10/1/20: Eight centuries of global real interest rates

There is a smashingly good paper out from the Bank of England, titled "Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018", Staff Working Paper No. 845, by Paul Schmelzing.

Using "archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time."

Key findings:

• "... across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and...
• "... since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed."
• "A gradual increase in real negative‑yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis."

The present 'abnormality' in declining interest rates is not, in fact 'abnormal'. Instead, as the author points out: "Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory."

Two things worth commenting on:

1. Secular stagnation: in my opinion, interest rates trend is not in itself a unique identifier of the secular stagnation. While interest rates did decline on a super-long trend, as the paper correctly shows, the broader drivers of this decline can be distinct from the 'secular stagnation'-linked declines in productivity and growth. In other words, at different periods of time, different factors could have been driving the interest rates declines, including higher (not lower) productivity of the financial system, e.g. development of modern markets and banking, broadening of capital funding sources (such as increase in merchant classes wealth, emergence of the middle class, etc), and decoupling of capital supply from the gold standard (which did not happen in 1973 abandonment of formal gold standard, but predates this development by a good part of 60-70 years).
2. "Permanently negative territory" for interest rates forward: this is a major hypothesis from the perspective of the future markets. And it is consistent with the secular stagnation, as availability of capital is now being linked to the monetary expansion, not to supply of 'organic' - economy-generated - capital.

More hypotheses from the author worth looking at: "I also posit that the return data here reflects a substantial share of ‘non‑human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record."

There is a lot in the paper that is worth pondering. One key question is whether, as measured by the 'safe' (aka Government) cost of capital, the real interest rates even matter in terms of the productive economy capital? Does R vs G debate reflect the productivity growth or economic growth and do the two types of growth actually align as closely as we theoretically postulate to the financial assets returns?

The macroeconomics folks will call my musings on the topic a heresy. But... when one watches endlessly massive skews in financial returns to the upside, amidst relatively slow economic growth and even slower real increases in the economic well-being experienced in the last few decades, one starts to wonder: do G (GDP growth) and R (real interest rates determined by the Government cost of funding) matter? Heresy has its way of signaling unacknowledged reality.

9/1/20: Herding and Anchoring in Cryptocurrency Markets

Our new paper, with Daniel O'Loughlin, titled "Herding and Anchoring in Cryptocurrency Markets: Investor Reaction to Fear and Uncertainty" has been accepted to the Journal of Behavioral and Experimental Finance, forthcoming February 2020.

The working paper version is available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3517006.

Abstract:
Cryptocurrencies have emerged as an innovative alternative investment asset class, traded in data-rich markets by globally distributed investors. Although significant attention has been devoted to their pricing properties, to-date, academic literature on behavioral drivers remains less developed. We explore the question of how price dynamics of cryptocurrencies are influenced by the interaction between behavioral factors behind investor decisions and publicly accessible data flows. We use sentiment analysis to model the effects of public sentiment toward investment markets in general, and cryptocurrencies in particular on crypto-assets’ valuations. Our results show that investor sentiment can predict the price direction of cryptocurrencies, indicating direct impact of herding and anchoring biases. We also discuss a new direction for analyzing behavioral drivers of the crypto assets based on the use of natural language AI to extract better quality data on investor sentiment.

8/1/20: Creative destruction and consumer credit

My new article for @TheCurrency_, titled "Creative destruction and consumer credit: A Fintech song for the Irish banks" is out. Link: https://www.thecurrency.news/articles/6150/creative-destruction-and-consumer-credit-fintech-song-for-the-irish-banks.

Key takeaways: Irish banks need to embrace the trend toward higher degree of automation in management of clients' services and accounts, opening up the sector to fintech solutions rather than waiting for them to eat the banks' lunch. Currently, no Irish bank is on-track to deploy meaningful fintech solutions. The impetus for change is more than the traditional competitive pressures from the technology curve. One of the key drivers for fintech solutions is also a threat to the banks' traditional model of business: reliance on short-term household credit as a driver of  profit margins.

"Irish banks are simply unprepared to face these challenges. Looking across the IT infrastructure landscape for the banking sector in Ireland, one encounters a series of large-scale IT systems failures across virtually all major banking institutions here. These failures are linked to the legacy of the banks’ operating systems."

"In terms of technological services innovation frontier, Irish banks are still trading in a world where basic on-line and mobile banking is barely functioning and requires a push against consumers’ will by the cost-cutting banks and supportive regulators. To expect Irish banking behemoths to outcompete international fintech solutions providers is equivalent to betting on a tortoise getting to the Olympic podium in a 10K race."

