Sunday, March 20, 2016

20/3/16: Economic Reality v Central Banking: Vegas-styled Showdown

What’s going wrong with the global monetary policy? Nothing, really, except for the economic reality.

Let me explain. In a forthcoming article I will be highlighting the channels through which monetary policy deployed in recent years (a combination of extremely low lending rates, negative in many cases deposit rates, massive asset purchases or QE) have contributed to increasing markets and economic volatility, whilst achieving preciously nothing in terms of lifting up economic growth.

Here, let’s consider what I shall term the ‘extreme impotency’ of monetary policy in the age of a structural debt crisis.

Lessons from the ECB

Earlier this month, ECB did something remarkable. Prior to its March meeting, the ECB has hyped markets expectations for a dramatic monetary expansion (as pre-flagged here: On the day of the announcement, the ECB actually exceeded markets expectation as I noted here: and de facto threw in the entire kitchen sink of monetary policies at the fire. This had no real effect.

The ECB forced through extraordinary measures:

  1. Already negative interest rate on ECB’s main deposit facility were pushed down from -30 to -40 basis points. 

  2. ECB’s monthly bond purchases (the so-called QE programme) were expanded by 1/3rd from EUR60 to EUR80 billion a month, and the time frame for QE was not cut shorter, staying at March 2017 end-date. Better yet (or rather worse), Mario Draghi said the deadline might be extended, if required. 
  3. ECB expanded the range of assets it is buying to include “investment-grade, non-bank corporate bonds” - a measure that will be deployed from June on, reflective of tightening supply in sovereign bond markets and of the ‘kitchen sink’ approach to policy. 
  4. Then, there is an expansion of the T-LTROs universe to introduction of four new targeted long-term refinancing  operation facilities with a maturity of four years. The TLTROs are ECB loans to banks designed - so it says on the tin - to help them increase liquidity. Which is, as pure bullshit goes, pure bullshit - there is no shortage of liquidity in the banking system. If there was one - ECB will not be having negative deposit rates. Instead, there is a perceived shortage of lending from that liquidity. Or in simple terms: not enough debt is being issued. So to help banks lend, the ECB promised that those banks where net lending exceeded a benchmark, the interest rate charged by the ECB on TLTRO loans can be set as low as the ECB deposit rate facility rate of -0.4%. In other words the ECB will actually pay banks to issue the loans. 

Notice one simple regularity: all measures deployed by the ECB in March and indeed all measures deployed by the ECB across the entire QE are designed to do one thing and one thing only. They are designed to create more debt in the system that has been imploding from too much debt ever since the start of 2008. The ECB is, therefore, curing drug addiction by massively increasing supplies of more pure grade cocaine. If before the ECB started acting the system was sloshing around privately intermediated debt with higher associated costs, now it is being primed by low cost liquidity from the ECB.

The monetary party should have turned into a total rave by now. It did not. Primarily because the financial drug addicts have already over-dosed, so new shipments of the monetarists’ white gold are simply no longer capable of doing much. Just how bad things are? Amidst announcing its most recent ‘blanket bombing with cash’ approach to monetary policy, ECB also lowered its growth projections for the euro area, from 1.7% y/y real GDP growth to 1.4% for 2016. You really can’t make it up: as Mario Draghi bragged about ECB’s valiant efforts to boost economic growth, and as he promised even more of the same, his own forecasters were telling us that none of it is working.

No one in the markets is actually believing anything the Central Bankers say anymore

Bonds investors are refusing to sell bonds (something that should have happened if anyone trusted Central Banks on their promises to deliver higher inflation). Banks shares remain in the same pattern of volatile trading with no one having a faintest idea as to profitability of the paper they are shifting. Asset prices are rising, but they are not rising for real assets (hedges against potential inflation). Banks lending, meanwhile, is getting more questionable. Larger corporate borrowings are funding increasingly higher volumes of shares buybacks (see post here While ECB prints cash, households and SMEs continue to struggle with legacy debts, so that demand for new loans is simply not there no matter how low the interest rates get.

In the U.S., subprime auto loans are now in a securitisation squeeze (see here While student loans defaults eased somewhat (down form 2.5% of all loans in 4Q 2014 to 2.3% in 4Q 2015) much of the decline is accounted for by softer loans covenants (see here: The 'deleveraged' U.S. households are about to be whacked with healthcare loans markets resting on securitisation model because new debt is good debt until it becomes the unrepayable old debt (

The UK household debt is heading for new highs (  Canadian household debt is already there ( In the U.S., borrowing is rising across virtually all categories ( In Europe, Finland, Spain, Portugal, UK, Sweden, Ireland, Norway, Cyprus, Netherlands and Denmark all have household debt in excess of 100% of GDP.

Meanwhile, negative deposit rates for the banks holding funds with the central banks are hurting banking profitability, costing bank services users in higher fees and higher cost of loans, and dis-incentivising more conservative banks' reserves accumulation.

The real problem, of course, is that the Central Banks are unwilling to face the music. Again, consider the euro area. Here, sluggish demand and weak growth are the key drivers for low inflation. And these drivers themselves are determined by the well-known factors, such as, structural decline in labour and TFP productivity growth, lack of serious competition and free trade across much of services, legacy of pre-crisis debt overhang in household sectors and over-leveraging that has  gone on in corporate sector since 2010. Both of these now require restricting legacy debts and/or their partial repayment funded by the ECB. There are also bottlenecks in labour markets, including in areas relating to labour costs, but also in areas relating to skills, workplace practices, wages growth, hours of work demanded, labour force participation, etc.

All of which means that the ECB has been targeting wrong policy objectives using wrong policy tools. And the result is utter and total failure to deliver on its targets. A failure that is equally present for Bank of Japan, and in the longer run - potentially for the U.S. Fed. Let me put this simply: the only functional tool that central banks like ECB and Bank of Japan have is the tool of directly injecting liquidity into debt-burdened companies and households, targeting such injections to either repayments of legacy debts or to building up functional pensions and capex savings buffers. This is much more nuanced than Friedman’s ‘helicopter drop of money’, but it is similar to it in so far as the ‘drop’ must not target debt underwriting intermediaries (banks) and it should not aim to increase issuance of new debt. Instead, it should target balance sheets of households and companies.

