30/10/15: Why Economists Failed & What's Up With Irish Banking Reforms?..

Earlier this week I gave a small presentation to a group of academics and researchers from Holland on two topics:

1. Why majority of economists did not foresee the Global Financial Crisis? and
2. What is the state of play with Irish banking sector reforms?

Here are my slides from the talk:

30/10/15: 'Internet Natives': Power of Value Creation + Power of Value Destruction

A very interesting Credit Suisse survey of some 1,000 people of the tail end of the millennial generation (age 16-25) across the U.S., Brazil, Singapore and Switzerland. Some surprising insights.

Take a look at the following summary:

The results are seriously strange. Around 48% of all respondents use internet for payments transactions, but only 19% on average use it for obtaining financial advice. In other words, convenience drives transactions use, but not analytics demand.

Meanwhile, on average just 20% use internet for earning money or working. Which makes you wonder, what jobs (if any) do the respondents hold if only 1 in 5 use internet to execute it? And, furthermore, look at the percentages of respondents who use internet for job searches compared to earning money or working. Once again, something fishy.

Internet use for political and social engagement heavily exceeds personal relations. And this is true for all countries surveyed. Which simply does not bear any relationship to young generation voting participation in the real world, but does match their responses to whether or not they use internet for voting.


While responses across previous set of questions suggest that internet-based social (political / civic) engagements are more prevalent amongst the young respondents than personal engagements, there is the opposite view of internet as bearing personal benefits as opposed to social benefits.

This is especially true in the U.S. and Switzerland, where the gap between those who think internet is a positive personal platform as opposed to social platform is 12-13 percentage points.

Confusing? May be not. The ‘web naturals’ that we all are, we are simultaneously experiencing two aspect of internet-enabled life:

• Too much information and clutter; and
• Significant value to the power of engagement.

What this means to me is that social and interactive platforms have to stop inventing new channels to push through to us - information users - commercialised crap and start letting us take charge of content once again. To do this, the successful platforms of the future will need the following:
1) Own brand capital that is clean from being pure advertisement pushers;
2) More creative and empowering deployment of user-generated content; and
3) Ability to re-focus their business strategies on margin delivery.

Otherwise, they will end up cannibalising themselves and destroying our - users’ - value.

30/10/15: Eurocoin: Not so Sunny on the Growth Horizon...

Eurocoin - a leading growth indicator for Euro area economy published by CEPR and Banca d'Italia - posted second consecutive monthly decline in October, falling to 0.36 from 0.39 in September and down from the recent peak of 0.43 registered in August. This is the weakest reading for the indicator in 6 months.

For what it is worth, the ECB remains stuck in a proverbial monetary corner:

While in historical terms, growth signal of 0.36% (and annualised average over the last 12 months of 1.58%) is above long term average (annualised average growth over the last 15 years of 1.03% or over the last 5 years of 0.57%), growth remains anaemic by all possible comparatives beyond the Euro area.

You can see the less than pleasant specifics on eurocoin drivers for October here: http://eurocoin.cepr.org/index.php?q=node/243. In the nutshell, things are static across all major sectors, with households' optimism is largely flattening; and if we ignore the European Commission survey signals, things are poor for the industrial sector.

30/10/15: Repaired Irish Banking: Betting Your House on Corporate Deleveraging

I have not been tracking more recent changes in Irish banking sector aggregate balance sheets for quite some time now. However, preparing for a brief presentation on Irish banking crisis earlier this week, I had to update some of my charts on the topic. Here is some catching up on these.

Take a look at Central Bank’s data on credit and deposits in Irish banking system. These figures incorporate declines in both due to sales of loan books by Irish banks, so step-changes down on credit lines reflect primarily these considerations. As superficial as the numbers become (in this case, the aggregate numbers no longer fully reflect the true quantum of debt held against Irish households and companies), there are some positive trends in the figures.

