29/9/19: Divided ECB

Divided they stand...

Source: https://www.bloomberg.com/news/articles/2019-09-29/lagarde-inherits-ecb-tinged-by-bitterness-of-draghi-stimulus

The ECB is more divided than ever on the 'new' direction of QE policies announced earlier this month, as its severely restricted 'political mandate' comes hard against the reality of VUCA environment the euro area is facing, with:

1.  Reduced forward growth forecasts (net positive uncertainty factor for QE)
2. Anaemic inflation expectations (net positive risk factor for QE), but reduced expectations as to the effectiveness of the QE measures in their ability to lift these expectations (net negative uncertainty factor)
3. Low unemployment and long duration of the current recovery period (net negative uncertainty factor for QE)
4. Relative strength of the euro, as per chart below, going into QE (net positive risk factor for QE)
5. Related to (5), deteriorating global growth and trade outlooks, with the euro area being a beneficiary of the Trump Trade Wars so far (ambiguous support for QE)
6. Expectations concerning the Fed, Bank of Japan, Bank of England etc policy directions (a complexity factor in favour of QE), and
7. Expectations concerning the potential impact of Brexit on euro area economy (another complexity factor supporting QE).

Here is a chart showing exchange rate evolution for the euro area, and key QE programs timings (higher values denote stronger euro):

Meanwhile, for the measures of monetary policy effectiveness (lack thereof) see upcoming analysis of the forward forecasts for euro area growth on this blog in relation to Eurocoin data.

28/9/19: Evidence of Systemic Risk from Major Cybersecurity Breaches

In our post for Columbia Law School's CLS Blue Sky Blog, myself and Shaen Corbet explain in non-technical terms our ground-breaking findings on systemic nature of cybersecurity risks in financial markets:

• LexBlog link: https://www.lexblog.com/2019/09/26/evidence-of-systemic-risk-from-major-cybersecurity-breaches/
• CLS link: http://clsbluesky.law.columbia.edu/2019/09/27/evidence-of-systemic-risk-from-major-cybersecurity-breaches/
• Original working paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033950
• Published paper: https://www.sciencedirect.com/science/article/pii/S1057521919300274.

Our study is the first in the literature showing evidence of systemic contagion from cyber attacks on one company to other companies and stock exchanges.

Based on these findings, we have a chapter forthcoming in an academic volume on the future of regulation, proposing a novel mechanism for regulatory detection, monitoring and enforcement of cybersecurity risks. We will post this chapter when it goes to print, so stay tuned.

23/9/19: Corporate Finance in a Chart

The glut of debt and the unbearable lightness of corporate leverage:

20/9/19: New paper: Systematic risk contagion from cyber events

Our new paper, "What the hack: Systematic risk contagion from cyber events" is now available at International Review of Financial Analysis in pre-print version here: https://www.sciencedirect.com/science/article/pii/S1057521919300274.

Highlights include:

• We examine the impact of cybercrime and hacking events on equity market volatility across publicly traded corporations.
• The volatility generated due to cybercrime events is shown to be dependent on the number of clients exposed.
• Significantly large volatility effects are presented for companies who find themselves exposed to hacking events.
• Corporations with large data breaches are punished substantially in the form of stock market volatility and significantly reduced abnormal stock returns.
• Companies with lower levels of market capitalisation are found to be most susceptible to share price reductions.
• Minor data breaches appear to be relatively unpunished by the stock market.

20/9/19: New paper on Cryptos pricing

Our paper "Fractal dynamics and wavelet analysis: Deep volatility and return properties of Bitcoin, Ethereum and Ripple" is now available in The Quarterly Review of Economics and Finance - early stage print version - here https://www.sciencedirect.com/science/article/abs/pii/S1062976919300730.

9/9/19: Ireland and OECD: Income Tax Rates Comparatives

Based on the OECD data for 2018, Ireland is the second worst OECD country to earn income from work at the upper margin of earnings (167% of the average annual gross wage earnings of adult, full-time manual and non manual workers in the industry), compared to lower earners (67% of the average wage earnings). And although this story is not new (we were in the same position back in 2014), the gap in effective marginal taxes charged on the higher earners relative to lower earners is getting worse.

Here is the chart for 2014 data:

And a comparative 2018 data:

Back in 2014, nine of the OECD countries had zero or negative upper marginal tax rate penalty on higher wage earners. In 2018, the number rose to ten. In 2014, seven countries, including Ireland, had a tax rate penalty on higher wage earners in excess of 10 percentage points. In 2018, that number rose to eight. Ireland ranked second in terms of tax penalty on higher labour income tax burden relative to lower income in both 2014 and 2018. In 2014, our relative penalty stood at 18.961 percentage points, 2.753 percentage points below Sweden. In 2018, our relative penalty was 20.974 percent, 3.04 percentage points below Sweden. The OECD average penalty was 5.31 percentage points in 2018, down from 5.57 percentage points in 2014.

It is worth noting that in Ireland, voluntary spending on healthcare (indirect tax) is roughly 50 percent higher than it is in Sweden (https://data.oecd.org/healthres/health-spending.htm). Ireland spends less than half what Sweden does on early childhood education per pupil, and about 60 percent of what Sweden spends on tertiary education per pupil (https://data.oecd.org/eduresource/education-spending.htm). In other words, higher taxes on higher earners in Sweden seem to be purchasing substantially more services for taxpayers than they do in Ireland. Sweden also has older demographics and a somewhat functional military. Ireland has younger (lower health spending) demographics and not much in terms of a military expenditure. Of course, Swedish parliamentarians earned EUR 6,269 per month salary in 2918, when their Irish counterparts were paid EUR 7,878, but that hardly explains the gaps in spending and taxation systems.