7/1/20: Tax cuts, trade and growth: The Trumponomics Effect

My article on U.S. economy and the implied risks to investors for Manning Financial and Cathedral:
https://cfc.ie/2019/12/10/tax-cuts-trade-and-growth-the-trumponomics-effect/.

#USEconomy #Economics #Markets #USgrowth #GlobalGrowth #GlobalEconomy #SecularStagnation @cathedrlfinance @sheehymanning 

7/1/20: Euromoney on 2020 Risk Outlook for the Eurozone

Euromoney on Eurozone risks into 2020, with some comments from me: https://www.euromoney.com/article/b1js9nd289vtm9/country-risk-2020-vision-brings-the-eurozones-risks-into-focus. 

7/1/20: BRIC Composite PMIs 4Q 2019

Composite Global economic activity, as measured by Composite PMI has slowed down markedly in 2019 compared to 2018. In 2018, average Composite Global PMI (using quarterly averages) stood at 53.6. This fell back to 51.7 in 2019. In 4Q 2019, average Global Composite activity index stood at 51.3, virtually unchanged on 51.4 in 3Q 2019. Overall, Global Composite PMI has now declined in 7 consecutive quarters. 

This weakness in the Global economic activity is traceable also to BRIC economies.

Brazil’s Composite PMI has fallen from 52.0 in 3Q 2019 to 51.5 in 4Q 2019. Things did improve, however, on the annual average basis, 2018 Composite PMI was at 49.6, and in 2019 the same index averaged 51.4. 

Russia Composite PMI has moved up markedly in 4Q 2019, thanks to booming reading for Services PMI. Russia Composite index rose to 52.7 in 4Q 2019 from 51.0 in 3Q 2019. reaching its highest level in 3 quarters. However, even this robust reading was not enough to move the annual average for 2019 (52.3) to the levels seen in 2018 (54.1). In other words, overall economic activity, as signaled by PMIs, has been slowing in 2019 compared to 2018.

China Composite PMI stood at 52.6 in 4Q 2019, up on 51.5 in 3Q 2019, rising to the highest level in 7 consecutive quarters. However, 2019 average reading was only 51.7 compared to 2018 reading of 52.2, indicating that a pick up in the Chinese economy growth indicators in 4Q 2019 was contrasted by weaker growth over 2019 overall. 

India Composite PMI remained statistically unchanged in 3Q 2019 (52.1) and 4Q 2019 (52.0). On the annual average basis, 2018 reading of 52.5 was marginally higher than 2019 reading o 52.2. 

In 4Q 2019, all BRIC economies have outperformed Global Composite PMI indicator, although Brazil was basically only a notch above the Global Composite PMI average. In 2019 as a whole, China, Russia and India all outperformed Global Composite index activity, with Brazil trailing behind.

7/1/20: BRIC Services PMIs 4Q 2019

BRIC Services PMIs have been a mixed bag in 4Q 2019, beating overall Global Services PMI, but showing similar weaknesses and renewed volatility.

Brazil Services PMI slipped  in 4Q 2019, falling from 51.8 in 3Q 2019 to 51.0. Statistically, this level of activity is consistent with zero growth conditions. In the last four quarters, Brazil's services sector activity ranged between a high of 52.3 and a low of 48.6, showing lack of sustained growth momentum in the sector.

Russia Services sector posted a surprising, and contrary to Manufacturing, robust rise from 52.0 in 3Q 2019 to 54.8 in 4Q 2019, reaching the highest level in three quarters. Statistically, the index has been in an expansion territory in every quarter starting with 2Q 2016. 4Q 2019 almost tied for the highest reading in 2019 overall, with 1Q 2019 marginally higher at 54.9. For 2019 overall, Services PMI averaged 53.3, which is below 2018 average of 54.6 with the difference being statistically significant.

China Services PMI ended 4Q 2019 at 52.4 quarter average, up on 51.7 in 3Q 2019. Nonetheless, 4Q 2019 reading was the second weakest in 8 consecutive quarters. The level of 4Q 2019 activity, however, was statistically above the 50.0 zero growth line. In 2019, China Services PMI averaged 52.5 - a slight deterioration on 53.1 average for 2018, signalling slower growth in the sector last year compared to 2018.

India Services PMI averaged 51.7 in 4Q 2019, statistically identical to 51.6 in 3Q 2019. Over the last 4 quarters, the index averaged 51.5, which is effectively identical to 51.6 average for 2018 as a whole. Both readings are barely above the statistical upper bound for 50.0 line, suggesting weak growth conditions, overall.