1. Over the 3 months through August 2015 Irish households have reduced the level of outstanding debt by some 7.1% compared to the same 3mo period in 2014. Total level of household debt now stands at the average of December 2004-January 2005. This is a massive reduction in debt burden, achieved by a combination of repayments, defaults and sales of loans to non-banking entities (e.g. vulture funds). However, loans for house purchases have declined by a more moderate 4.5% over 3mo through August 2015 compared to the same period in 2014. This brings current pile of house mortgages outstanding to the average level of February-March 2005. Which is impressive, but, once again factoring in the fact that quite a bit of these reductions was down to defaults and sales of loans, the overall organic deleveraging has been much slower than the chart above indicates. Over the last 3 months (though August 2015), total volume of household debt declined, driven down by deleveraging in mortgages debt and ‘other debt’ against a modest increase in consumer credit. It is interesting to note that over the last 12 months (based on 3mo average), volume of ‘other loans’ has dropped by a massive 38%, suggesting that this category of credit is now also subject to superficial debt reductions, for example originating from insolvencies and bankruptcies. For the record, there are at least three highly questionable reductions in recorded household debt on record: November-December 2010 drop of EUR7.5 billion, September-October 2011 drop of EUR17.2 billion, and May-June 2014 decline of EUR4.1 billion. This suggests that the official accounts of household deleveraging may be overstating actual degree of deleveraging by upwards of EUR28 billion which could bring our debt levels back to September-October 2011 and signify little material reduction in total debt over recent years.
2. Over the 3 months through August 2015, loans outstanding to the Non-financial corporations in Ireland fell 19.4% compared to the same period average in 2014. Most of this decline was driven by the 19.5% drop in loans, with debt securities outstanding declining by only 5.7%. This marks 12th consecutive month of m/m declines in credit outstanding to the corporate sector. Current level of corporate credit brings us back to the levels last seen in 3Q 2003. Just as with households there are at least 3 episodes of significant declines in credit volumes since the start of the Global Financial Crisis, although the path for corporate loans has been more smooth overall than for household debt. This suggests that banks have prioritised resolving corporate arrears over household arrears, as consistent with 2011 PCAR strategy that also prioritised corporate loans problems. 

Total credit outstanding to the real economy (excluding Government and financial intermediaries) has fallen 12% y/y in the three months through August 2015. The official register now stands at EUR145.3 billion, a level comparable to the average for June-July 2004.The truly miraculous thing is that, given these levels of deleveraging, there is no indication of severe demand pressures or significant willingness to supply new credit.

As shown in the chart below, Irish banking sector overall has been enjoying steadily improving loans to deposits ratios.

Over the July-August, household loans to deposit ratios dropped to 99% - dipping below 100% for the first time since the Central Bank records began in January 2003. Loans to deposit ratio for non-financial corporates declined to 120% also the lowest on record. However, this indicator is of doubtful value to assessing the overall health of the financial sector in Ireland. To see this, consider the following two facts: household loans/deposit ratios have been below pre-crisis lows since October 2011, while corporate loans/deposits ratios have been below pre-crisis lows since July 2014. Reaching these objectives took some creative accounting (as noted above in relation to loan book sales), but reaching them also delivered practically no impetus for new credit creation. In other words, deleveraging to-date has had no apparent significant effect on banks willingness to lend or companies and households willingness to borrow.

By standards set in PCAR 2011, Irish banks have been largely ‘repaired’ some months ago. By standards set in PCAR 2011, Irish banks are yet to start their ‘participation in the economy’.

Meanwhile, take a look at the last chart:

As the above clearly shows, Irish banking system is nothing, but a glorified Credit Union, with credit outstanding ratio for household relative to corporates at a whooping 177%. This, again, highlights the simple fact that during this crisis, banks prioritised deleveraging of corporate debt and lagged in deleveraging household debt. Irish economic debt burden, thus, has shifted decisively against households.

Someone (you and me - aka, households) will have to pay for the loans write downs granted to companies over the years. And the banks are betting the house (our houses) on us being able to shoulder that burden. 

30/10/15: None of Them 'Harmful' Tax Inversions, Dupes...

Remember how in recent months, on foot of an uproar in the U.S. and across the EU, Irish Government has told us that there will be no ‘harmful’ corporate inversions? In other words, there will be no redomiciling of the U.S. companies into Ireland purely for tax purposes?

Well, the mother of all inversions is currently underway, and it is brand new. Behold, Allergan (Irish-based previously inverted U.S. company making Botox) is in talks with Pfizer (U.S.-based global pharma giant) on a merger that will lead to, well, in the words of BusinessInsider: “In this case it would have Pfizer moving its tax domicile - not necessarily its management headquarters - to Ireland, where Allergan is based.”

Read more on this here: http://uk.businessinsider.com/pfizer-allergan-tax-inversion-2015-10?r=US&IR=T

So about none of that business with ‘harmful’ inversions thus?..  staying all OECD-compliant...

28/10/15: Russian Economy Update: Consumption and Debt

Updating Russian stats: September consumption and deleveraging: bigger clouds, brighter silver lining. 

In basic terms, as reported by BOFIT, per Rosstat, Russian seasonally-adjusted retail sales (by volume) fell more than 10% y/y in September, with non-food sales driving the figure deeper into the red. On the ‘upside’, services sales to households fell less than overall retail sales. This accelerates the rate of decline in household consumption expenditure - over 1H 2015, expenditure fell just under 9% y/y. Small silver lining to this cloud is that household debt continued to decline as Russian households withdrew from the credit markets and focused on increased savings (most likely precautionary savings).

