Tuesday, March 20, 2018

19/3/18: Drivers of the low labor force participation rate: U.S. data since 2001

Why doesn't U.S. economic expansion 'feel' like an economy is at full employment? Because of the low participation rate that has effectively reduced unemployment to superficially low levels without creating sufficient amount of quality jobs to offset the rise in working age population since the end of the Great Recession.

Here is a chart, via @ernietyedeschi, showing that the U.S. economic expansion has only recently started reducing the sticky non-participation drivers that remain in play since 2001:

The above is a fundamental problem for a range of advanced economies, not just the U.S. as I have noted in a number of previous posts, as well as a factor related to the secular stagnation thesis on both, demographic side (demand side secular stagnation) and technology / wages side (supply side secular stagnation).

Monday, March 19, 2018

19/3/18: Trump Trade Challenge: An Opportunity for Ireland?

My article on the potential implications of the U.S. trade tariffs on Ireland's economy was published by the Sunday Business Post yesterday. Here is the link: https://www.businesspost.ie/business/constantin-gurdgiev-trump-trade-412065

19/3/18: Bitcoin as a Hedge?..

The story of Bitcoin has been told, repeatedly, as a story of an asset that offers a hedge to stocks, a hedge against the fiat currencies and a hedge against the excesses of QE. That story is pure, unadulterated bullshit.

As the chart above shows, Bitcoin is more of a lead-indicator to S&P 500, than a hedge. With volatility well in excess of other comparable instruments. 

Tuesday, March 13, 2018

13/3/18: Another Brick in the Secular Stagnation Wall

Another brick in the Secular Stagnation Wall: global productivity growth has now collapsed in all major groups of economies:

And the short-lived blip to the upside over the late 2014 in the advanced economies is now... well, short-lived.

Wednesday, March 7, 2018

7/3/18: U.S. Economy: May Keynesian Economics and Fiscal Prudence R.I.P.

We've got an old problem, Roger. Deficits and their forward projections:

And the more detailed vision of the problem:

Now, keep in mind: we are accumulating these at the time of an expanding economy and continued accommodative monetary policies. In other words, the spring is being loaded on the double.

May both, Keynesian economics and Fiscal Prudence, R.I.P.

Monday, March 5, 2018

5/3/18: Rational Valuations Meet a Parody Cowboy

There is one word that explains the latest Bloomberg musings on the markets pricing in the impact of Trump's aluminium & steel tariffs: ambiguity. Here is the original article:
"The good Donald, the bad Donald and the ugly market" https://www.bloomberg.com/gadfly/articles/2018-03-02/tariffs-the-good-donald-the-bad-donald-and-the-ugly-market via @gadfly

With its cool imagery:

And here is my analysis: tariffs pricing by the markets reflects three VUCA factors. Factor 1: Ambiguity. This relates to ambiguous nature of Trump's policies, with tariffs seemingly laying waste to the idea that Trump Administration can be deemed to be 'maturing' into the office. Factor 2: Complexity. This relates to the nature of the global economy and its dependence on international cooperation agreements and frameworks, the very same institutions that Factor 1 puts into question without providing any certainty as to the exact direction of future change or, indeed, the metrics by which policy successes will be measured. Factor 3: Second Order Ambiguity. This arises from the interaction between Factors 1 and 2 above: as Trump Administration bites chunks out of international structures and treaties, ambiguity and complexity arise not only within the context of the Administration tenure itself. Trump's actions drive unpredictable, uncertain and ambiguous changes into the post-Trump era responses from the future U.S. Presidents. If you are running a business or investing in a company, you need to think beyond November 2020 (which is just over 2.5 years away) and that thinking is virtually impossible under current policy volatility and uncertainty.

In Hollywood, falling out of the second story window, while showering the town around you in bullets is a fun game. In the real world, you just might end up being killed. Companies and investments are not run like an Indiana Jones' movie set. Even when a 'Western' parody cowboy is sitting in the White House.

5/3/18: S&P upgrade and Russian markets reaction

Belatedly, on the S&P upgrade for Russian Sovereign Debt, here is a good primer from Bloomberg: https://www.bloomberg.com/gadfly/articles/2018-02-23/russia-bonds-are-poised-to-come-off-the-junk-heap.

Markets repricing was quick on the news, when S&P did upgrade country bonds from BB+ to BBB: Russian dollar- and euro-denominated bonds rose across the maturity curve. Russia’s 2043 eurobond was up 1.4 cents to 115 cents in the dollar the day after the upgrade, while 2026 issue was up 0.69 cents to 105 cents, and the 2027 issue was up 0.72 cents to 101 cents. 5 year CDS fell 5 bps to 103 bps.

This was not a watershed, however, as Russian bonds been rallying (with some volatility) for quite some time prior, shaking off completely end of January extension of the U.S. sanctions.

A neat chart via BOFIT shows the improvement in the state of Russian fiscal position:

Russia spent 3 years in 'junk rating' lock up, much of it down to the U.S. and EU sanctions, rather than to any adverse dynamic in Russian sovereign default risks.

As BOFIT noted, "S&P Global Ratings noted that Russia’s macroeconomic policy has allowed the economy to adjust to lower commodity prices and international sanctions. The outlook for the Russian economy is stable. S&P’s rating for Russian sovereign foreign bonds now matches that
of Fitch, while Moody’s continues to apply a junk rating (Ba1). ... The Russian government currently faces no compelling need to borrow from abroad as the current fiscal outlook is rather good thanks to the rise of oil prices and fiscal discipline."

In 2017, Russia witnessed an 18 percent rise in Federal revenues, and an 8 percent increase in allocations to the Social Reserve Funds (spending from the funds rose 6 percent).