The markets know that the Central Banks are out of options, out of depth and out of understanding of what is really wrong with the economy. And, thus, markets are no longer listening to what the Central Bankers say, resting upon the knowledge that the extraordinary policies of the recent past are not a cure of the disease, but the symptom of it: the stronger the Central Bank's signalled commitment to easing, the weaker is the underlying economy, the less likely is the Central Bank's announced policies to have an effect.

Lessons from Japan

Back on January 29th, Bank of Japan announced a convoluted program of differential negative interest rates on deposits.

After the initially positive reaction, the entire game was up: yen rose (instead of falling), and Japan’s terms of trade deteriorated instead of improving. With the negative rates sitting on top of a USD700 billion annual money printing QE programme, yen appreciation was concentrated in two currencies (both the USD and renminbi) which account for most of the Japanese exports. What is more amazing is that following the announcement, Japanese bond yields collapsed (predictably), only to subsequently rise again. The whole market for Japanese Government paper was oscillating like a precarious bubble ready to pop. In this environment, as U.S. is heading for a Fed-declared ‘monetary normalisation’, Government bond yields continue to fall. Meanwhile, in the monetary expansion-minded Europe, German yields are rising, then falling, then rising again. Ditto for Japan. In other words, there is no longer any real connection between monetary policy and markets pricing of Government bonds.

The Central Banks no longer have signalling power left, as the markets have largely stopped listening to the monetary authorities pronouncements. While the Fed has de facto destroyed monetary policy credibility by the way it prepared for, carried out and followed upon its December 15 rate hike, Bank of Japan and the ECB have finished the same off by their kitchen sink efforts at stimulating inflation.

Bill Gross has a neat summary of the state of play: “Instead of historically generating economic growth via a wealth effect and its trickledown effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects… Negative yields threaten bank profit margins as yield curves flatten worldwide and bank NIM’s (net interest rate margins) narrow. The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future ROE’s will be much akin to a utility stock. Observe the collapse in bank stock prices – not just in the last few months but post Lehman. I’ll help you: Citibank priced at $500 in 2007, now $38 as shown in Chart I. BAC $50/now $12. Credit Suisse $70/now $13. Deutsche $130/now $16. Goldman Sachs $250/now $146. Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of writeoffs, tighter regulation and significantly lower future margins. I’ll vote for the latter.” (Bill Gross Investment Outlook March 2016)

More of the same v much much much more of the same

Which brings us about to the key question: with monetary policy becoming completely impotent, what can be done to provide a meaningful stimulus to the economies staring at a de facto stagnation (Japan and the Euro area) or the risk of structurally slower growth (the U.S. and much of the rest of the advanced economies)?

The answer depends on what your monetary ideology is.

In the camp of traditional Central Bankers, it is ‘doing more of the same’ with ever widening scope of instruments: when printing money via QE is not enough, go to negative deposit rates and expand QE to all sorts of corporate debt papers. The key premise here is that issuing more debt is the only solution to the debt crisis. The problem with this approach is apparent. There is too much debt in the system already and our (companies and households) capacity to absorb more of it is exhausted.

In the other camp (and I must disclose personal interest here), the view is that given we are faced with the debt crisis, the only answer is to reduce debt or deleverage. This can be done destructively (by engaging in bleeding the economy dry by forcing debt foreclosures and bankruptcies, while simultaneously reducing the cost of debt carry through lower interest rates), or constructively (via structured write-offs of debt and through QE that injects funds directly into companies and households accounts for the purpose of debt write downs). The former approach requires sustained economic contraction over the period of forced deleveraging. The latter approach implies actually healthier balance sheets across the entire economy.

The first camp of ‘traditionalists’ is only now starting to realise that the only way their approach might work is if the Central Banks de facto commit to a perpetual easing (as opposed to temporary). Narayana Kocherlakota thinks same should apply to the negative deposit rates, although one is hard pressed to imagine what quality of assets and capital does he think the banks will hold in the medium term with negative deposit rates.

The problem, however, is that the ‘traditionalists’ - who dominate Central Banks and Government advisory - are still refusing, some 9 years into the crisis, to acknowledge the debt overhang nature of the crisis. Until they do, Central Banks will continue throwing good money at the wrong targets, delivering neither a relief for the real economy nor a momentum for real growth.

Saturday, March 19, 2016

19/3/16: Shares Buy-Backs: The Horror Show of QE Cash Excesses is Back

Remember the meme of the ‘recovery’?

The story of years of rising shares buy-backs by corporate desperate to do something / anything with all the debt they could get their hands on from the lending banks, whilst having no interest in investing any of these loans in real activity.

Well, back at the end of 2011 and the start of 2014, pumped up on hopium  of the so-called imminent recovery in global demand, we witnessed two dips in shares buy-backs, with resulting volatility going the flat trend taking us through some 12 months before lifting off the whole circus to new highs.

Source: @soberlook

And as you can see, the same momentum is now back. Shares buy-backs are booming once again, almost reaching all time highs of 2007. Thus, the toxic scenario whereby companies use cheap credit (QE-funded) to leverage themselves only to fund shares buybacks and not to fund new investment - that vicious cycle of leverage risk and wealth destruction - is open us once again.

Note: I have been tracking the topic on this blog, covering few months back the link between buybacks and lack of corporate capex:

19/3/16: Awaiting Tax Holidays

In an amazing chart from Credit Suisse, the U.S. companies retained earnings parked in foreign (ex-U.S.) tax havens has hit record levels in 2015, with four out of six key sectors recording highest retained earnings of all times.

Happy times: as companies rationally see rising probability of a tax holiday post-2016 elections, and as global demand sluggishness restricts their willingness and ability roll these retained arraigns into actual new capex, cash held abroad rises, taxes paid in the U.S. fall and countries like Ireland, Luxembourg, and other tax havens, get happy.

19/3/16: QE Corpses in One chart

A neat chart from @JPMorgan summarising the dynamics and relative levels of global QE efforts by the activist central banks:

Yes, Swiss National Bank is off the charts (alongside BOJ), and yes, ECB is now running ahead of the Fed. But no, all of this activism ain’t doing any miracles for anyone when it comes to unlocking the growth momentum.

19/3/16: Danske’s forecasts for Russia: Mild with little chance of a surprise

Danske’s latest forecasts for Russia are out this week. In contrast to 2015 forecasts, Danske is now running a relatively moderately bearish outlook on Russia. Remember, Danske forecast - as late as of September 2015 - the Russian GDP to shrink 6.2% y/y in real terms (it ended the year with a decline of 3.7%), while projecting USDRUB exchange rate at 72-74 for 3mo-12mo horizon (it is now at around 68.1 and the bank’s new forecasts are for 62.2-66.4 over the next 3mo-12mo horizon).

Per latest, “The path of economic contraction continues to slow. GDP shrank 2.5% y/y In January 2016 versus a 3.5% y/y fall in December 2015. We expect the economy to shrink 2.1% y/y in 2016 if the crude price stays at USD31/bl on average, while we would expect expansion to happen if the oil price climbs to USD59/bl on average.”

Overall, Danske’s view is that supply side of growth equation is now close to / already in expansionary territory, while demand (and investment) sides are both still struggling.

Problem is, this imbalance should be leading to rapidly declining inflation. In part this is starting to show through. As noted by Danske team: “Inflation eased to 8.1% y/y in February, from 9.8% y/y in January, as prices already included the RUB devaluation and the high base effect is weighing on the CPI. We expect 2016 inflation to stay single digit, posting 8.1% y/y in December 2016.”

With this in mind, table below shows Danske’s forecasts summary

At -2.1% for 2016, this is a relatively moderate forecast, at the lower end of the forecast envelope for the consensus, but not low enough to raise eyebrows as with their 2015 outlook. CPI forecasts at 8.1% for 2016 is probably realistic, whilst 5.8% forecast for 2017 is quite likely to go unmet, given upside to growth penciled in and M1 expansion estimated at 9.3% and 10.2% in 2016-2017.

Overall, not that far off from my own expectations for the year, though Current Account surplus is, in my view, more likely to come in at around 3.5-3.8 percent of GDP.

The key to the above is the headline GDP figure (weak and likely to remain weak for some time into 2016) and external balances (strong and likely to remain such into 2016-2017). The economy is struggling to gain the elusive recovery footing, but it is also paying for itself.

Wednesday, March 16, 2016

16/3/16: ESRI and Imaginary Numbers: Irish Economy Forecast 2016-2017

My article for Sunday Business Post on latest ESRI forecasts for the Irish economy 2016-2017:

15/3/16: Irish Banks: CoCos Locos

Remember CoCos? Those pretty ugly convertible securities the banks have been issuing to provide bailable cushions in case of a solvency crisis? I covered them in a recent post on Deutsche here:

Well, the Additional Tier 1 instruments have been issued primarily by European banking giants over the last 7 years and not surprisingly, by Irish banks too.  Alas, Irish banks are not known for doing things in moderation, and so Per ValueWalk data, Irish banks have managed to issue some USD4.1 billion of this 'innovative' paper, which is the 5th largest issuance in the world... yes... FIFTH LARGEST in the WORLD.

Tuesday, March 15, 2016

15/3/16: Times Higher Education Europe Rankings: Not Too Kind for Ireland

Times Higher education 2016 rankings for European Universities, published recently here are an interesting read.

We have:

  • TCD at 78th place, below TU Dresden, U of Liverpool, and a bunch of other not too 'premier league' schools. Average showing, given it is 78th across Europe.
  • UCD in 88th place. Below Eidhoven UofTech, U of Konstanz, U of Barcelona et al. Good news, it is close to TCD, creating something of a cluster. Bad news is: no Irish Uni in top50 for Europe.
  • Third highest ranked school in Ireland is apparently NUI Galway (edging out UC Cork) which is ranked somewhere between 131st and 140th places. Not in top100, thus, despite the fact these rankings are for Europe alone.
  • Fourth highest ranked is a specialist school - the Royal College of Surgeons in Ireland - a stronger position for the school, given it has no broader remit of, say NUIG. It also ranks somewhere between 131st and 140th.
  • Fifth is UC Cork in the group of Unis ranked 181st through 190th in Europe. It makes top 200, thus, but only by a small margin.
  • Sixth is NUI Maynooth which manages to make top 200 in Europe by squeezing into the ranking group between 191st and 200th. 
Overall, not a pretty picture, to be honest. Yes, rankings are not the only metric worth pursuing. Not even the main metric (in my opinion). But rankings do determine students demand for schools, and they determine faculty recruitment. And they do reflect a range of assessment metrics that do matter. And worse, they are all starting to converge on a conclusion that Irish Universities have suffered a long-term set back to their competitiveness during the years of the crisis.

Don't blindly trust the rankings. But don't ignore them either.

Monday, March 14, 2016

14/3/16: T-Rex v Paper Clip: Of Draghi and His Whatevers...

Remember recent ECB commitment to start buying more non-sovereign, non-financial corporates' paper? It was the part of the blanket bombing with 'measures' deployed by Mario Draghi last week.

Here is my summary as a reminder: The European Central Bank cut its key lending rate to zero (from 0.05 percent) in March, slashing its deposit rate further into negative territory (to -0.4 percent from -0.3 percent). Desperate for stimulating slack corporate investment, the ECB also significantly expanded the size and scope of its asset-buying program, hiking monthly purchases targets from EUR60 billion to EUR80 billion. Worse, Mario Draghi also expanded the scope of the programme to include investment grade, euro-denominated debt issued by non-financial corporations. And he announced yet another TLTRO – a longer-term lending programme (4 years duration this time around, having previously failed to deliver any meaningful uplift in the corporate capex via three 3-year long programmes). The new TLTRO will be operating on the basis of the ECB deposit rate, effectively implying that Frankfurt will be giving away free money to the banks as long as they write new loans using this cash. Last, but not least, the finish line for the ECB’s flagship QE programme was pushed out into March 2017 from September 2016. And yet, the ECB’s leatest blietzkrieg into the uncharted lands of monetarist innovation ended with exactly the same outrun as was the case for the Bank of Japan few weeks before it.

What is important however is not the above summary, but the estimated quantum of paper that the ECB so courageously planning to buy in order to prevent Euro area from sliding in a Japan-styled depression.

Enter BAML with their estimate:
No, the lads ain't kidding. The Big Bang is at 100% of the market only EUR554 billion. Shaving off for some tightening of yields, stretching of spreads and eliminating holdings not available for sale, suppose ECB hoovers out 50% of the market. The latest 'stimulus' to the Euro area economy will be... EUR275 billion or so...

You can't make this up.

Or can you? Here's the problem, folks: Last time Bank of Japan’s policy rate was at or above 1% was in June 1995. Before the era of low rates on-set, Japanese economy managed to deliver average annual rate of real economic growth of around 3.6 percent. Since the onset of monetary easing, Japanese economic growth averaged less than 0.8 percent. Bad?.. Bad. But not as bad as in the glowing success of the Eurozone. Here, ECB policy rate fell below its pre-crisis historical low in March 2009 and continued on a downward trend from then on. This coincided with a swing in average real growth rates from 2.02 percent per annum to 0.05 percent. Yes, the numbers speak for themselves: since the start of the Global Financial Crisis, Euro area enjoyed average rates of economic growth that are 16 times lower than the same period average growth in Japan. No need to remind you which economy suffered from a devastating earthquake and a tsunami in 2011.

And to counter this, the ECB is deploying a measure that at most can deliver ca EUR275 billion. 

Forget the idea of going after the bear with a buckshot load. Try going after a T-Rex with a paperclip... 

14/3/2016: Foreign Investors, Sovereign Risks & Regulatory Clowns

Over 2012-2013, sovereign and corporate bonds markets started showing sigs of QE-related fatigue within the system, most commonly associated with periodically volatile trading spreads, term premia and risk spreads. In 2013, following the onset of the Fed-related “taper tantrum” many emerging markets spreads on their sovereign bonds widen dramatically, especially in response to rapid devaluations of their domestic currencies.

“This prompted market analysts to identify five of the worst hit economies as the “fragile five,” attributing their vulnerability to economic fundamentals, particularly to current account deficits.” Which is fine - current account is a reasonably important signal of the overall external balance in the economy, but… the but bit is that current account alone means little. Take for example Russia: back in 2013, the economy enjoyed record current account surpluses - so was a picture of rude health by the analysts criteria. Yet, within the economy there was already an apparent and fully recognised on-going structural slowdown.

Bickering over indicators validity aside, however, it would be nice to know which indicators and which risk models do investors flow when they decide to buy or sell emerging market bonds?

Traditionally, we think about two types of factors: “push” and “pull” factors, determining whether the emerging economy experiences capital inflows or outflows.

- “The push factors often relate to economic or financial developments in the global economy as a whole or in the advanced economies, notably the United States.”
- “The pull factors often relate to country-specific economic fundamentals in emerging markets”

Both push and pull factors seem to be important.

In analyzing returns on sovereign CDS contracts, the BIS paper looks at CDS returns “for 18 emerging markets and 10 advanced countries over 11 years of monthly data from January 2004 to December 2014.”

Findings in a nutshell:

  • “Statistical tests for breaks in the movements of CDS returns suggest a break at the time of the eruption of the global subprime crisis in October 2008. This leads us to consider two subperiods separately, an “old normal” before the outbreak of the crisis and a “new normal” afterwards.”
  • “In both the old normal and new normal, we seek to explain the variation of these [principal factors] loadings [onto risk premia] in terms of such fundamentals as debt-to-GDP ratios, fiscal balances, current account balances, sovereign credit ratings, trade openness, GDP growth and depth of the domestic bond market.”
  • “In the old normal, the first risk factor alone explains about half of the variation in CDS returns…” 
  • “This factor becomes more dominant in the new normal, in which it explains over three-fifths of the variation in returns.”
  • “When it comes to how the different countries load on this factor, we find that that the commonly cited economic fundamentals have little influence on the country-specific loadings on the factor. Instead the single most important explanatory variable for the differences in loadings is a dummy variable that identifies whether or not a country is an emerging market.”

To summarise the BIS findings: “In the end, we find that CDS returns in the new normal move over time largely to reflect the movements of a single global risk factor, with the variation across sovereigns for the most part reflecting the designation of “emerging market”. There seems to be no “fragile five”; there are only emerging markets. While the emerging markets designation may serve to summarize many relevant features of sovereign borrowers, it is a designation that lacks the kind of granularity that we would have expected for a fundamental on which investors’ risk assessments are based. The importance of the emerging markets designation in the new normal suggests that index tracking behaviour by investors has become a powerful force in global bond markets.”

And the cherry on top of the proverbial pie? Why, here it goes: “Haldane (2014) has argued that in the world of international finance, the global subprime crisis and the regulations that followed made asset managers more important than banks. Miyajima and Shim (2014) show that even actively managed emerging market bond funds follow their benchmarks portfolios  quite closely. For the most part, when global investors invest in emerging markets, instead of picking and choosing based on country-specific fundamentals, they appear to simply replicate their benchmark portfolios, the constituents of which hardly change over time.”

Wait, what? All regulators are running around the world chasing the bad bankers (for their pre-2008 shenanigans), all the while the new threat has already migrated to asset management. The regulators and enforcers are busy bee-buzzing around courts and regulatory hearings chasing the elusive ‘signalling value’ of enforcing old rules onto the heads of the bankers. With little real outcome to show, I must add. … But the future culprits are not to be found amongst those who care to watch the fate of bankers unfolding in front of them.

In short, having exposed the farce of bond / CDS markets pricing risks based on a vague and vacuous designation of a country, the BIS paper inadvertently also exposed the massive futility of the financial regulators chasing their own tails trying to get past crises culprits to prevent new crises from happening, even though the future culprits don;t give a toss about the past culprits.

Dogs, tails, everything wagging everyone, and vice versa…

Full paper here: Amstad, Marlene and Remolona, Eli M. and Shek, Jimmy, “How Do Global Investors Differentiate between Sovereign Risks? The New Normal versus the Old” (January 2016). BIS Working Paper No. 541:

14/3/2016: Inheritance-Rich Social Disasters?

Using microdata from the Household Finance and Consumption Survey (HFCS), a recent research paper from the ECB examined “the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries.”

Top of the line findings:

1) “About one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit.” Which is sort of material: in a democracy 1/3 of voters making their decisions based on inherited wealth can and (I would argue) does impose a cost on those who do not stand (do not expect) to inherit wealth. Examples of such mis-allocations? Take Ireland, where everything - from retirement to housing markets to childcare provision to education hours is predicated on transfers of income and / or wealth within the family. While those who stand to gain through this system cope well, those who stand to not gain through this familial wealth and income transfers system, stand to lose. Guess who the latter are? Of course: the poor (or those from the poor background, even if they are higher earners today) and the foreign-born.

2) “Regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries.” Which, in basic terms means that you have to work 2.5 times harder to achieve the same impact as inheritance for every point increase in inherited wealth. Merit, you say? Of course not: daddy’s money vastly outperforms, as far as financial returns go, own education, effort, aptitude etc… Though, of course, here’s a pesky bit: for all those pursuing equality and other nice social objectives, higher income taxes, of course, make it even less feasible for income (work) to catch up with inherited wealth. Which might explain why well-heeled (and often inept) folks of Dublin South are so much in favour of the ideas of raising income taxes, but are not exactly enthused about hiking inheritance taxes.

3) “Multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth.” Which, basically, says the utterly unsurprising: wealthy households don’t rely on social welfare. Doh, you’d say. But not quite. The “findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase -- rather than a decrease -- of observed wealth inequality.”

In other words, inheritance induces higher inequality in wealth. It compounds this effect by allocating inheritance without any sense of merit and at an indirect (policy) cost to those households that are not standing to inherit wealth. Which means that more inheritance-based is the given society, more wealth inequality you will get in it, and less merit in wealth allocation will result. Which, in turn implies you gonna pay for this with higher taxes (everyone will, except, of course, the really wealthy).

Next time you driving through, say Monkstown, check them out: the *daddy’s money* wandering around… they cost you, in tax, in higher charges for policy-related services, and in merit-less society.

Full paper here: Fessler, Pirmin and Schuerz, Martin, Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State (September 22, 2015). ECB Working Paper No. 1847:

Friday, March 11, 2016

11/3/16: This Week: From Dublin...

Couple of quick deliveries from this week:

  • Enjoyed teaching my Applied Investment Management and Trading course at TCD, MSc Finance;

It has been a busy and rewarding week, so apologies for not blogging... 

Friday, March 4, 2016

4/3/16: Can Cryan halt Deutsche Bank's decline? Euromoney

Recently, I wrote about the multiple problems faced by the Deutsche Bank (see post here

Subsequently, Euromoney published a well-researched and wide-ranging article on the same subjects that is also worth reading, even though there are quite significant overlaps with my earlier post:

Thursday, March 3, 2016

3/3/16: BRIC Composite Activity - February

On a cumulative basis (based on Composite PMIs for each country), the BRIC economies as a group have posted a very disappointing performance in February 2016.

Note: for this index, 100.0 is a zero growth marker.

Russian economy Composite Indicator posted a positive upside surprise, rising from a contractionary reading of 96.8 in January to a weakly-expansionary reading of 101.2. 3mo average through February 2016, however, remains below 100 line at 97.9, which is weaker than the 3mo average through November 2015 at 100.3. The details of Russian Manufacturing sector woes are covered here:, while details of Russian Services and Composite PMIs upside are covered here:

As a result, Russian economy acted as a factor pushing up BRIC rates of growth in February:

In contrast with Russia, Chinese Composite Indicator posted a significant contraction in February, falling from 100.2 (zero growth) in January 2016 to 98.8 (weak contraction) in February. On a 3mo average basis, the index is now at 99.3 for the period through February 2016, up marginally on 98.9 reading for the 3months through November 2015, but down on 102.4 reading for the 3mo average through February 2015. Details of Chinese Manufacturing PMIs are covered here:, while details of Services and Composite PMIs are covered here:

India’s Composite Indicator fell from 106.6 in January to 102.4 in February, signalling major slowdown in the rate of economic expansion. 3mo average through February 2016 is at 104.1, reflecting robust growth in January, and up on 102.9 3mo average through November 2015, but below 105.3 reading for the 3 months period through February 2015. The weakness in the Indian economic growth is highlighted by comparison to the historical average, which stands at 109.5.

Per Markit: “February data showed that services firms and goods producers alike registered weaker increases in activity. …Falling to a three-month low of 51.4 in February, from 54.3 in January, the seasonally adjusted Nikkei Services Business Activity Index highlighted a softer expansion of output that was only marginal. Where growth was seen, businesses reported higher levels of incoming new work. Although new orders at services firms continued to rise in February, the rate of expansion eased to the weakest since last November as firms reportedly faced strong competition for new work during the month. A quicker increase in order book volumes in the manufacturing economy was insufficient to prevent growth of private sector new orders from easing to a three-month low.”

Conditions in Indian Manufacturing are covered in detail here:

Meanwhile, Brazil remained the sickest economy in the BRIC group. Composite Indicator for Brazilian economy sunk to an all-time low of 78.0 from an already recessionary 90.2 in January. As the result, 3mo average for Brazil’s Composite Indicator was at 85.3, down on already extremely weak 86.6 recorded over the 3 months through November 2015 and on 100.1 3mo average through February 2015.

According to Markit: “The downturn in the Brazilian economy took a noticeable turn for the worse in February. Business activity, new orders and employment all fell at, or near to, the fastest rates since the combined manufacturing and service survey began in March 2007. Companies continued to link the adverse operating environment to the ongoing economic, financial and political crises. …Accelerated downturns were registered at manufacturers and service providers alike, although the slump at services companies was especially severe. At 36.9 in February, down from 44.4 in January, the seasonally adjusted Markit Services Business Activity Index posted its lowest reading in the nine-year survey history. Business activity has fallen in each of the past 12 months.”

Brazil’s Manufacturing PMIs were covered in detail here:

The summary of changes in both manufacturing and Services sectors across all BRIC economies is here:

Thus, overall, global GDP-weighted BRIC PMI Indicator (computed by me) fell to 98.4 - signalling moderate or mild contraction, down from January reading of 100.6. The Index is now registering sub-100 readings in seven out of nine last months. Worse, BRIC economies last posted a statistically significant reading for growth back in December 2014. On a 3mo basis, 3 months average through February 2016 is at 99.1, which is basically unchanged on 3mo average through November 2015 (99.0) and significantly lower than the 3mo average through January 2015 (101.8). Starting with February 2015, the index has been averaging zero growth.

3/3/16: China Services & Composite PMI: February

China Services PMI fell to 51.2 in February, from January’s six-month high of 52.4, pointing to a much slower rate of growth than the historical series average of 55.0. This comes on foot of Manufacturing PMI registering an outright contraction in February, with the rate of reduction quickening to the steepest since September 2015 (details here:

Services PMI 3mo average through February was 51.3, which is basically flat on 51.2 recored in 3mo period through November 2015 and lower than 3mo average through February 2015 (52.4).

Per Markit: “New business growth also slowed across the service sector in February after a solid rise at the start of the year. Furthermore, the latest increase in new orders was weaker than the long-run trend and only modest, with some panellists commenting on relatively subdued client demand. New orders continued to decline at manufacturing companies, and at a slightly quicker rate than at the start of 2016.”

After posting a weak stabilisation in January (at 50.1), the Composite PMI fell to a recessionary level of 49.4 in February, indicating “a renewed fall in total Chinese business activity in February… to signal a marginal rate of contraction.”
 On a 3mo basis, 3mo average through February 2016 was at 49.7, up on 3mo average through November 2015 (49.5) and down on 3mo average through February 2015 (51.2). Again, last six months we saw averages well below historical average (52.9).

Per Markit, “slower increases in both activity and new orders contributed to a weaker expansion of service sector staff numbers in February. Companies that reported higher staff numbers generally mentioned hiring new employees in line with new order growth. Job shedding meanwhile intensified across the manufacturing sector in February, with the latest decline in workforce numbers the sharpest since January 2009. As a result, composite employment fell at a rate that, though modest, was the quickest in six months.”

This clearly signals that troubles are not over for Chinese economy and also suggests that currently projected rates of growth for the world’s second largest economy are way off the mark. Composite PMIs have now posted sub-zero growth signals in five out of the last seven months, with one other month reading being basically consistent with zero growth. On a Composite indicator basis, China is now the second weakest economy in the BRIC group after Brazil, with Russia overtaking itm having posted a composite index reading of 50.6 in February. Over the last 12 months, the same situation prevailed in July-September 2015, and in November 2015 the two countries were tied for the second worst performance reading.

3/3/16: Russia Services & Composite PMI: February

Russian Services PMI came in with surprising upside that bucked the trend in Manufacturing (see links here:, posting 50.9 reading in February, up from 47.1 in January. On a 3mo basis, however, 3mo average through February remains below 50.0 expansion line at 48.6, which is actually poorer than 49.6 3mo average through November 2015, although much better than 43.7 3mo average through February 2015. In simple terms, February uptick in growth in Services is fragile, unconfirmed, and at this stage does not constitute a robust signal of economic stabilisation.

Per Markit: “Russian service providers reported a slight increase in their business activity levels during February, driven by an expansion in new orders. However, a rise in new projects could not prevent a further sharp deterioration in outstanding business in the sector. Meanwhile, job cuts were evident while price pressures continued to persist.” Still, “the latest increase ends a four month sequence of contraction. Panel members partly linked rising output to an increase in new export orders, the result of a depreciating rouble.”

Net summary is: February reading for Services is encouraging, but is not yet consistent with sustained stabilisation in the economy. 

This has been confirmed by the Russia’s Composite Output Index which also returned to expansion territory in February for the first time in three months. Per Markit: “however at 50.6, up from January’s 48.4, the latest upturn was relatively weak.” On a 3mo basis, the Composite index is still below 50 at 49.0, which is lower than Composite Index average for the 3 months through November 2015 (50.2) although strongly ahead of the abysmal reading for the 3mo period through February 2015 (46.2).

“A higher level of new business was reported by Russian service providers during February, the first increase in five months. However, the pace of
growth was relatively weak. Anecdotal evidence suggested that the expansion reflected the introduction of new products across the sector. Meanwhile, a slight rise in volumes of new orders were reported by manufacturers this month.”

Again, on the net, Composite PMI figures show the return to growth to be unconvincing at this stage. We will need at least 3 consecutive months of above 50 readings to make any serious judgement as to the reversal of recessionary dynamics in Russian economy.

3/3/16: Long-Run China Tops Scary Charts League This Week

The Truly Scary Chart of the week comes not the courtesy of the world of finances, but that of demographics... and no, it is not of the dead elephants of Germany, Italy and the Euro area, but of the (for now much) alive China:

Yes, 2030s are far away, so level declines are yet to come, but rate declines are already here and it is the rate that matters, not so much the level, when it comes to growth.

3/3/16: Hitting Record Deflationary Expectations & Waves of Monetary Activism

In a fully-repaired world of the global economy...

Source: Bloomberg

Per SocGen, thus, all the QE and monetary activism have gone pretty much nowhere, as deflationary expectations are hitting all-time record levels. And that with the U.S. inflationary readings coming in relatively strong (see

Which might be a positive thing today, but can turn into a pesky problem tomorrow. Why? Because U.S. inflationary firming up may be a result of the past monetary policy mismatches between the Fed and the rest of the world. If so, we are witnessing not a structural return to 'normalcy' but a simple iteration of a vicious cycle, whereby competitive devaluations, financial repressions and monetary easing waves simply transfer liquidity surpluses around the world, cancelling each other out when it comes to global growth.

Give that possibility a thought...

2/3/16: Irish Manufacturing PMI: February

Irish Manufacturing PMI posted a long-anticipated, and relatively mild slip back from a rapid pace of expansion in January (54.3) to shallower growth in February 2016 (52.9).

Despite this fall back, 3mo average Manufacturing PMI for the period through February stood at 53.8, which is above the 3mo average reading through November 2015 (53.6), although well below the 3mo average through February 2015 (56.5).

Per Markit release: “Growth eased in the Irish manufacturing sector in February as new orders increased at the weakest pace since late-2013. Output and purchasing activity also rose at slower rates, but employment bucked the wider trend by increasing more quickly than at the start of the year. The rate of input cost deflation quickened to the fastest since November 2009, with output prices also falling at a sharper pace in response… Where new
orders did increase, panellists often mentioned higher new business from export markets, in turn reflecting new orders from the UK and US. Growth in new export business also slowed, however.”

Good news is: “…the latest solid expansion in production extended the current sequence of growth to 33 months.” Bad news is: much of growth seems to be concentrated in the areas benefiting from weaker Euro, not in the areas of organic expansion.

2/3/16: BRIC Manufacturing PMI: February

BRIC manufacturing sector conditions have posted major deterioration in February 2016 compared to January, marking another ugly month for world’s largest emerging economies.

Russian Manufacturing PMI for February posted a rather unsurprising and relatively mild deterioration from already marginally-recessionary reading in January. Details are covered here:

Chinese Manufacturing PMI continued to tank in February, with country Manufacturing sector remaining the weakest of all BRICs, save Brazil, every month since July 2015. The details are covered here:

Meanwhile, Brazil’s manufacturing recession “extended to February, with a further drop in incoming new work leading companies to lower production and cut jobs again. Such was the extent of the downturn that firms shed jobs at the second-fastest pace since April 2009,” per Markit.

Brazil’s Manufacturing PMI fell from an ugly 47.4 in January to a horrific 44.5 in February, marking 13th consecutive sub-50 reading. On a 3mo average basis, Brazil’s Manufacturing remained in a contraction (45.8) over the 3mo period through February 2016, just as it was in the contraction (44.0 average) in the 3mo period through November 2015. In 3mo period through February 2015, PMI averaged 50.2.

Per Markit: “Amid evidence of an increasingly fragile economy and a subsequent fall in demand, the level of new business received by Brazilian manufacturers decreased in February. Having accelerated to the fastest since November 2015, the pace of contraction was steep. As a consequence, companies scaled down output again. Production dipped at a sharp and accelerated rate.
Supported by the depreciating real, new foreign orders for Brazilian manufactured goods improved for the third straight month in February. That said, new business from abroad increased at a modest pace overall.”

All in, Brazil remains BRIC’s weakest economy in Manufacturing sector terms every month since February 2015.

As in previous months, India was the only BRIC economy with Manufacturing PMI reading above 50.0 marker. In February 2016, Indian Manufacturing PMI stood at 51.1, unchanged in January 2016. The positive impact of this, however, is weak, at 51.1 marks relatively low (by historical comparisons) growth in the Indian Manufacturing sector.

Per Markit: “Manufacturing business conditions in India continued to improve, with new orders, exports, output and purchasing activity all rising in February. However, a faster expansion in new business inflows failed to lift growth of output and workforce numbers were left broadly unchanged again. PMI
data also highlighted a weaker rise in costs and the first reduction in selling prices since September 2015… Reflecting sustained growth of new work, Indian manufacturers raised their production volumes in February. That said, the rate of expansion eased since January and was marginal overall.”

On a 3mo MA basis, Indian Manufacturing PMI averaged 50.4 in 3 months through February 2016, down on 50.7 average for the 3mo period through November 2015 and down massively on 52.9 3mo average through February 2015.

Overall, India remains the best performing economy in the BRIC group, even though its Manufacturing sector growth is now in slow growth mode since September 2015.

In summary, in February, BRIC group of world’s largest emerging markets economies has posted another deeply disappointing performance across the Manufacturing sector. This compounds adverse headwinds in these economies in January and signals strong possibility of the BRICs exerting a significant negative pressure on global growth.

Wednesday, March 2, 2016

2/3/16: China Manufacturing PMI: February

Chinese Manufacturing PMI for February signalled worsening operating conditions in the sector and marked 12th consecutive month of recessionary readings, reaching 48.0 in February, down from 48.4 in January and down from 50.7 in February 2015.

Per Markit: “Operating conditions faced by Chinese goods producers continued to deteriorate in February. Output and total new orders both declined at slightly faster rates than at the start of 2016, which in turn contributed to the quickest reduction in staffing levels since January 2009. Lower production was a key factor leading to the steepest fall in stocks of finished goods in nearly four-and-a-half years during February. At the same time, lower intakes of new work enabled firms to marginally reduce their level of work-in-hand for the first time in ten months. Prices data indicated weaker deflationary pressures, with both selling prices and input costs
declining at modest rates.”

On a 3mo MA basis, 3mo average through February stood at 48.2 - second lowest in the BRICs, up marginally on 48.0 3mo average through November 2015, but down on 50.0 3mo average through February 2015.

It is simply impossible to imagine how this data can be consistent with 6.9 percent growth recorded in 2015 or with over 6% growth being penciled for 1Q 2016.

As shown above, China is now a consistent under-performer in the BRIC group since July 2015 with its Manufacturing PMI reading below that of Russia (in a recession) and above Brazil (in a deep recession).

2/3/16: Russia Manufacturing PMI: February

Russian Manufacturing PMI for February produced another disappointment, falling from a marginally contractionary reading of 49.8 to somewhat faster contraction-signalling 49.3.

Per Markit, “Russian manufacturers reported a further deterioration in operating conditions during February, the third in as many months. Job cuts
were evident amid a sharp fall in backlogs of work. However, production remained broadly unchanged as a slight rise in new orders was reported. Meanwhile, price pressures remained evident, as both output charges and input costs rose.” So firms effectively were reducing their backlogs of orders, with work-in-hand reductions continuing now every month since March 2013.

On a slightly positive note, per Markit: “Russian goods producers recorded a slight expansion in new business volumes during February. According to anecdotal evidence, a higher volume of new work reflected the development of new products. However, the rise in new orders was driven by the domestic market, as new export orders declined further. The rate of contraction accelerated to the sharpest in 19 months and was marked overall.”

On a 3mo MA basis, 3mo average through February 2016 stood at 49.3, which is lower than the 3mo average through November 2015 (49.8), but still better than the 3mo average through February 2015 (48.7).

So the key reading from this data is that Manufacturing remains in a shallow downturn for the third month in a row, signalling a poor start to 2016 and leaving no doubt that the economy is now set to post another quarter of negative growth, unless there is a major improvement in Services sector readings in February and a major gain across both sectors in March.

Tuesday, March 1, 2016

29/2/16: GE 2016 - Ireland's Answers to No Questions Asked

The election 2016 is a catalyst-free contest that has been shaped by the political parties attempts to understand the mind of the electorate, while the electorate has been struggling to make up its mind about what the pivotal issues of the election should be. Compounded by the  epic gaffes of the reality-skipping life-time politicos (take that Enda Kenny pill, ye old comedian) and we had an election devoid of real ideas and ideals as far as the mainstream parties go.

Harder Left and genuine Centre-Left (e.g. Social Democrats and majority of the independents) have attempted to focus the elections on the issues relating to the lagging nature of economic recovery in the domestic sectors - an issue that, traditionally, has been the core breadwinner for the Labour. However, having completely abandoned any pretence at ideals-based, principles-rich politics, the Labour has thrown its weight behind the FG-led attempt to steer plebiscite into a debate about a general (and to majority of us abstract) notion of policy continuity and stability of governance as the panacea for the ‘continued recovery’. Topical issues and specific policies aimed at actually producing a real recovery that is not stuck in the canyons of tax arbitrage by the MNCs became the victims of this absurd departure from the world of the living into the world of FG/LP.

Even shielded from competition by being effectively the only Right-of-Centre (in the Politics of Boggerville 101-style of Enda Kenny and Michael Noonan) party, FG has managed to squander the election by such a massive margin, one has to wonder how on earth can the party continue to pretend to represent anyone other than a handful of clientilist farmers, rent-seeking businessmen and a bunch of conservative civil servants. 

Not surprisingly, the key battles of the GE2016 have been waged in the contestable space created by Labour’s departure from its social and electoral core. 

Failure of Labour and FG to consolidate Centre-Left and Centre has meant that the FF was left significant room to recover some of its electoral fortunes. In a typically FF fashion, the ‘new party of the Centre-Left’ has managed to deliver very few tangible new ideas, but provided plenty oppositional rhetoric and old-fashioned pork barrel promises.

All in, Election 2016 was dominated by the lack of big thinking, shortage of specific ideas, and a large doses of surrealism. Neither global, nor European context entered the mainstream debates; economics swung from ‘tax and don’t spend’ to ‘don’t tax and do spend’ heralding the arrival of the Celtic Tiger 3.0. The entire circus of the ‘fiscal space’ debates was yet another opportunity for Enda Kenny to play the role of a cross between the U.S. Republican contestants Ben Carson and Jeb Bush - a dynamic combo of a man who can’t run for the office and a man who doesn’t know he wants to run for the office. Money, advisers, analysts, party machines and even track record - all squandered on disconnecting from the voters.

In contrast, three smaller political groupings / parties: Renua from the Right and Social Democrats from the Centre Left and the Independent Alliance have mangled to produce far reaching, ambitious, even if, at times, poorly structured policies proposals. The Independent Alliance and Soc Dems have fielded some really strong, highly impactful candidates with ideals and occasionally ideas of their own. These three forces, relatively weak and surrounded by a sprinkling of other independents and political groupings brought into Election 2016 something missing in Irish politics - integrity, honesty, openness and debates. No matter how strong their showing in the current Election has been, they provided a crucially important alternative to the stale politics of Irish elites: the Axis of FG, FF and Labour.

The most surprising aspect of the Election 2016 is the complete and total disregard by the core political parties for the voter perception of Irish politics as a palace of parochialism, corruption and cronyism. After 5 years of the current Coalition effectively replaying old FF book on cronyism and favouritism, while droning on about the ‘New Era in Politics’, the litmus test of this electoral cycle should have been a focus on political system renewal and reforms. This simple was a task too difficult for the political system to handle and even contemplate. Which, sadly, means that our Permanent Government - the cabal of unelected advisers and senior civil servants - remain in place, aided and abetted by the school of hungry and agile piranhas from the private sector always ready to issue a research note or two about the need for continuity, the necessity of predictability, the value of stability and the fabled markets’ longing for conformity with the status quo.

All hail Tipperary North constituency for delivering much of it in a concentrated form once again… 

Which brings us around to 'predicting the future'. It will be the same as the past.  

Any coalition involving FG will be a poison chalice to either FF or FG or both precisely because although FF lacks ideas, at least it is based on the ideal of a pub-pump-politics that connects with wider ranging population. FG can't even muster as much. Despite the fact that the latter has a better pool of younger cadre than the former, in my opinion, and has been better in governance too (although here we really are setting the bar low to begin with). FG will continue to play the 'extend and pretend' card in any power deal, hoping the miracle of recovery (sooner or later, it is bound to happen in a meaningful way, or so the theory goes) will sustain them into the next election. Which means their track record will be woeful - no reforms, no change, just throwing pennies and dimes at problems as soon as Michael Noonan can rake them in. 

For FF, such a scenario won't be good enough because the party needs desperately to rebuild and re-energise its base (which it started doing in the GE 2016, but is yet to complete).

Any other coalition (involving Independents) will not be stable, as FG seniors clamour for top brass positions, while the Independents largely want the same. Competition is an unbearable condition for Irish elites that prefer to play a 'spread others' butter on your spuds' game.

Alternatively, the whole circus tent might come down and we might go to the polls once again, comes late 2016 - early 2017, especially if the 'fiscal space' gets shocked a tad.

I'd put 30-35% chance on the GE2016.2.0, an a balance on the FF/FG shotgun marriage, and a 40% change on GE2017. Though, of course, miracles of the parish priest and the publican agreeing with the AIB branch manager down at the pub on where to put that new Centra in town do happen, still... Harmony might be attained.