Monday, May 21, 2018

21/5/18: Truth Decay and Fake News: Four Links

Some useful links on recent research  concerning the relationship between empirical/factual evidence, newsflows and policy discourse in the West:

21/5/18: Italian Sovereign Risks Are Blowing Up

As I noted in my comment to ECR / Euromoney and in my article for Sunday Business Post (see links here: and, the ongoing process of Government formation in Italy represents a fallout from the substantial VUCA events arising from the recent elections, and as such warrants a significant (albeit delayed) repricing of country sovereign risks. This process is now underway:

Source: Holger Zschaepitz @Schuldensuehner

Per chart above, Italy's 10 year bonds risk premium over Germany jumped to 181 bps on markets concerns with respect to fiscal dynamics implied by the new Government formation. This, however, is just a minor side show compared to the VUCA environment created by the broader dynamics of political populism and opportunism. And in this respect, Italy is just another European country exposed to these risks. In fact, as the latest data from the Timbro's Authoritarian Populism Index, Europe-wide, political populism is on the rise:

21/5/18: Risk experts take flight over Italy's political risk

Euromoney and ECR are covering the story of Italian political risk, with my comments on the rise of populism in Italy and its effects on sovereign risk with respect to the Italian Government formation negotiations:

21/5/28: Trouble is brewing in the Euro paradise

My article for the Sunday Business Post on the continued risk/VUCA from politics of populism to the Euro area reforms and stability:

Sunday, May 20, 2018

19/5/18: Leverage risk in investment markets is now systemic

Net margin debt is a measure of leverage investors carry in their markets exposures, or, put differently, the level of debt accumulated on margin accounts. Back at the end of March 2018, the level of margin debt in the U.S. stock markets stood at just under $645.2 billion, second highest on record after January 2018 when the total margin debt hit an all-time-high of $665.7 billion, prompting FINRA to issue a warning about the unsustainable levels of debt held by investors.

Here are the levels of gross margin debt:


And here is the net margin debt as a ratio to the markets valuation - a more direct measure of leverage, via Goldman Sachs research note:
Which is even more telling than the absolute gross levels of margin debt in the previous chart.

Per latest FINRA statistics (, as of the end of April 2018, debit balances in margin accounts rose to $652.3 billion, beating March levels

And things are even worse when we add leveraged ETFs to the total margin debt:

In simple terms, we are at systemic levels of risk relating to leverage in the equity markets.

Saturday, May 19, 2018

19/5/18: The Scary Inefficiency & Environmental Costs of Bitcoin

Bitcoin is just one of the cryptocurrencies, albeit the dominant one by market capitalisation and mining assets deployment. The cryptocurrency is best known for volatility of its exchange rate to key fiat currencies and other commodities, but the more interesting aspect of the Bitcoin (and other cryptos) is their hunger for energy. Cryptos are based on blockchain technologies that promise a range of benefits (majority unverified or untested or both), amongst which the high degree of security and peer-to-peer data registry, both of which are supported by the mining processes that effectively require deployment of  a vast amount of hash/algorithmic calculations in order to create data storage units, or blocks. In a sense, energy (electricity) is the main input into creation of blockchain records of transactions.

As the result, it is important to understand Bitcoin (and other cryptos) energy efficiency and utilisation, from three perspectives:
1) Direct efficiency - value added by the use of energy in mining Bitcoin per unit of BTC and unit of information recorded on a blockchain;
2) Economic efficiency or opportunity cost of using the energy expended on mining; and
3) Environmental efficiency - the environmental impact of energy used.

To-date, estimating the total demand for electricity arising from Bitcoin mining (let alone from mining of other cryptos) has been a huge challenge, primarily because Bitcoin miners are too often located in secretive jurisdiction, do not report any data about their operations and, quite often, can be highly atomistic. Although Bitcoin mining is a concentrated activity - with a small number of mega-miners and mining pools dominating the market - there is still a cottage industry of amateur and smaller scale miners sprinkled around the globe.

Thus, to-date, we have only very scant understanding of just how much of the scarce resource (energy) does the new industry of cryptos mining consume.

