Nonetheless, with governments and public sector taking an ever expanding role in management of our society, economy and geopolitical spheres, this task is hugely important.

2019 International Civil Services Effectiveness Index is trying to do exactly that. The index can be accessed via https://www.bsg.ox.ac.uk/about/partnerships/international-civil-service-effectiveness-index-2019.

Ireland (score 0.62) ranks overall respectably above the 38 countries average, in the 14th place, below Switzerland (score 0.65), tied with France and Austria, and just ahead of Spain (score of 0.60). Chart below maps Ireland against Finland (ranked 4th with score of 0.88) in terms of overall index:

• In terms of civil service Capabilities metric, Ireland (0.72 score) is closer to the average (0.61) than to Finland (0.85). 
• In Crisis and Risk Management, Ireland (0.65) significantly underperforms Finland (0.98), ranking close to average (0.63). 
• In Digital Services, Ireland (0.52) ranks well below average (0.61) and miles behind Finland (0.83). 
• In Fiscal and Financial Management, Ireland scores on the average (0.59) and below Finland (0.73).
• Surprisingly, Ireland performs strongly (score of 0.99) in terms of HR Management in the civil service. Or maybe not, given the strength of the unions in Irish civil service.
• In Inclusiveness and Openness, Irish Civil Service is at or below the group average, and well below Finland.
• In Integrity, Ireland scores 0.68, which is closer (somewhat) to Finland's 0.79 and well ahead of the average (0.54). 
• In Policy Making, not surprisingly, Irish civil service score is mediocre 0.67, closer to the average of 0.56 than to Finland's 1.0.
• Procurement systems are stronger in Ireland (0.69) than in Finland (0.57) and above average (0.54).
• Regulation scores are one area where Ireland substantially underperforms the group average (see chart below).
• Finally, Ireland performs well in Tax Administration.

Focusing on just the areas of major underperformance, here are summary charts for the five categories in which Ireland's civil service falls close to or below the group averages: 

Ireland's underperformance in Digital Services, Openness and Regulation are especially worrying, as these categories should be closely tied to the presence of major ICT leaders in Ireland. This presence has commonly been cited by the Irish officials as a source of technological modernisation of the Irish economy, giving Ireland an alleged competitive edge over the more traditionally-focused economies in terms of adoption, deployment and utilisation of digital services, data analytics, data intensification of decision making etc. If these claims are genuinely descriptive of the Irish reality (a massive 'if'), there is a puzzling lack of transmission of the technological capital intensification of the Irish economy to the civil service in the country. 

For all it caveats, the data presented by the study is interesting and points to a number of areas where Irish civil service and public sector can deliver some gains in efficiency and quality of services delivery.