Russian households are not the only ones that are saving. Overall external debt of the Russian Federation fell, again, in 3Q 2015, with preliminary data from the Central Bank of Russia figures putting total foreign debt at USD522bn as of end-September, down just over USD30bn compared to 2Q 2015. Per official estimates, ca 50 percent of the overall reduction q/q in external debt came from repayment of credit due, while the other 50 percent was down to devaluation of the ruble (ca 20 percent of Russian external debt was issued in Rubles).

Overall, 3Q 2015 saw some USD40 billion of external debt maturing, which means that over 1/4 of that debt was rolled over by the non-bank corporations. Per CBR estimates, ca 40% of the external debt owed by the Russian non-bank corporations relates to intragroup loans - basically debt owed across subsidiaries of the same percent entity. And over recent quarters, this type of debt has been increasing as the proportion of total debt, most likely reflecting two sub-trends:
1) increasing refinancing of inter-group loans using intra-group funds; and
2) increasing conversion of intra-group investments/equity into intragroup debt (and/or some conversion of FDI equity into intra-group debt).

Over the next 12 months (from the start of 4Q 2015), Russian foreign debt maturity profile covers USD87 billion in maturing obligations against country currency reserves of USD370 billion-odd. As noted by BOFIT, “A common rule-of-thumb suggests that a country’s reserves need to be sufficient to cover at least 100% of its short-term foreign debt to avoid liquidity problems.” Russia’s current cover is closer to 430%. And that is absent further ruble devaluations.

A chart via BOFIT:

28/10/15: Flatter Growth Trend = Opportunities in Fundamentals

My outlook for investment markets - interview at IG Summit https://www.ig.com/uk/live-video?bctid=4581832859001&bclid=3671160850001.

28/10/15: O regresso do tigre celta

My article on Irish economic recovery for Portugal's Expresso (October 23, 2015, page 30):

26/10/15: About that Repaired Liquidity

Over recent months, I warned about the weakening liquidity in the global markets in my column for the Village Magazine, for the Manning Financial newsletter. And I covered the topic in my analysis of both the IMF WEO/FSR updates for October.

The problem continues to persist despite monetary policy remaining accommodative.

Per Credit Suisse report (emphasis is mine): “While bid-ask spreads for sovereign and corporate bonds in the U.S. and Europe have narrowed significantly from the wide gulfs of 2008, they are still well above their pre-crisis lows. Sovereign bond markets have also become shallower since the U.S. Federal Reserve began tapering its asset purchases in 2014 – and even markets that look deep based on trading volume can bottom out fast during bouts of volatility."

Credit Suisse points to October 15, 2014, when "U.S. 10-year Treasury bond yields fell 16 basis points and then recovered within 12 minutes, fluctuating 37 basis points over the course of a single trading day" - a rare event that happened only three times since 1998.  "Even for U.S. large-cap stocks, where bid-ask spreads are at their lowest levels since 2007, trades are increasingly clustered in the most liquid hours of the day. One in six S&P 500 stock transactions occurred in the last hour of trading in 2014, compared to one in 10 in 2007." In other words, world's most liquid market is now experiencing trades clustering seemingly linked to liquidity timing. "It also seems to be getting more difficult – and costly – to execute large equity orders. Block trades of more than 1,000 shares comprise just 10 percent of all transactions compared to one-third a decade ago. Bid-ask spreads for U.S. small-cap stocks have also widened relative to large caps.”

In simple terms, all of this indicates that the old regime of ever-expanding liquidity conditions in the markets that prevailed over two decades preceding the Global Financial Crisis are no longer with us.

Credit Suisse attributes pre-crisis markets deepening to three factors:

1. financial sector deregulation;
2. technological advances in trading; and
3. highly expansionary monetary policies

Per Credit Suisse: “…all three trends are reversing course. Dealer inventories fell dramatically after regulators raised banks’ capital reserve requirements and banned proprietary trading in the wake of the crisis. Total trading assets at the top 10 U.S. and European banks have fallen 17 percent since their 2010 peak. On the technology front, Credit Suisse says that “the marginal benefits of innovation in trading are receding” as high-frequency trading speeds push the boundaries of physics. And while zero interest rate policies in the developed world have supported risky assets since 2008, Credit Suisse believes rate hikes from the Federal Reserve and Bank of England could cause liquidity to evaporate from bond markets.”

Which is the same as saying that one a drug addiction kicks in, the highs of each subsequent hit tend to become replaced by the lows of each crash.

And which brings us to the point of concern forward:

• emerging regulatory environments (separation of banking activities across trading vs retail lines - covered by the EBU reforms and discussed in depth here, introduction of financial transactions taxes - covered here, increased costs of capital buffers - covered in the EBU reforms link above), as well as 
• changing market structures (rates 'normalisation' and dissipating power of global SWFs - written about here and briefly discussed in the context of early warnings here) 

all signal more instability linked to liquidity pressures in the markets in the future. Not less. Which is all fine and dandy, except the entire promise of the global financial reforms post Global Financial Crisis has been to lower that said structural instability.

Which is to remind us all that the road to hell is so often paved with good intentions.

25/10/15: Mess in Lisbon: Democracy is Complicated...

What on Earth is going on in Portugal? Here are some views:

1) By Ambrose Evans-Pritchard, the headline that says most of it: “Eurozone crosses Rubicon as Portugal's anti-euro Left banned from power” with a sub-head that says the rest: “Constitutional crisis looms after anti-austerity Left is denied parliamentary prerogative to form a majority government”. Key quote (emphasis is mine): “For the first time since the creation of Europe’s monetary union, a member state has taken the explicit step of forbidding eurosceptic parties from taking office on the grounds of national interest. Anibal Cavaco Silva, Portugal’s constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to smash the austerity regime bequeathed by the EU-IMF Troika.” Read the rest here.

2) By Chris Hanretty (University of East Anglia) sums up the facts about the President Silva decision that contrast with the common narrative that the President has forbidden Eurosceptic parties from gaining power. Read his points here.

3) And a view from Portugal’s president which clearly postulates the primary reason for his decision to re-appoint Prime Minister, Dr. Pedro Passos Coelho was the objective of ensuring continuity with Portugal’s commitments to the Troika and stability of policy formation. The considerations of democratic traditions and rules were instrumental to that primary objective.

4) So perhaps the better summary of the events unfolding in Lisbon is the more balanced report from Simon Nixon for the WSJ. “Undoubtedly, Mr. Cavaco Silva helped fan such talk with what even some of his own party concede was an ill-judged televised address in which he cited the need to maintain the confidence of markets and adhere to the country’s European destiny among the reasons for his decision. Yet the reality is that Mr. Cavaco Silva has acted fully in accordance with the constitution, which gives the directly elected president wide discretion in the appointment of the prime minister.”

And another fact that is beyond any doubt: Portugal’s electorate is split. Very seriously split. And there is little hope of consensus emerging any time soon.

Source: http://visualoop.com/infographics/legislative-2015-all-numbers-wondering-about-elections

25/10/15: Grifols and the Ghosts of OECD

An interesting set of contrasts: one company, one move, two reports.

Last week, Irish and Spanish press reported on the Spanish Multinational pharma Grifols moving most of its operations from Spain to Ireland. Here are two examples of reports:
- One from Spain (http://economia.elpais.com/economia/2015/10/24/actualidad/1445711002_780890.html?id_externo_rsoc=TW_CM) focusing on tax optimisation reasons behind the Grifols' move; and
- One from Ireland (http://www.irishtimes.com/business/health-pharma/spanish-healthcare-firm-grifols-to-create-140-jobs-1.2401541) without a single mentioning of tax issues. You can also see this one from the Irish Examiner (http://www.irishexaminer.com/business/grifols-creates-140-jobs-in-dublin-360972.html) which also fails to mention tax issues.

Spanish report quotes Grifols CFO on the issue of tax optimisation. Irish reports say absolutely nada about the topic.

Spanish report references the statement that Grifols will channel all of its non-Spanish and non-US revenues via Ireland (a practice used for tax optimisation by many MNCs based here). But both Irish reports linked above fail to mention this quite material fact.

Remember OECD BEPS ‘reforms’? When someone doesn’t want to know the obvious, one doesn’t have to worry about the obvious…

22/10/15: Ah, those repaired credit flows...

BIS data on 2Q 2015 cross border lending is ugly... on so many levels (see breakdowns here: https://www.bis.org/statistics/rppb1510.pdf). But the ugliest is the aggregate rate of change:

Yep, that's right. In the economy repaired by multiple countries surrenders to the IMF, years of massive QEs, the printing presses perpetual overheating and all other policy shenanigans, 2Q 2015 has seen the sharpest decline in cross border lending by the banks in history of the series (from 1978 on).

Borrowing is down across all intermediaries:

and all currencies save Japanese Yen:

and for every borrowing region, save EMEs (read: China):

and if you think the rot is dominated by the Emerging Markets, think again:

So when some time ago I described the state of play in the global economy as being Japanified, I wasn't kidding. The monetary policy dream of 'repairing' credit flows by making credit dirt cheap has had... well... at best an underwhelming effect. Time to think about actual, real, economic demand, maybe?..