As the chart above indicates, BRIC Services PMI - based on global GDP weightings for BRIC countries - was indistinguishable from the Global Services PMI. Both averaged 52.2 in 2019, with BRIC services index slipping from 52.6 in 2018 and Global services index falling from 53.8 in 2018. On a quarterly basis, BRIC services PMI averaged 52.3 in 4Q 2019, compared to 51.7 in 3Q 2019 - both statistically significantly above 50.0; for Global Services PMI, comparable figures were 52.0 in 3Q and 51.6 in 4Q 2019, again showing statistically significant growth.

5/1/20: BRIC Manufacturing PMIs 4Q 2019

As global manufacturing sector activity barely stayed above the recession line in 4Q 2019, BRICs manufacturing PMIs indicated a cautious upswing in activity, with exception for Russia and India. Here are the core details:

• Brazil's 4Q 2019 Manufacturing PMIs averaged 51.8, statistically unchanged on 3Q 2019 figure of 51.9. Both 3Q and 4Q readings were statistically above 50.0, indicating modest growth, and above historical average of 50.3. Nonetheless, 4Q 2019 reading was the second lowest in six consecutive quarters.
• Russia posted its second consecutive quarter of recessionary growth readings for manufacturing sector, with quarterly average PMI slipping to 46.8 in 4Q 2019, down from 48.2 in 3Q 2019, making 4Q contraction the sharpest since 2Q 2009. All in, the last time Russian manufacturing sector posted statistically above 50.0 reading was in 1Q 2019. The signal here is severely negative to overall growth prospects for the Russian economy for the entire 2019 and a major concern for the 1H 2020 dynamics. 
• China manufacturing PMI surprised to the upside in the last quarter of 2019, rising from 50.6 in 3Q 2019 (a reading statistically indistinguishable from zero growth 50.0 mark) to 51.7 in 4Q 2019 (a reading indicating moderate expansion, compared to the historical average of 50.8). Statistically, Chinese manufacturing has not been in an expansion mode over 3Q 2018 - 3Q 2019 period, which makes 4Q 2019 reading an important signal of a potential turnaround.
• India manufacturing PMI averaged 51.5 in 4Q 2019, slightly down on 51.8 in 3Q 2019. This is the weakest level since 3Q 2017, but statistically it is still indicative of expansion in the sector.

Overall, BRIC Manufacturing PMI (based on each country share in global GDP) has improved from 50.7 in 3Q 2019 to 51.2 in 4Q 2019, marking the fastest rate of the group's manufacturing sector expansion 1Q 2018 and the second consecutive quarter of the index being statistically above the 50.0 zero growth line.

Globally, manufacturing sector growth conditions improved from 49.5 in 3Q 2019 to 50.1 in 4Q 2019, although statistically, no reading from 2Q 2019 onwards was significantly above or below the zero growth 50.0 line.

As the chart above clearly shows, Global Manufacturing sector activity remains extremely weak. On-trend, more recent BRICs Manufacturing sector growth is above that of the Global PMI signal, but both show weaknesses. 

5/1/20: EU's Latest Financial Transactions Tax Agreement

My article on the proposed EU-10 plan for the Financial Transaction Tax via The Currency:

Link: https://www.thecurrency.news/articles/5471/a-potential-risk-growth-hormone-what-the-financial-transaction-tax-would-mean-for-ireland-irish-banks-and-irish-investors or https://bit.ly/2QnVDjN.

Key takeaways:

"Following years of EU-wide in-fighting over various FTT proposals, ten European Union member states are finally approaching a binding agreement on the subject... Ireland, The Netherlands, Luxembourg, Malta and Cyprus – the five countries known for aggressively competing for higher value-added services employers and tax optimising multinationals – are not interested."

"The rate will be set at 0.2 per cent and apply to the sales of shares in companies with market capitalisation in excess of €1 billion. This will cover also equity sales in European banks." Pension funds, trading in bonds and derivatives, and new rights issuance will be exempt.

One major fall out is that FTT "can result in higher volumes of sales at the times of markets corrections, sharper flash crashes and deeper markets sell-offs. In other words, lower short-term volatility from reduced speculation can be traded for higher longer-term volatility, and especially pronounced volatility during the crises. ... FTT is also likely to push more equities trading off-exchange, into the ‘dark pools’ and proprietary venues set up offshore, thereby further reducing pricing transparency and efficiency in the public markets."