So where all this tax penalty or surcharge on the higher earners levied on Irish residents is being spent? Clearly not on better financed education or health services, and not on military.

Another interesting way of looking at the figures is by comparing the actual tax rates. For those on 67% of average labour income, Ireland's rate of taxation in 2014 was 37.7 percent or 3.92 percentage points below the OECD average,. This fell in Ireland to 35.72 percent in 2018, while the gap with OECD average rose to 6.29 percentage points. If you consider OECD average to be a realistic metric for tax burden on lower earners, Irish lower earners were more substantially undertaxed in 2018 than they were in 2014. For higher earners, disregarding the fact that Irish upper marginal tax rates kick in at an absurdly low level, for wage earners of 167% of the average wage, Irish tax rates were 56.66% and 56.70 percent in 2014 and 2018, respectively. This means that in 2014, Irish higher earners tax rates were 9.34 percentage points above the OECD average and in 2018 these were 9.38 percentage points above the OECD average. In both cases, higher earners were taxed more severely in Ireland when compared to the OECD average. The matters are similar if we were to run a comparative between Ireland and OECD median tax rates, so there is no point of arguing that OECD data includes 'outlier' countries.

On a personal note, I do not think comparatives between Sweden and Ireland paint the latter in any better terms than the former. However, if one were to look at the OECD figures as some objective measures of tax burdens, Irish lower and higher earners (labour income) are overtaxed by the OECD 'norms' (average and median). When one takes into the account a relatively scarce supply of services to the taxpayers as well as a relatively higher out-of-pocket costs of the services supplied, things appear to be even worse. This is not a value judgement. It simply down to the plain numbers.

6/9/19: Small Cap Stocks EPS: racing to the bottom of the MAGA barrel

Everything is going just plain swimmingly in the Land of MAGA, where American companies are now expected to do their duty by President Trump's agenda for investment in the U.S. because, you know, this:

As 'share' part of the EPS ratio has shrunk (thanks to buybacks and M&As tsunami of recent vintage), earnings per share should have gone up... and up... and up. Instead, small cap stocks' EPS has collapsed. To the lowest levels since the 2007-2008 crisis.

But never mind, more money printing by the Fed will surely cure it all.

Source for the above chart: @soberlook and WSJ.

2/9/19: Trump's Tariffs of War...

Two charts summarizing the effects of the ongoing Trump Trade War on U.S. tariffs (overall, first chart) and on bilateral U.S.-China trade (second chart)

Source: @Soberlook

Source: https://www.piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide

In the mean time, China's tariffs vis a vis the rest of the world are falling:

Source: ibid.

Someone is winning in this war (maybe Europeans https://trueeconomics.blogspot.com/2019/08/15819-winning-trade-wars-round-3.html or others https://trueeconomics.blogspot.com/2019/08/19819-import-zamescheniye-replacing.html) but it ain't the U.S.

2/9/19: One view of Austerity

A picture is worth a thousand words, some say. So here is a picture of austerity we've had (allegedly) in recent decades:

Source: @Soberlook 

The things are savage: debt is up from ca 70% to over 110%. Cost of debt carry is down from just under 4% to under 1.75%. So where are all those fabled public investments? And who has benefited from this massive increase in debt? Virtually all - financialized (a nice euphemism for being absorbed into financial assets valuations). Austerity, after all, is just the old-fashioned transfer of resources from the broader economy to the select few, made more palatable by the superficially low cost of borrowing.

1/9/19: U.S. Non-Financial Corporate Sector: Stagnation in Net Value Added

Value added by the U.S. non-financial corporates has been languishing well below the cyclical peak for some months now:

In fact, since Q3 2016, net value added by the non-financial corporations has been running below long run trend, and has been basically flat. This suggests substantial pressures build up in the economy, consistent with all previous early indicators of a recession. Interestingly, there is zero evidence of any improvement in the non-financial economy in the U.S. since 2016 election.

1/9/19: Priming the Bubble Pump: Extreme Credit Accommodation in the U.S.

Using Chicago Fed National Financial Conditions Credit Subindex (weekly, not seasonally adjusted data), I have plotted credit conditions measurements for expansionary cycles from 1971 through late August 2019. Positive values of the index indicate tightening of credit conditions in the economy, while negative values denote loosening of credit conditions.

Since the start of the 1982 expansionary cycle, every consecutive cycle was associated with sustained, long term loosening of credit conditions, which means the Fed and the regulatory authorities have effectively pumped up credit in the economy during economic expansions - a mark of a pro-cyclical approach to financial policies. This trend became extreme in the last three expansionary cycles, including the current one. In simple terms, credit conditions from the end of the 1990s recession, through today, have been exceptionally accommodating. Not surprisingly, all three expansionary cycles in question have been associated with massive increases in leverage and financialization of the economy, as well as resulting asset bubbles (dot.com bubble in the 1990s, property bubble in the 2000s, and financial assets bubbles in the 2010s).

The current cycle, however, takes this broader trend toward pro-cyclical financial policies to a new level in terms of the duration of accommodation and the fact that it lacks any significant indication of moderation.

26/8/19: ifo Survey Shows Increasing Business Concerns in Germany

Ifo Institute's Business Climate indicator for Germany is falling off the cliff:

In simple terms, current business situation assessment has now fallen to its lowest reading since March 2015, forward business expectations are the lowest since June 2009, and overall Business Climate index is at its lowest reading since November 2012.

August 2019 marks fifth consecutive month of decline in the overall Business Climate index, current Business Situation index, and Business Expectations index.

Overall, the indicator is still pointing to a downturn in growth, as opposed to a recession:

The Dispersion Index - a measure of the degree of businesses-perceived uncertainty about the future direction of the economy - has now risen to the levels last seen in April 2010.