3/8/20: Ireland's Real Surreal Economy

In recent months, I have mentioned on a number of occasions the problem of Ireland's growing GDP-GNI* gap. The gap is a partial (key, partial) measure of the extent to which official GDP overstates true extent of economic activity in Ireland.

In general terms, GDP is an estimate of the total value of all goods and services produced within a nation in a year. The problem is, it includes capital and investment inflows into the country from abroad and is also distorted by accounting manipulations by domestic and foreign companies attributing output produced elsewhere to output produced in the country. In Ireland's case, this presents a clear-cut problem. Take two examples:

1. An aircraft leasing company from Germany registers its 'capital' - aircraft it owns - in Dublin IFSC. The value of aircraft according to the company books is EUR10 billion. Registration results in 'new investment inflow' into Ireland of EUR10 billion and all income from the leases on these aircraft is registered to Ireland, generating annual income, of, say EUR100 million. EUR 10.1 billion is added to Irish GDP in year of registration and thereafter, EUR 0.1 billion is added annually. Alas, none of these aircraft ever actually enter Ireland, not even for services. Worse, the leasing company has 1/4 employee in Ireland - a lad who flies into Dublin once a month to officially 'check mail' and 'hold meetings', plus an Irish law firm employee spending some time - say 8 hours a week - doing some paperwork for the company. Get the idea? Actual economic activity in Ireland is 12 hours/week x EUR150 per hour x usual multiplier for private expenditure = say, around EUR230,000; official GDP accounting activity is EUR100 million (in years 2 on) and EUR10.1 billion (in year 1).
2. A tech company from the U.S. registers its Intellectual Property in Ireland to the tune of EUR10 billion and attributes EUR 2 billion annually in sales resulting from the activities involving said property from around the world into Ireland. The company employs 1,000 employees in Dublin Technology Docks. Actual economic activity in Ireland is sizeable, say EUR 7 billion. Alas, registered - via GDP - activity is multiples of that. Suppose IP value grows at 10% per annum. In year 1 of IP transfer, company contribution to GDP is EUR 2 billion + EUR 10 billion + EUR 7 billion Normal Activity. In Year 2 and onwards it is EUR 2 billion + 10%*EUR 10 billion + EUR 7 billion Normal Activity. 

Now, normal GNI calculates the total income earned by a nation's employees and contractors, etc, and businesses, including investment income, regardless of where it was earned. It also covers money received from abroad such as foreign investment and economic development aid.

So GNI does NOT fully control for (1) and (2). Hence, CSO devised a GNI* measure that allows us to strip out (1) above (the EUR 10 billion original 'investment'), while leaving smaller parts of it still accounted for (employment effects, appreciation of capital stock of EUR 10 billion, etc), but largely leaves in the distorting effects of (2).  Hence, GNI* is a better measure of actual, real activity in Ireland, but by no means perfect.

Still, GNI*-GDP gap is telling us a lot about the nature and the extent of thee MNCs-led distortion of Irish economy. Take a look at the chart next, which includes my estimates for GDP-GNI* gap for 2020 based on consensus forecasts for the GDP changes in 2020 and the indicative data on flows of international trade (MNCs-dominated vs domestic sectors) implications for potential GNI* changes:

As it says in the chart, Irish GDP figures are an imaginary number that allows us to pretend that Ireland is a super-wealthy super-duper modern economy. These figures are a mirage, and an expensive one. Our contributions to international bodies, e.g. UN, OECD et al, is based on our GDP figures, and our contributions to the EU budget are, partially, based on GNI figures. None are based on GNI*. For the purpose of 'paying our way' in global institutional frameworks, we pretend to be a Rich Auntie, the one with a Gucci purse and no pension. For the purpose of balancing our own books at home, we are, well, whatever it is that we are, given GNI*. 

This distortion is also hugely material in terms of our internal policies structuring. We use international benchmarks to compare ourselves to other countries in terms of spending on public goods and services, public investment, private entrepreneurship etc. Vast majority of these metrics use GDP as a base, not GNI*. If we spend, say EUR10K per capita on a said service, we are spending 14% of our GDP per capita on the service, but 23% of our GNI*. If, say, Finland spends 20% of its GDP per capita on the same service, we 'under-spend' compared to the Finns on the GDP basis, but 'over-spend' based on GNI* basis.

There is a serious cost to us pretending to be a richer, more developed, more advanced as an economy, than we really are. This cost involves not only higher contributions to international institutions, but also potential waste and inefficiencies in our own domestic policies analysis. Gucci purse and no pension go hand-in-hand, you know... 

1/8/20: Ireland: Agricultural Subsidies and Production

CSO published final data for 2019 'value added' in agriculture. As always, a fun read from the perspective of which constituency in a 'market economy' loves Big State. You've guessed, it Agri business. And no, I can't claim it is farmers, for they get the minority stake in the largesses that are European Common Agricultural Policy subsidies.