Russia retains the position, rather rare for any country, to be able to pay off its entire external Government debt from its sovereign reserves.

5/2/18: Italy Smacks into VUCA Wall

VUCA wins. In Italy.

Italian elections results are coming in and several key VUCA components are now clearly at play in Europe's third largest economy: https://www.theguardian.com/world/ng-interactive/2018/mar/05/italian-elections-2018-full-results-renzi-berlusconi.

Now, what does this mean?

Italian Parliament:
234 seats for M5S
122 seats for Lega
105 seats for PDs
96 seats for FI

Italian Senate:
115 seats for M5S
55 seats for Lega
53 seats for FI
50 seats for PD

M5S - the 'Five Star Movement' has consolidated and expanded its launching position of 2013, despite virtually all analysts declaring the party to be 'falling' in support, especially after 2017 local elections. Welcome to the world of VUCA, where the more 'accomplished' the analyst, the less accurate are her/his predictions, because our traditional analytical tools miss the C & A bits of VUCA (complexity & ambiguity).

Renzi & mainstream politics have lost. His PDs are decimated. They have only themselves to blame: centre-left ideology is of nil distinction from centre and centre-right these days. Not only in Italy, but elsewhere too: just observe the U.S. Democrats sparing with the U.S. Republicans on virtually everything, save actual policies. The squabbling that the lack of ideological core implies is intense within the centre-left in Italy. Just as it is intense elsewhere (e.g. the U.S., where the centre-left's only differentiation from the centre-right is who to blame for the country problems, save blaming themselves).

Centre-right (Berlusconi) failed to capture anyone's hearts and minds, so the Lega Nord has taken its votes. Which makes Lega a major winner in the election: the party went from its cyclical low of 4 percent in 2013 election to its historical peak of around 18 percent in this election. The change of leadership in 2013 (to Salvini) has paid off.

Key takeaway from all of this is that in the modern, highly volatile, uncertain, complex and ambiguous political environment, writing off populist parties at the extreme o political spectrum is a dangerous game. We think of these parties as being driven to successes and subsequent failures by individual personalities of their leaders. That does not appear to be the case. Complexity overrides trends.

Meanwhile, in Brussels, power-fixing mode was on. As reported in the Guardian: "The [EU] commission’s chief spokesman, Margaritis Schinas, told reporters its president, Jean-Claude Juncker, wanted to see a “stable government in Italy” and “regarding the potential impact and so on and so forth... ‘Keep calm and carry on’”. In other words, get Renzi back by all possible means and do not challenge centrism. That is just another manifestation of VUCA for you: the ossified elites dependent on status quo ante will only recognise VUCA effects after they drive the system to a point of no return.

Thursday, March 1, 2018

28/2/18: San Francisco Fed Research: Secular Stagnation Confirmed

This blog has been consistently warning about the continued pressures on the U.S. (and global) economy. In fact, bringing together two strands of research my a range of economists, I defined the term 'twin secular stagnations' to describe a trend of structural long term decline in the potential growth rates on

  • The supply side of the U.S. economy (productivity growth and technological progress slowdowns, along with monopolization trends in the economy, or the supply side secular stagnation), and 
  • The demand side  (excessive leverage, growing asymmetry in distribution of productive capital ownership, and ageing-induced changes in savings, consumption and investment, or the demand side secular stagnation).
The topic has not gone away, even though media commentariate in the U.S. and elsewhere have been fully consumed by the waves of optimism stemming from the tale of a 'robust growth' cycle.

Well, guess what: the 'spectacular' or 'tremendous' (using White House terminology) growth is largely a cyclical phenomena, as the latest research from the U.S. Federal Reserve Bank of San Francisco indicates.  You can read the full note here: https://www.frbsf.org/economic-research/files/el2018-04.pdf. The core is in this chart:

You can see the flattening out and the decline in the cyclically-adjusted growth rate (the blue line).  This line shows us the rates of growth smoothing out the effects of growth-and-recessions cycles. Secular stagnation is still here: "As expected, the cyclical adjustment removes the sharp drop in actual output associated with the recession. But since then, the trajectory of the blue line is nowhere close to a straight line projection from the 2007 peak. Rather, cyclically adjusted output per person rose slowly after 2007 and then plateaued in recent years."

The authors link this worrying development to supply-side slowdown in productivity growth, and they clearly state that this slowdown in productivity growth pre-dates the Great Recession. In other words, the collapse in productivity growth is structural, not cyclical.

"The seeds of the disappointing growth in output were sown before the recession in the form of slow productivity growth and a declining labor force participation rate. Quantitatively, relative to the recoveries of the 1980s, 1990s, and early 2000s, cyclically adjusted output per person has grown about 1¾ percentage points per year more slowly since 2009. According to our analysis, about a percentage point of this is explained by the shortfall in productivity growth and about ¾ percentage

point is explained by the shortfall in labor force participation."

The latter is shocking!

So no, folks, the U.S. economy has not been doing 'ugely' well since 2009. It has not been doing better, either, than in the pre-crisis period. In fact, the U.S. economy has lost a lot of its long run economic growth potential. And so far, there is absolutely nothing anyone in Washington is willing to do about changing that long-term decline, because doing so will require deep reforms and rebalancing of the economy away from oligopolistic and monopolistic competition, away from rent seeking, away from rewarding physical capital at the expense of human capital, as well as reducing massive drags on demand side, including healthcare and education costs, debt overhang in households (especially younger cohorts), abating skyrocketing rents & property inflation in key urban locations, and so on. 

Care to suggest any party in Washington willing to tackle these?..