A new paper, published in a peer-reviewed journal, Joule, which is a reputable academic journal, titled "Bitcoin's Growing Energy Problem" and authored by Alex de Viries (Experience Center of PwC, Amsterdam, the Netherlands) attempts exactly this. The paper is the first in the literature to be peer-reviewed and uses a new methodology to discern trends in Bitcoin's electric energy consumption. The paper does not cover other cryptos, so its conclusions need to be scaled to estimate the entire impact of cryptocurrencies energy use.

The findings of de Viries are striking. He estimates the current Bitcoin usage of energy at 2.55 gigawatts, close to that of Ireland (3.1GW), approaching 7.67GW that "could already be reached in 2018", comparable to Austria (8.2GW). When reached, this will amount to 0.5% of the total world electricity consumption.

Per 'efficiency of blockchain', a single transaction on Bitcoin network uses as much electricity as an average household in the Netherlands uses in a month. Which is, put frankly, mad, wasteful and utterly unrealistic as far as transactions costs go for the network.

Per de Viries: "As per mid-March 2018, about 26 quintillion hashing operations are performed every second and non-stop by the Bitcoin network (Figure 1). At the same time, the Bitcoin network is only processing 2–3 transactions per second (around 200,000 transactions per day). This means that the ratio of hash calculations to processed transactions is 8.7 quintillion to 1 at best. The primary fuel for each of these calculations is electricity."

The key to the above numbers is that they vastly underestimate the true costs of Bitcoin and other cryptos to the global economy. The paper focuses solely on energy used on mining. However, other activities that sustain Bitcoin and blockchains are also energy-intensive, including trading in coins/tokens, storage of information blocks, etc. Worse, mining and processing / servicing of the networks required use of constant electricity supply, which means that the energy mix that goes to sustain cryptocurrencies operations is the worst from environmental quality perspective and must rely on heavy use of fossil fuels in the top up range of electricity demand spectrum. The environmental costs of Bitcoin and cryptos is staggering.

Scaling up Bitcoin figures from de Viries; paper to include other major cryptocurrencies would require factoring in the BTC's share of the total crypto markets by energy use. A proxy (an imperfect one) for this is BTC's total share of the cryptocurrencies publicly traded markets which stood at around 37.3% as of May 16, 2018. Assuming this proxy holds for mining and servicing costs, total demand for electricity from the cryptocurrencies and blockchain use around the world is more than 2.55GW/0.37 or more than 6.9GW, with de Viries' model implying that by year end, the system of cryptocurrencies can be burning through a staggering 1.35% of total electricity supply around the world.

The problem with the key cryptocurrencies proposition is that the system of blockchain-based public networks can deliver lower cost, higher efficiency alternatives to current records creation and storage. This proposition simply does not hold in the current energy demand environment.

The full paper can be read here: de Vries: "Bitcoin's Growing Energy Problem"

Friday, May 18, 2018

18/5/18: Euro area current accounts 1980-2017

What happened to the Euro area current accounts since the introduction of the Euro?

Periodically, I update my charts on the Euro effects on the external balances of the EA-12, the original economies of the Euro area. Here are the updates:

Considering first cumulated current account balances over 1980-2017 period, the chart below aggregates the EA12 into two sub-groups:

  • The 'periphery' defined as a group composed of Italy, Greece, Spain and Portugal
  • The 'core' group composed of the remaining EA12 countries

The chart shows several interesting facts
  1. Current account deficits in the 'peripheral' states predate the introduction of the Euro
  2. Since the introduction of the Euro through 2013 there was a consistent increase in the current account deficits amongst the 'periphery' states, with acceleration in deficits staring exactly at the point of the introduction of the Euro
  3. Current account deficits in the Euro area 'peripheral' states were rapidly accelerating into 2009
  4. Since 2014, current account deficits in the 'peripheral' states have been drawn down, at a moderate rate, as consistent with the internal deleveraging of these economies
  5. Meanwhile, the introduction of the Euro accelerated accumulation of current account surpluses within the 'core' group of EA12
  6. The rate of current account surpluses acceleration increased dramatically around 2004 and then again starting with 2009
In terms of external balances, the creation of the Euro area clearly resulted in compounding pre-Euro era existent structural imbalances in the EA12 economies.