Here is a chart:

In 2019, Irish agricultural sector gross output at producer prices was EUR 7,960.9 million. Based on estimated GNI*, this means that the entire sector gross output (not net) amounted to just around 3.73% of the domestic economy in Ireland, just around the average for the decade of the 2000-2009 (3.95%) and below the average for 2010-2018 (4.60%).  In annual terms, gross output was down 3.1 percent y/y and was the lowest since the end of 2016. Subsidies net of taxes paid amounted to EUR 1,837.1 million in 2019, the highest level since 2008 and up 2.63 percent y/y. 

Overall, subsidies in 2019 amounted to 64 percent of the entire Gross Value Added in the sector, and 96 percent of the Net Value Added. CSO reports data for 'entrepreneurial income' in agriculture, which, really, is income accruing to owners of the production units. These include farmers, but also large corporates and coops. Subsidies amounted to 69 percent of the total Entrepreneurial Income in 2019.

Subsidies fell in importance when it comes to the Net Value Added in the sector year on year from 103% in 2018 to 96% in 2019, but remained the same in terms of their importance to the 'Entrepreneurial Income' in the sector.

By decade: subsidies amounted to 39% of the 'Entrepreneurial Income' in the sector in the 1990s on average, rising to 99% in the decade of 2000s, primarily due to a massive jump over 2005-2009, before falling back to 78% for the decade through 2019. Excluding net subsidies, 'Entrepreneurial Income' in agriculture averaged EUR 1,127.6 million per annum in the 1990s, and excluding the Great Recession period, EUR 259.8 million in the 2000s. Again, excluding the period of the Great Recession, the same annual average was EUR 666.12 million in 2010-2019, with 2019 annual figure of EUR 829.6 million. 

To say there is little growth in economic activity in Irish agricultural sector, in terms of sector value added is to make an understatement. Comparing 1995-1999 average to 2017-2019 average, Irish GNI* is now 3.1 times higher than it was in the 1990s. Meanwhile, agricultural output at basic prices rose by just 46 percent, Agricultural sector Gross Value Added is up only 1 percent, Net Value Added is down 15 percent, Entrepreneurial Income is up 45.7 percent, while subsidies (net of taxes) are up 73 percent.

29/07/20: Federal Deficit in COVID19 Era

Roger, we need a new scale for the chart.

Latest data for U.S. Federal deficit through June 2020 is shocking. Here is a visual:

June deficit was a whooping $864.07 billion, the largest on record. This bring Trump 1 term cumulative deficits to a staggering $5.105 trillion, far in excess to $3.52 trillion average Obama term deficit.

Some historical comparatives:

The sheer scale of fiscal spending is frightening! No question, this is an emergency situation, but do observe that since 1980 through today, the U.S. has seen not a single decade of balanced fiscal policies. And within the next two months, the U.S. Federal deficit for 2020 alone will be in excess of the combined deficits accumulated in two decades between 1980 and 1999. 

29/7/20: COVID19 Update: Russia and BRIICS

An infrequent update on Russia COVID19 stats:

Daily Cases and Deaths:

Russia is failing to arrest the new cases curve and the deaths curve, with both series running at elevated levels through July. Thee decline in new cases around the end of June was also associated with a drop in daily deaths. Since the opening up of the restrictions in advance of the July referendum vote, Russian COVID19 cases and deaths have shown disruption in the prior positive trends. Last 7-days average new cases are running at 5,741, which is statistically indistinguishable from the prior 7-days average of 6,197. Similarly, current 7-days average of 132 is materially indistinguishable from the prior 7-days average of 138.

I noted in late June that Russia is rushing into relaxation of restrictions and this is a mis-guided policy decision that seem to have nothing to do with the pandemic dynamics. It appears that my analysis was correct.

Mortality Rates: 

Russian mortality rates are rising, and are now firmly close to the average of the BRIICS economies:

Amongst all countries with more than 25,000 cases (58 countries & EU27), currently, Russia ranks

• 22nd highest by the number of COVID19 cases per capita
• 32nd highest by the number of deaths per capita of population
• 44th highest by the mortality rate (deaths per 1,000 COVID19 cases)
• Cumulatively, across all three categories of metrics, Russia scores within the 95% confidence interval for the mean score for the group of 58 countries and the EU27.

29/7/20: COVID19 Update: US vs EU27

Updating my charts for COVID19 cases and deaths for the U.S. and EU27:

New Cases:

U.S. continues to show the way on how NOT to do pandemic response. However, in recent days, there has been a re-acceleration in the new cases arrivals in the EU27 - a trailing outrun of the fairly aggressive restrictions relaxation measures across Europe, and re-opening of some holidays travel. This is something to watch in weeks to come.