19/12/19: Irish Planning Permissions 3Q 2019: Some Goods, Some Bads

The latest Irish data for Planning Permissions approvals is a mix of some good news, some bad news and some ugly trends. Here is the summary of them for 3Q 2019:

1. Overall, planning permissions numbers for housing applications are up 4.02% y/y - this is the good news. Better news: cumulative 1Q-3Q 2019 numbers are up 7.12%  on the same period in 2018.
2. New dwelling planning permissions are up 6.01% y/y - this too is the good news. Also exciting: cumulative 9 months permissions are up 6.33% y/y.
3. Other new construction ex-dwellings permissions are up 6.29% - another bit of good news.
4. Extensions and alterations-related planning permissions are up only 1.42%. But this is offset by the cumulative 9 months gain of 7.65% y/y. Which is a nice number.
5. Bad news: private homes permissions are up only 1.13% y/y in 3Q 2019, and worse news: the same are down massive 5.57% y/y on a cumulative basis for the first 9 months of 2019.
6. Great news: apartments permissions (for units, not aggregated over schemes) are up massive 80.15% in 3Q 2019 y/y and are cumulatively up 86.81% y/y for the first nine months of 2019.
7. Average area of the houses for which new permissions are grated is up 0.82% in 3Q 2019 compared to 3Q 2018, but average area of the apartments with new permissions granted is down big time: down 14% y/y in 3Q 2019 and on average down 7.1% in the first 9 months of 2019.

So we are planning more apartments (good), not as significantly more homes (bad), but our apartments planned are getting smaller (bad). 

Now for some other bad news, or trends, rather. 

Given the demographic demand and the state of construction industry in the post-crisis period, we are continuing to under-supply new housing to the markets. Based on the assumed demand for 25,000 new homes annually, cumulative undersupply of new permissions to build residential units since 1Q 2010 currently stands at around 81,900 units and although this number is finally declining (since 4Q 2017), at the current rate of new planning permissions approvals (Q1-Q3 2019 figure), it would take almost 6.5 years to clear the backlog. That is, assuming in the mean time, there is no new recession to knock out the wind from the building and construction sector, and/or no significant inward / return migration to boost demand. Accounting for depreciation at ca 4100 units per annum (https://www.savills.com/insight-and-opinion/savills-news/273944/john-mccartney--housing-obsolescence-commonly-overestimated--and-depreciation-heavily-concentrated-in-rural-ireland) extends this horizon to 10.3 years. 

18/12/19: Winning Trade [Price] Wars: Updated Data

With the recent announcement of the so-called Phase 1 'Trade Deal' with China, the U.S. President has claimed that his Administration is winning the trade war with Beijing and that the U.S. economy is gaining from the rounds and rounds of tariffs and trade restrictions imposed on its bilateral trade with China.

Here is a tangible set of metrics showing the cost indices for U.S. trade (exports and imports) over the period of President Trump's tenure, compared to the track record of his predecessors:

In basic terms, the adverse movements in imports prices have been more than offset by the positive movements in export prices since the start of the Trump presidency. However, two caveats to this warrant more cautious analysis of this data:

1. Mr. Trump's presidency has not been associated with statistically distinct imports prices performance, compared to the Obama administration (see averages and levels for import price indices in the above), while Mr. Trump's tenure has been associated with markedly lower export prices for the U.S. exporters (the blue line above); and
2. The gap between export prices and import prices (positive and larger gap signals higher relative prices of exports compared to imports - a net positive for the external balance), under Trump administration remains well below previous administration's track record (see chart next).

There is preciously little if any evidence in the trade prices indices to suggest that the Trump administration is either winning any trade wars or improving U.S. exporters' environment. If anything, there is more evidence that the U.S. economy is facing similar supportive tailwinds from global imports prices deflation to those experienced by its counterparts, and these are broadly in line with the tailwinds experienced by China:

16/12/19: There is no Inflation, folks... none...

There is no inflation, folks. This is what the Fed been telling us for some time now. And the CPI figures, on aggregate, say the same.

Unless it is if you need health services or health insurance, or if you happen to *want* education. These discretionary items of spending, avoidable by choice of a prudent consumer, are, of course, exceptions to the rule...

Note, of course, the standard inflation measurements of price changes in healthcare are a bit obscure too, as they average-out effects of private insurance inflation by adding old-age and low-income insurance purchases by the state:

But, never mind, as I said above, these are purely discretionary spending items, so we should not let them cloud out the net official results that show 'no inflation'.