Meanwhile, there is no discernible impact of the Euro on supporting growth in trade within the Euro area (here, we use changing countries composition of the Eurozone):

  As per above chart:
  • From 2000 and prior to 2014, Eurozone performance in terms of growth rates in exports of goods and services largely underperformed other advanced economies (ex-G7) and was in line with G7 performance
  • Before 2000, Eurozone was broadly in line with both the G7 and other advanced economies in terms of growth rates in exports of goods and services
  • Lastly, starting with 2014, the Euro area has been outperforming both the G7 and other advanced economies in terms of growth in exports of goods and services - a development that is more consistent with the fallout from the twin Global Financial Crisis (2007-2009) and the Euro Area Sovereign Debt Crisis (2011-2013), as the process of internal devaluation forced a number of Eurozone countries into more aggressive exporting
On the net, there remains no current account-linked evidence to support an argument that the creation of the Euro has been a net positive for the Eurozone member states in terms of improving their external balances and exports flows. On the other hand, there is little evidence that the Euro has hindered trade flows growth rates, whilst there is strong evidence to claim that the Euro has exacerbated current account imbalances between the 'core' and the 'periphery' states.

17/5/18" Timeline of Russian Growth 1992-2023 (forecasts)

I have annotated the timeline of Russia's GDP per capita from 1992 through forecast (IMF) out to 2023 with the inflation dynamics and presidential terms. For comparison, BRICS ex-Russia GDP per capita dynamics are presented as well.

Draw any conclusions you want:

Thursday, May 17, 2018

17/5/18: U.S. Labour Markets and the Trump Administration Record

The Global Macro Monitor have published an exhaustive study of the U.S. labour market trends over the first 15-16 months of the President Trump's tenure. The  post is long, brilliantly detailed, and empirically and intuitively flawless (yeah, I know, I don't think I ever used this descriptor of an economics research piece before). So read it in full here:

Top line conclusions are:

  • Comparing the "first 15 [monthly] payroll reports of the Trump administration to the last 15 of the Obama administration",  "as of the end of April 2018, the Trump economy has generated 2.7 million jobs versus 3.1 million in Obama’s economy, or 373k fewer workers added to payrolls"
  • Growth in employment was of lower quality during the Trump tenure to-date too: "the private sector has also added 124k fewer jobs in the Trump economy. Net job creation in the government sector under President Trump is relatively flat." The latter metric puts a boot into the arguments that President Trump is a fiscal conservative aiming to reduce public sector weight in the economy. 
  • Earnings comparatives are also wobbly: "There is relatively little difference in the growth of average hourly earnings in the Trump and Obama employment reports." Which is more striking when one recognises that the Trump Administration inherited a tightening labour market, in which, normally, one would expect more wages inflation.
  • "Job creation in President Trump’s economy outperforms the Obama economy in 5 of the 13 private sector industry groups, most significantly in manufacturing and mining", but "Almost all of the relative outperformance in mining is the result of the reversal in oil prices. Coal mining and auto manufacturing employment has not recovered". In other words, even in the core industries targeted by the Administration for growth, the Administration efforts have little to do with any recovery in the mining sector./ 
  • Cyclically, the authors note that "The results are surprising as GDP growth was significantly higher during the Trump payroll reports, averaging of 2.53 percent on an annual basis, versus 1.56 percent during the last five quarters of the previous administration". However, this also means that current jobs creation is coming toward the end of the expansion cycle, and can be expected to be lower due to constraints of labour supply.
  • Key observation, from macroeconomic environment point of view is that "the economy continues to reward capital over labor disproportionately". There is a fundamental problem with this development. The U.S. labour markets flexibility represents a net positive for the private sector productivity in the short run. However, as capital and technological deepening of production processes progresses, the very same flexibility leads to lower degree of upskilling and re-training of the existent workforce. This is a huge source of risk and uncertainty for the U.S. economy forward in terms of longer run potential growth and productivity growth.

In short, read the original post - it is packed with highly informative and very important data and observations!


Tuesday, May 15, 2018

15/5/18: S&P500 Earnings Diversification: International Trading Pays

An intersting (and occasionally covered on this blog) chart via FactSet on earnings and revenue growth for S&P500 constituents based on their exposures to international markets:

As the above clearly shows, globally diversified (by source of activity) companies have stronger growth in earnings and aggregate earnings. Not surprising, in general, but given the relative strength of the U.S. growth, compared to other regions' dynamics, this shows the value of income diversification.

15/518: Four macro charts that explain Trumpvolution

The current growth cycle has been the second longest on record:

Source: FactSet

But it has been much shallower than the previous cycles: "real GDP growth in the current expansion lags the other three expansions—by a lot. As of the first quarter of 2018, real GDP has expanded by 21% since the beginning of the current expansion; this is far lower than the 36% compound growth we saw at this point in the 1991‑2001 expansion. The chart also shows that the growth path for the longest expansions has continued to shift lower over time; the 1961‑1969 expansion saw real GDP grow by 52% by the end of its ninth year, while the economy had grown by just 38% by the end of year eight of the 1982‑1990 expansion."

Source: FactSet

And here's a summary of why loading risks of recession onto households is not such a great idea: "Real consumption has grown by 23% since the summer of 2009, compared to growth rates of 41% and 50% at the same point in the expansions of 1991‑2001 and 1961‑1969, respectively. The reluctance of consumers to spend in this expansion is not surprising when you consider how much of the brunt of the last recession was borne by this group."

Households' net worth collapse in the GFC has been more dramatic and the recovery from the crisis has been less pronounced than in the previous cycles:

Source: FactSet

Hey, you hear some say, but the recovery this time around has been 'historic' in terms of jobs creation. Right? Well, it has been historic... as in historically low:
Source: FactSet

So, despite the length of the recovery cycle, current state of the economy hardly warrants elevated levels of optimism. The recovery from the Global Financial Crisis and the Great Recession has been unimpressively sluggish, and the burden of the crises has been carried on the shoulders of ordinary households. Any wonder we have so many 'deplorables' ready to vote populist? As we noted in our recent paper (see:, the rise of populism has been a logical corollary to (1) the general trends toward secular stagnation in the economy since the mid-1990s, and (2) the impact of the twin 2008-2010 crises on households.

15/5/18: Beware of the Myth of Europe's Renaissance

My article for last Sunday's Business Post on why the Euro area growth Renaissance is more of a fizzle than a sizzle, and what Ireland needs to do to decouple from the Go Slow Europe: Hint: not an Irexit... and not more Tax Avoidance Boxes...

15/5/18: TrueEconomics makes top 100 blogs list

Delighted to see True Economics blog making Top 100 Economics Blogs list with the Intelligent Economist Huge thanks to all my readers for making this possible!

Saturday, May 12, 2018

12/5/18: Bubbles or Gartner Cycles? Tech is in it, again...

Nice visual on Gartner-maturity curve structure of sentiment driven fads in sectoral valuations:

12/5/18: Monetary Activism at ECB: A Chart of Failure

A simple chart, a great observation by Holger Zschaepitz @Schuldensuehner: "Chart of failure: #Eurozone core inflation has plunged to 0.7% despite #ECB balance sheet at record high. If ECB permanently fails to hit its #inflation target, it's time to rethink target. By the way, there is inflation in stocks, bonds, real estate not measured in official CPI."

The story of ECB racing away from the Fed and even BoJ in pursuit of the inflation Nirvana:

Which brings us to a bigger question: with ECB at play, what is there to brag about when it comes to Europe's latest growth "renaissance"? Read my article in the Business Post tomorrow... 

12/5/18: U.S. War in Afghanistan: when the patient yields to the compulsion to repeat

On and off, I have written occasionally about the complete lack of value-for-money accounting in the U.S. military spending and its imaginary successes. This is just another one of such occasions.

Here is a summary of the Special Report by the U.S. military watchdog, filed by the neoconservative in it is geopolitical positioning Foreign Policy magazine (the folks who support wars, like the one conducted in the Afghanistan):

I have summed the main findings in a series of tweets reproduced here:

Special Inspector General for Afghanistan reconstruction report of May 1: suicide attacks in Afghanistan up 50% in 2017, opium production +63%. Last GDP growth was recorded in 2012, since then, continued recession +

+ U.S. spent $126bn in relief & investment in Afghanistan over 17 years. The country now ranks 183 in the world to "do business.” < 1/3 of Afghans are connected to power grid. +

+ Number of bombs dropped by the West in Afghanistan in Jan-Feb 2018 was the highest it's been since 2013. Suicide attacks in Afghanistan are up 50% in 2017. Casualties from attacks are steadily rising. Sectarian attacks tripled in 2017. +

+ Only 65% of the Afghan population lives under government control, even though direct US expenditures to Afghan security forces of $78bn > than third largest military budget in the world. +

+ Number of serving Afghan military & police fell sharply in 2017, but U.S. forces presence is rising. "Insider attacks by Afghan soldiers are rising".

Note: the IMF data does not show decline in Afghanistan's GDP since 2013 in real terms (domestic currency), or in current US dollar terms, or in PPP-adjusted terms. The issue here is that the IMF data shows national accounts that include U.S. and Western Coalition spending and investment in the country and does not account for population growth. In fact: Afghanistan ranked 23rd lowest in the world in income per capita terms (using PPP-adjusted international dollars) in 2012. In 2017 it was ranked 19th lowest. This does mean that the economy got worse in Afghanistan in recent years. In line with this, Reuters reported earlier this year that Afghanistan's poverty rates have risen "sharply" over the last five years ( from 38% in 2011-2012, to 55% in 2016-2017. "Food insecurity has risen from 30.1 percent to 44.6 percent in five years, meaning many more people are forced to sell their land, take their children out of school to work or depend on food aid".

More details?  In September 2014, Foreign Policy wrote about another report by the same watchdog, headlining their story with a telling tag line: "Watchdog: United States Made Corruption in Afghanistan ‘Pervasive and Entrenched’". It is worth repeating that Foreign Policy is an intellectual bulwark of neoconservative doctrine that saw nothing wrong with any war the U.S. has started in the past.

The U.S. has already spent more on the war in Afghanistan (and related 'investments' there) than the entire country's GDP over the last decade. And it is tied into spending vastly more ( and

In January this year, to make the valiant efforts by the Western Coalition (read: Washington) in Afghanistan more transparent, Pentagon sought to withhold key information about the campaign from the public (

Yet, despite the U.S. larger-than-reported presence in the country, January report by SIGAR noted that  "43 percent of Afghanistan’s districts were either under Taliban control or being contested". This was after more than 16 years of war waged against the Taliban and other extremist groups by the largest, the mightiest and the best-equipped military force in the world. "Last year [2017], U.S. forces in Afghanistan restricted the amount of data it provided on the ANDSF, including casualties, personnel strength and attrition rates - data that has now been completely withheld." (See for more details).

In 2011, ten years into the campaign that promised to bring democracy and human rights to Afghanistan, the U.S. State Department stopped listing human rights as an objective for the U.S. Afghanistan policies. Not because these rights have been fully restored (or rather instituted), but because it became too embarrassing to keep them in policy documents as a reminder of the U.S. failures.

Seventeenth year into what amounts to a small war for the enormous military machine of the Fourth Rome, and the 'most brilliant', 'highly decorated', grossly overpaid and deeply revered in the popular media culture U.S. generals and politicos are clueless as to why the exceptionalist U.S. of A. has failed to control a dispersed gang of resistance fighters that, unlike the Vietnamese of the 1970s and the North Koreans of the 1950s, do not even have a superpower standing directly behind them. The reason, of course, is in the very ethos of the American power, the notions of exceptionalism and self-appointed mandate, both of which imply zero capacity to think based on historical and rational premises. As one of the authors on the topic quipped, quoting from Freud's 1914 paper Recollecting, Repeating, and Working Through,  "...the patient yields to the compulsion to repeat, which now replaces the impulsion to remember... The greater the resistance, the more extensively will acting out repetition replace remembering."

The Freud's quote (part of it) appears in this article from 2017 on the depressing comprehensiveness of the American war failure. It is worth a read: for it narrates in some detail the process of the repeated denial of reality by, at this stage, the third presidential administration in Washington engaged in an imperial dance of victory amidst the defeat.

The staggering cost of the Washington's adventurism in Afghanistan (and Iraq, and Libya, and next up - Syria, as well as in other parts of the world) has now cost the U.S. one of its historically closest proxies/allies, Pakistan (  This is a major, strategic defeat, given Pakistan's role in the region and the potential for the strengthening of the Pakistan-India-China-Iran cluster of power contests that will undoubtedly shape the entire region into the future. In simple terms, the U.S. has lost not just the war in Afghanistan, but it is losing dominance over the large swath of land that constitutes the largest cluster of world's population and has strategically central importance to the global economy and resources.

These failures are not surprising, once one takes a more rational look at the U.S. military machine and the religious devotion to it exhibited by Washington and American press. Quoting at length from Forbes (
"As it happens, the Pentagon is unique among federal agencies in having never undergone a full audit, an oversight with serious national security consequences. ...The good news is Congress has finally mandated an audit be completed by September of 2017, a deadline reached after the Department of Defense managed to skirt a government-wide audit requirement for more than two decades. The bad news is likely the audit results themselves. After all, a recent audit of the Army General Fund found bookkeepers somehow screwed up their accounting by $6.5 trillion in 2015. That number is particularly remarkable given that it is 13 times the size of the entire Pentagon budget for that year. “How could the Army misplace, fudge, misappropriate or otherwise lose $6.5 trillion?” asked an incredulous Matthew Gault reporting on the Army audit for War Is Boring. “It’s simple. Years of no oversight, bad accounting practices and crappy computer systems created this problem. And remember, this is just the Army and just its general fund.” If that’s the sort of rot we find in a single branch of the military, imagine the fiscal horrors yet to be uncovered throughout."

Note: the Defense Department delayed the audit start until December 2017 and is now promising a report from the auditors by November 2018. Worse, the audit is conducted by internal teams, in other words, the lunatics who run the asylum are now counting plates and pills in the place too. To put some veneer on this exercise, the Inspector General has hired 'external audit firms' to help analyse data collected by Pentagon's teams. The same 'audit firms' are some of the largest military and security consulting contractors, of course.

Meanwhile, the idiotic parroting of the past and failed narratives remains the leitmotif of the Washington's policy. Best exemplified by the amnesia-ridden, Ivy League-trained army of status quo dependent 'experts' and the headlines in the U.S. media echoing them: "Armed with a new strategy and renewed support from old allies, the Trump administration now believes it has everything it needs to win the war in Afghanistan." This, pretty much, sums up the best that the American-trained 'intellectual class' of the West Point-graduated generals and Harvard-trained 'analysts' can produce in place of a strategy.

The logical denouement of the U.S. failure to learn from Afghanistan adventure is the loss of the U.S. position in the region to China, followed by Iran, Pakistan, India and Russia - in that exact order. Afghanistan is likely to be the next - much larger than Syria - theatre of confrontation between Iran and Saudi-U.S. coalition, with Israel at a play too, and the American liabilities in such a conflict will be well beyond anything experienced in Iraq and Afghanistan combined. A proxy war between Iran and the U.S. via Afghanistan can risk spilling into an outright war between the two countries, which the U.S. will lose more decisively than Afghanistan, although the toll on Iran will be huge as well.

What Afghanistan has been exposing over the last 16 years, plus, is that the Pax Americana lacks not fire power, but vision, and that the lack of vision is what loses wars, and ends empires. Sail on, my thought-lacking friends from the Western Academia, military colleges, Washington's circles of Byzantine power-brokering expertise, and 'influential media'. Keep those aircraft carriers busy circling the globe. Keep awarding your military ranks free parking spaces at Walmarts and rent subsidies in the Paradise.

Wednesday, May 9, 2018

8/5/18: BRICS DECK: Part 2: PMIs, Investment and Inflation

In a recent post ( I have provided top level analysis of growth dynamics in the BRICS economies based on the IMF WEO April 2018 update. Here is the section of my BRICS deck with updated view on PMIs, Aggregate Investment and Inflation:

8/5/18: Law of Unintended Consequences and Complexity: Tax Cuts and Jobs Act 2017

The law of unintended consequences (or second order effects, as we call in economics) is ironclad: any policy reform has two sides to the coin, the side of forecasted and analyzed changes the reform engenders, and the side of consequences that appear after the reform has been enacted. The derivative proposition to this theorem is that the first side of the coin is what gets promoted by politicos in selling the reform, while the other side of the coin gets ignored until its consequences smack you in the face.

Behold the U.S. Tax Cuts and Jobs Act 2017, aka Trump's Tax Cuts, aka GOP's Gift for the Rich, aka... whatever you want to call it. Fitch Ratings recently released their analysis of the Act's unintended consequences, the impact the new law is likely to have on U.S. States' fiscal positions. And it is a tough read (see full note here:

"Recently enacted federal tax changes (H.R.1) are making budgeting and revenue forecasting more complex for many U.S. state governments," says Fitch. "...provisions including the cap on SALT deductions are a likely trigger behind a spike in state revenue collections for the current fiscal year. In Massachusetts for example, individual income tax collections through January 2018 were up nearly 12% from the prior year, this after the commonwealth recorded just 3% annual growth in January 2017. Many states are seeing robust year-over-year gains in revenue collections, though this will likely amount to little more than a one-time boost with income tax collections set to level off for the rest of the fiscal year."

State tax revenues can increase this year because, for example, of reduced Federal tax liabilities faced by households. As income tax at federal level falls, State tax deductions taken by households on their personal income for Federal tax liabilities will also fall, resulting in an increase in tax revenues to the States. Similarly, as Federal corporate income tax falls, and, assuming, corporate income rises, States will be able to collect increased revenues from the corporate activity domiciled in their jurisdictions. All of this implies higher tax revenues for the States. Offsetting these higher tax revenues, the Federal Government transfers to the individual states will likely decline as deficits balloon and as Pentagon demands an ever-greater share of Federal Budget.

In other words, the tax cuts are working, but do not expect these to continue working into the future. Or put differently, don't spend one-off revenue increases, folks. For high-spending States, like California, it is tempting to throw new money onto old bonfires, increasing allocations to public pensions and state hiring programs. But 2017 Tax Reform is a combination of permanent and temporary measures, with the latter more dominant than the former. Expiration of these measures, as well as complex interaction between various tax measures, suggest that the longer term effect of the Act on States' finances is not predictable and cannot be expected to remain in place indefinitely.

As Fitch noted: "Assessing the long-term implications of H.R. 1 will not be an easy task due to the complicated interrelationships of the law changes and because many of the provisions are scheduled to expire within the next decade. Yet-to-be finalized federal regulations around the tax bill and the possibility of additional federal legislation add more complexity and risk for states."

Tuesday, May 8, 2018

8/5/18: Germany's ifo: World Economic Climate Deteriorates

Here is the summary of the Germany's ifo Institute World Economic Climate outlook update (emphasis is mine):

"The ifo World Economic Climate has deteriorated. The indicator dropped from 26.0 points to 16.5 points in the second quarter, returning to more or less the same level as in the fourth quarter of 2017. Experts’ assessments of the current economic situation remained as favourable as last quarter, but their expectations are far less optimistic. The world economy is still experiencing an upturn, but it is losing impetus.

The economic climate deteriorated in nearly all regions. Both assessments of the current economic situation and expectations fell significantly in the USA. In the European Union, Latin America, the CIS countries, the Middle East and North Africa economic expectations also cooled down. Assessments of the current economic situation, by contrast, improved. Economic expectations also clouded over in the Asian emerging economies and developing countries. Assessments of the current economic situation, by contrast, remained more or less unchanged.

In line with rising inflation expectations, short and long-term interest rates will rise over the next six months. Experts also expect far weaker growth in world trade, partly because they are reckoning with higher trade barriers. Overall, experts expect world gross domestic product to increase by 3.9 percent this year."

This is in line with my recent warnings on the pressures building up in the global economy, as raised in a series of recent articles for the Sunday Business Post see and, and for the Cayman Financial Review see:

Thursday, May 3, 2018