Daily Deaths:

No resurgence in new deaths in the EU27 so far, but this is consistent with the lags to new cases and to be expected, given some uplift in new cases arrivals.

The U.S. is clearly experiencing resurgence in deaths, as expected, with significantly longer lags between new cases and deaths than in the earlier phase of the pandemic.

Comparatives between the EU27 and the U.S.

Total deaths in the U.S. continue to pull away from the total number of deaths in the EU27 with the current gap at over 14,000.

The gap in total number of deaths and in deaths per capita of population between the U.S. and the EU27 continues to grow.

While the pandemic continues to accelerate in the U.S., it is the slight uptick in the EU27 new cases that is more concerning, given our general fatigue with pointing out the extent of the public health disaster that the U.S. represents.

But for those inclined to watch the complete meltdown of the American public health system (and the ethical monstrosity of the U.S. public indifference to the risks faced by the others), here is a summary table for the largest advanced economies (Ireland is included for different comparatives) COVID19 stats to-date:

29/7/20: COVID19 Update: Worldwide Cases and Deaths

Updating main charts for global COVID19 cases and deaths through today's data:

Global New Cases:

We are continuing to hit all-time highs in new cases globally as the pandemic shows no signs of moderation.

• Week-to-date, daily case numbers ranked within top 10 in six days, including four all-time highs in the last 7 days. 
• Historical mean of daily new cases is currently at 82,601. Last seven days average daily new cases count is 255,262. This is more than 2.2 standard deviations higher than the historical average. 30-days running average is 217,092 which is more than 0.5 standard deviations below the 7-days average.
• Last local max was observed in early April 2020. Since then, the pandemic trend has been persistently upward.

Global Daily Deaths:

The trend in daily deaths counts is re-accelerating and starting to approach past peak:

• In the last 10 days, deaths increased 14.1% over the previous 10 days period, reversing the negative rates of growth between June 26 and July 9.
• Historical mean is 3,269 deaths per day, with the last 30-days average at 5,214 and the last 7 days average at 6,258. Current 7-days average is 0.75 standard deviations higher than the historical average.
• The rate of new deaths arrivals has been slower than the rate of growth in new cases until 20/07/2020. Since then, the rate of new deaths growth is exceeding the rate of new cases arrivals. Both are positive (chart next):

As noted consistently in my posts, deaths are lagged to cases, but in addition, changes in geography of new cases (with an added change in methodology for attributing deaths in a range of developing countries, compared to the EU methodology) drive lower death counts in recent months. In addition, lags between new cases are being extended, while deaths and death rates per confirmed case are also being held lower by younger demographics of new cases in the U.S. and around the world.

All of this contributed to the growing sense of complacency amongst global policy leaders during the recent period of moderate deaths arrivals - from the late April through mid-July. It now appears that such complacency was premature, as death rates are now rising once again.

Summary tables of the largest pandemic cases by country (countries with > 25,000 cases):

25/720: Updated: America's Scariest Charts: Unemployment Claims

Updating my Scariest Charts for the latest data, through thee week of July 18, 2020:

First, a summary table and chart for changes in the Initial Unemployment Claims:

Next: Continued Unemployment Claims through the week of July 11, 2020:

Key takeaways this week:

Continued unemployment claims changes:

• Latest count at 16,197,000, down from 17,304,000 a week ago - a decline driven by both, re-gained jobs and exits from unemployment benefits;
• Latest week w/w decline is faster than in any of the prior weeks of the current recession;
• Latest counts are 14,495,000 above the levels recorded in the first week of the current recession and are 14,548,000 above pre-recession trough;
• At last week's rate of decline, we have 13 weeks of unemployment claims to work through before recovering to pre-recession levels; based on the last 4 weeks average - 19 weeks.

New unemployment claims changes:

• Latest new unemployment claims filed figures are the lowest in the current recession cycle, but materially close to those recorded in the week of July 4, 2020;
• Nonetheless, we are now in 18 weeks of continued new unemployment claims filings in excess of 1 million per week.

Longer term view:

• Discontinuation of emergency $600/week unemployment support payment or curtailing of the benefit is likely to push both of the above series down in the short run in mid- to late-August, with a knock-on longer term effect of increasing longer term unemployment claims in September and onward. 

25/7/20: Markets and COVID19: Unwinding Restrictions

My column for Manning Financial on the direction of the markets in the period of COVID19 restrictions unwinding: https://cfc.ie/2020/07/10/where-to-mr-market/.

24/7/20: Bonds v Stocks: Of Yields, Investors and Large Predators

Corporates are reeling from the COVID19 pandemic impacts, yet stocks are severely overpriced by all possible corporate finance metrics. Until, that is, one looks at bonds.

Over the 3 months through June 2020, average 10 year U.S. Treasury yield has been 0.69 percent. Over the same period, average S&P500 dividend yield was 2.02 percent. The gap between the two is 1.33 percentage points, which (with exception of March-May average gap of 1.42 points) is the highest in history of the series (from 1962 on).

Given that today's Treasuries are carrying higher liquidity risk (declining demand outside the official / Fed demand channel) and higher roll-over risks (opportunity cost of buying Ts today compared to the future), the real (relative) bubble in financial markets todays is in fixed income. Of course, in absolute returns terms, long-term investment in either bonds or equities today is equivalent to a choice of being maimed by a T-Rex or being mangled by a grizzly. Take your pick.

23/7/20: Globalization and Populism: A Recent Study

I recently came across a fascinating paper by Dani Rodrik, an economist always worth reading. The paper, titled "Why Does Globalization Fuel Populism? Economics, Culture, and the Rise of Right-wing Populism" (NBER Working Paper No. 27526, July 2020) argues that "there is compelling evidence that globalization shocks, often working through culture and identity, have played an important role in driving up support for populist movements, particularly of the right-wing kind."

Rodrik carries out "an empirical analysis of the 2016 presidential election in the U.S. to show globalization-related attitudinal variables were important correlates of the switch to Trump."

• "Trump voters were more likely to be white, older, and college-educated. 
• "...they were significantly more hostile to racial equality and perceived themselves to be of higher social class. 
• "The estimated coefficient on racial attitudes is particularly large: a one-point increase in the index of racial hostility – which theoretically ranges from 1 to 5 – is associated with a 0.28 percentage point increase in the probability of voting for Trump (Table below, column 1). 
• "By contrast, economic insecurity does not seem to be associated with a propensity to vote for Trump.

"The finding that Trump voters thought of themselves as belonging to upper social classes ... largely reflects the role played by party identification in shaping voting preferences. When we control for Republican party identification (cols. 2 and 6), the estimated coefficient for social class drops sharply and ceases to be statistically significant."

"Note, however, that racial hostility remains significant, although its estimated coefficient becomes smaller (cols. 2 and 6)."

The other columns in the table above examine attitudes towards globalization (columns 2-5).

• "All three of our measures enter statistically significantly: 
• "Trump voters disliked trade agreements and immigration; 
• "They were also against bank regulation (presumably in line with the general anti-regulation views of (cols. 2-5) the Republican party). 
• "These indictors remain significant in the kitchen-sink version where they are all entered together (col. 6)."

"In none of these regressions does economic insecurity (financial worries) enter significantly. This
changes when we move from Trump voters in general to switchers from Obama to Trump (cols. 7-12). ... financial worries now becomes statistically significant, and switchers do not identify with the upper social classes. "

"Switchers are similar to Trump voters insofar as they too dislike trade agreements and immigration
(cols. 9-11). But they are dissimilar in that they view regulation of banks favorably. Hence switchers
appear to be against all aspects of globalization – trade, immigration, finance. the regression."


Rodrik postulates "a conceptual framework to clarify the various channels through which globalization can stimulate populism" on both "the demand and supply sides of politics". He also lists "the different causal pathways that link globalization shocks to political outcomes". 

Rodrik identifies "four mechanisms in particular, two each on the demand and supply sides:

• (a) a direct effect from economic dislocation to demands for anti-elite, redistributive policies; 
• (b) an indirect demand-side effect, through the amplification of cultural and identity divisions; 
• (c) a supply-side effect through political candidates adopting more populist platforms in response to economic shocks; and 
• (d) another supply-side effect through political candidates adopting platforms that deliberately inflame cultural and identity tensions in order to shift voters’ attention away from economic issues."

The full paper, accessible at https://www.nber.org/papers/w27526.pdf is choke full of other insights and is absolutely worth reading.

23/7/20: Irish property and COVID19

My column for The Currency is covering prospects for Irish property markets: https://www.thecurrency.news/articles/20965/.

22/7/20: COVID19 Update: USA vs EU27

U.S. continues to race ahead of the EU27 in the total counts of COVID19 cases and deaths:

U.S. is now significantly divergent to the EU27 in death rates per capita, both in terms of the actual rates and the rates of growth:

Notably, the EU appears to have virtually arrested the growth rate in deaths per capita, while the U.S. is experiencing relatively persistent growth in the deaths per capita. However, perhaps the most damning evidence of the systemic U.S. failure to deal with the pandemic is the simple fact that the U.S. excess total deaths (even without adjusting for timing lags and population size differences) continue to race ahead of the EU27.

Daily new cases and daily deaths counts confirm the above conclusions:

Meanwhile, some recent COVID19 newsflow: