Thursday, November 26, 2015

26/11/15: Counting Down to ECB's Big Surprise...

Counting the week to December 3rd ECB meeting, I have to ask one simple question: does anyone over in Frankfurt has a clue what they are doing?

Earlier this week, Reuters reported on a conversation with an unnamed ECB source

Here’s what we have learned:

  1. Things are far from smooth in the Euro area. We had some serious talking up on Money Supply side earlier this week, and we had incessant chatter about improving credit conditions. We even had promises of accelerated purchases in December (to offset holidays). But the ECB still appears to be directionless in so far as it still views QE road as insufficient. Menu of options is as wide as ever: more government bonds buys, deeper cuts to deposit rates, including a possible two-tier charge, purchases of municipal and regional debt, and even “buying rebundled loans at risk of non-payment has been discussed in preparatory meetings, although such a radical step is highly unlikely for now”. You really have to wonder: do they have any sense of direction (other than strictly forward)?
  2. "There are some who say you should surprise markets. But you cannot surprise indefinitely. Sooner or later, you are bound to disappoint." That is per ECB official. Wait a second, sooner or later? Just how many iterations of this circus will we be looking at? ECB’s commitment (rumoured) to push through a major surprise is a desperate bet. If surprise works, markets are likely to overshoot fundamental valuations on all fronts: from EUR/USD and EUR/Sterling to major equities indices and bond prices. But overshooting is not likely to hold unless the ECB continues to surprise the same markets. If, as likely, inflation remains anchored at low levels over the time of these surprises, the ECB will find itself in a situation where the only way to trigger any positive response from the markets will be to double down on every turn. Scared yet?..
  3. ”We have deflation, so you have to do something," said a second person. "How this all looks in a few years, nobody knows." And that is the scary bit - it appears that no one is willing to venture a field view deeper than a few months. Back to that directionless driving…
  4. Things, however, are clearly not working for Count Draghul: “Failing to [surprise the markets with expanded QE] so risks disappointing investors who expect ECB policy-setters to bolster a one-trillion-euro plus programme of quantitative easing when they meet on Dec. 3, in a move so significant it has been dubbed 'QE2’.” It seems the Euro area monetary policy is now equivalent to showing up in an alligator park with a crate of chickens: the faster you throw them, the closer you get to becoming a meal yourself, yet try not throwing any at all and you are a meal. And as an aside, what kind of a strategist bets on surprise and then pre-leaks all possible routes for such a surprise?..  
  5. Meanwhile, the gators are getting a sight of the chicken man slipping into their pond: “One person familiar with the matter said [non-performing loans that ECB might consider buying] could be packaged with more creditworthy loans before being put up for sale [to ECB]. "You could buy rebundled non-performing loans, combined with good loans," said the person. "If we get to that, then things are very bad.”” Oh dear, slice-and-dice tranches of MBS anyone? The ECB is moving closer and closer to tracing Lehman strategy ca 2006…
  6. If the ECB does buy municipal and regional debt, we are in yet another fiscal corner. Buying such paper will absolutely nothing to stimulate private sector capex. But it will loosen the purse for local governments, thus undoing all the ECB-led efforts to reign in fiscal profligacy. And, given the horrific state of public finances across the Euro area, it will set up the ECB to support municipals and regions for many years to come.

So for now, we have captain Draghi steering the ship at faster speeds and with greater determination. Except we don't quite have any idea of the exact course. Thursday should be fun…

26/11/15: Ireland on Inequality Heat Map

Much has been said about inequality in Ireland. On TV off TV and elsewhere. Much of it is, sadly put, locked out factoids.

You see, inequality is a tough thing to measure. So we have loads of various metrics to go by and none are ‘perfect’.

Here is a slightly more comprehensive view via @Jim_Edwards

What the above shows is that across comparable economies, Ireland is mid-range in terms of inequality. Right next to Canada and Austria - two societies that few would consider to be viciously unfair to their residents. Not that there is no room for improvement, mind.

That said, the chart does miss some relevant data for Ireland - the wealth distribution. Which we are, arguably, not a shining example of.

I am not going to repeat my arguments about the relationship between tax system and wealth inequality (you can read them here:, but it is worth noting that we rank well in terms of real wages growth and gender pay gap, as well as health status. We rank average in terms of all other metrics, save for involuntary part-time employment, which - by the way - is improving. I am not too keen on including arbitrary metric of ‘Digital Access’ in the scoring, however.

As an aside, the above table also fails to measure underemployment (you can read on this here:

26/11/15: Refugee Camps Are the Cities of Tomorrow

Given the plight of refugees and the current global crisis involving movements of people displaced by wars, famines, natural disasters and internecine governments, the problem of designing facilities for refugees is non-trivial and extremely important. Here is a fantastically informative interview by DeZeen on the topic:

Quote: "These are the cities of tomorrow," said Kleinschmidt of Europe's rapidly expanding refugee camps. "The average stay today in a camp is 17 years. That's a generation. In the Middle East, we were building camps: storage facilities for people. But the refugees were building a city."

26/11/15: On a long enough time line: Irish corporate inversions

Recently, I covered the Pfizer-Allergan ‘merger’ just as Irish media navel gazed into the usual ‘jobs for Ireland’ slumber.  [You can trace much of it from here:]

Now, few links that catch up with my analysis:

  1. Irish Times reported that the Exchequer may gain up to EUR620m in Pfizer’s Allergan deal, annually. Key quote: “Last year, Pfizer paid an effective tax rate of 26.5 per cent as a US company. Post-merger, it expects to pay between 17 and 18 per cent across the group. In Ireland, it will pay our 12.5 per cent tax rate on any international income routed through the new Dublin operation.” Err, Irish Times, no. Pfizer will be paying lower effective rate than 12.5% because it will be able to avail of the famous/infamous OECD-allegedly-compliant ‘Knowledge Development Box’. How much lower? Ah, who knows.
  2. Bloomberg covers the same deal with a heading: “Pfizer's Viagra Tax Dollars Head to Dublin as U.S. Loses Again”. A bit of a miss, as Ireland already milks Viagra fortunes, though with the new ‘investment’ that will most likely increase. Key quote: ““We are not pushing for inversions,” Irish Finance Minister Michael Noonan told reporters in Brussels on Monday, referring to the controversial transaction meant to cut corporate tax rates. The agency charged with winning investment for Ireland “never promotes inversions. It’s a decision for the two companies.” While Noonan said Allergan and Pfizer were plainly merging for “tax advantages,” the government has no problem with the deal as both companies had “substantial” operations in Ireland.” You have to be laughing… the same defence [we are not doing anything, all their fault] has been used in the past by Swiss and other tax havens to justify the arrival of tax-‘optimising’ money into the banks vaults. Now, it is Ireland’s turn. But for comical relief, we have this: “Patrick Coveney, chief executive of Greencore Group Plc, the Irish food company that’s the biggest sandwich maker in the U.K., told state-owned RTE Radio in Dublin on Tuesday that Pfizer’s proposed deal builds on its and Allergan’s presence in Ireland.” Yes, sandwich maker knows a thing or two about pharma and biotech. Next up: newsagent comments on new nuclear power plant design in the UK…
  3. Not to be left behind, U.S. politicians are jumping on a carbon copy of the bandwagon too scared to actually join the bandwagon itself. Per Zerohedge: “Hillary Slams "Unfair" Tax Inversions After Sanders Calls Pfizer/Allergan Deal "Disaster For Americans”” Apparently, following in the footsteps of the completely out-of-touch Bernie Sanders, Hillary Clinton “firmly believes businesses should get ahead by building a stronger economy here at home, rather than using tax loopholes to shift earnings overseas, or to move abroad to escape paying their fair share.” Hillary went on to do what politicians do best: promise to do something. “In the weeks ahead [no idea when] I will propose specific steps to prevent these kind of transactions… I urge Congress to act immediately [pretty definitive timeframe when urging other to do something though] to make sure the biggest corporations pay their fair share, and regulators also should look hard at stronger actions they can take to stop companies from shifting earnings overseas.” So in basic term, Hillary has nothing to say other than that she has to say something. That’s novel.

All of this would be gas were it not serious. Despite Irish Government promises to curb ‘harmful’ tax practices, despite our vocal ‘compliance’ with the spirit of the OECD ‘reforms’, Ireland remains a premier destination for tax inversions from the U.S. Worse, everyone now knows this, and no one is doing anything about it. Worse, yet, everyone is next going to be aware of the simple fact that no one is doing anything about it.

On a long enough timeline, things will be easier in the short run as Irish Exchequer milks the rest of the world for tax optimising commissions. In the long run… well, we might have to start looking into how we will pay all these future pensions when the penny finally does drop in Washington and Berlin…

Wednesday, November 25, 2015

25/11/15: Nama: That Gift Horse's Mouth...

Back in June this year, I posted about 10 most egregious cases of apparent mis-pricing of assets relating to Nama sales:

Now, we can add a new one. Per Irish Times report (

“Blackstone, the world’s biggest private equity firm, is on track to make a profit of €43 million on two office buildings it bought in Dublin’s south docklands only two years ago. The company has agreed sale terms at €123 million for the Bloodstone Building and an adjoining block on Britain Quay – 54 per cent more than the €80 million paid for them towards the end of 2013.”

In other words, we have vulture fund that bough completed properties two years back and managed to squeeze 54% appreciation out of them by doing virtually nothing new, adding virtually no new value. And Nama added zero value to the buildings as well as it got them off Sean Dunne in fully completed form.

The cherry on the cake (for Blackstone) is that it bought the above buildings for roughly EUR100 million, along with a third building: Hume House on Pembroke Road in Ballsbridge. Blackstone is yet to sell Hume House. So Blackstone actual returns on Nama purchase will be going up and up.

The Irish Times article also references another Nama ‘deal’ for the taxpayers. “Early in 2013, King Street Capital bought the Bishop’s Square office building on Kevin Street for €65 million and last January it sold it on to Hines, the international property company, for €92.5 million – a price rise of more than 42 per cent.”

That would be the deal described here:

So between these two ‘deals’, Irish taxpayers have foregone collective EUR70 million. Thanks, Nama!

Tuesday, November 24, 2015

24/11/15: Over-skilled & Under-Employed: Welcome to the Brave New World of Europe

Irish policymakers are keen telling us that jobs creation has been robust and of high quality in recent years. Which, thus, begs a question: why does OECD data show Ireland as having one of the most severe mismatches between workforce skills and employment?

Apparently, based on OECD data, Irish economy is not exactly offering jobs on par with our fabled skills. And, apparently, based on OECD data, our illustrious workforce holds a big untapped potential for productivity gains that are not being realised by the inflows of MNCs and FDI and domestic economy jobs creation to-date.

OECD doesn't quite offer an Ireland-specific explanation of this paradox, but it does offer an insight as to why the same phenomenon plagues virtually all of Europe:

Apparently, the quality of firms (or their systems for allocating Human Capital or both) in Europe is just not up to par. It turns out that the Irish disease of underemployment is a European disease.

This is especially tragic, given that we have a huge over-skilling present in the economy - in basic terms, our skills levels are too high for what our economy is capable of absorbing:

Few years ago, I quipped in my Sunday Times (now defunct) column that we are heading for Unemployed PhDs crisis. It looks like we have arrived.

So welcome to the Brave New World where years in education and training and years of on-the-job experience count for zilch when it comes to affording pensions, savings and investments.

24/11/15: Captured Economics and the Victim State

Per Simon Wren-Lewis: “…Perhaps the problem at the heart of the Eurozone is that economic policy advice in Germany has been effectively captured by employers' interests, and perhaps the interests of banks in particular.” (source here)

For one caveat: economics as profession has been largely captured by the state.

The European states are, of course, themselves have been captured by corporatist interests, including (but not limited to) those of big businesses and banks. One can make a similar argument about other (non-European) states too. Which makes the capture of economists by business only a part of that more corroded chain, and not an exclusive part. Otherwise, how can one explain that it is State-employed economists and State-aligned economists (with State boards positions and State research contracts) that so vocally defend the very same corporate welfare that Simon Wren-Lewis seems to correctly worry about?

My view on the subject was covered here:

In simple terms, enough whitewashing the State as a victim of business interests - instead, time to see the State as a willing participant in a corporatist system that allows capture of policy development and implementation mechanisms and institutions by vested interests that define the State.

24/11/15: Europe's Dead Donkey of Productivity Growth

Remember the mythology of European productivity miracles:

  1. The EU is at least as competitive as the U.S. (with Lisbon Agenda completed, or rather abandoned);
  2. The EU growth in productivity is structural in nature (i.e. not driven by capital acquisition alone and not subject to cost of capital effects); and
  3. The EU productivity growth is driven by harmonising momentum (common markets etc) at a policy level, with the Euro, allegedly, producing strong positive effects on productivity growth.
Take a look at this chart from Robert J. Gordon's presentation at a recent conference:
The following observations are warranted:
  • EU convergence toward U.S. levels of productivity pre-dates major policy harmonisation drives in Europe and pre-dates, strongly, the creation of the Euro;
  • EU productivity convergence never achieved parity with the U.S.;
  • EU productivity convergence was not sustained from the late 1990s peak on;
  • The only period of improved productivity in the EU since the start of the new millennium was associated with assets bubble period (interest rates and credit supply).
Darn ugly!

But it gets worse. Since the crisis, the EU has implemented, allegedly and reportedly, a menu of 'structural' reforms aiming at improving competitiveness.  Which means that at least since the end of the crisis, we should be seeing improved productivity growth differentials between Europe and the U.S. And the EU case for productivity growth resumption is supported by the massive, deeper than the U.S., jobs destruction during the crisis that took out a large cohort of, supposedly, less productive workers, thereby improving the remainder of the workforce levels of productivity.

Here is a chart from the work by John Van Reenen of LSE:

Apparently, none of this happened:
  • EU structural reforms have been associated (to-date) with much lower productivity growth post-crisis than the U.S. and Japan;
  • EU jobs destruction during the crisis has been associated with lower productivity increases than in the U.S. and Japan;
  • All EU programmes to support growth in productivity, ranging from the R&D supports to investment funding for productivity-linked structural projects have produced... err... the worst outcome for productivity growth compared to the U.S. and Japan.
And the end result?

I know, I know... a Genuine Productivity Union, anyone?...

Saturday, November 21, 2015

21/11/15: Be Kind to Economic Forecasting Dodos...

Oh, spare a kind thought for the economists... crippled by the intellectual feebleness of algebraic (and utterly useless) models and hamstrung by the need to sell 'good news' to naive retail clients pounded by the sell-side 'research', they have it tough in this life. And the things are going to get tougher.

So far, in anticipation of the U.S. Fed hikes, virtually all economics analysts working for sell-side stuff brokers have been declaring their firm conviction that once the Fed raises rates, things are going to be off to a neatly clean start - the U.S. economy will shake off any risks to growth, while the Euro area economy will get a devaluation boost from stronger dollar.

Which, by the way, may or may not happen, but as Reuters article (link here) clearly shows, it wouldn't be the economists crowd that will have any idea what is going to happen.

Here are two charts from Reuters:

Now, give this a thought: 2014 and 2015 were relatively 'trend' years for the U.S. economy. And yet, in both cases, analysts surveyed by Reuters vastly, massively, grossly missed the boat on their forecasts. The dodos did predict back in January 2015 that 1Q 2015 growth will be 2.8%, missing the mark by 3 percentage points. And they did chirp out a forecast of 2.5% growth for 1Q 2014 back in January 2014, missing the reality by a massive 5.4 percentage points.

And to give you some more flavour, here is a summary of IMF forecasts for advanced economies (not just the U.S.):

Which confirms the aforementioned truth: economic forecasts ain't got a clue where the major advanced economies are heading, with or without Fed rate hikes.

It would be laughable, if this was not serious: the same types of economists inhabit the forecasting halls of the Fed, providing 'technical (mis-)guidance' to the FOMC on which the decision to hike rates will be made. In other words, the blind are driving, the deaf are navigating them and we are all the passengers on their happy runaway train.

So buckle up. When Fed hikes rates, things might go smooth or they might go rough - we just don't know. But we do know as much: all these economic forecasters have not a clue what will happen...

Friday, November 20, 2015

20/11/15: For all that growth thinking, say 'Thanks' to the U.S. for leveraging up

While leadership of Ireland ponders the fortunes of our 'globally connected' (yet somehow always exceptional) economy, here is an actual global picture of who drove Europe's (and Ireland's) 'exporting economy' model of economic expansion.

The chart below plots current account imbalances by region as % of global GDP from 1980 through today.

Source here.

Since 1983, there has been only one, that i right, one year (1991) when the U.S. did not run a current account deficit. By converse, since 1994, there have been just four years when the EU run a statistically noticeable current account deficit.

Thus, leveraging of the U.S. economy, including through trade, household demand and corporate tax 'optimisations' was the consistent driving force behind the miracle of European growth (and global growth in general) since at least 1983. Since 2011 - the coincidentally very year of Irish recovery - U.S. deficits and growing deficits from the ROW have been coincident with rising surpluses for the EU.

Table below (compiled using IMF WEO database data) shows cumulated current account balances from 1980 through 2015 for the main groups of economies and the U.S. expressed in billions of euro:

For the readers' convenience, I shaded U.S., Euro area and EU positions. This shows just how dramatic was the acceleration in U.S. deficits position since 1997 compared to 1980-2015, and how symmetrically significant was the acceleration in the EU surpluses.

In a way, all strategy of 'national development policies' talk aside, brutal reality of the years ahead is that unless someone else picks up the U.S. leveraging game, there is little scope for the externally-driven economic models of Europe in the future.

Irish exceptionalist insiders should pause for some thought... perhaps on their way to a fancy state sponsored lunch at the Castle...

20/11/15: Gold's 'Road Back'?

No love for gold from Europe...

20/11/15: The Inversion Debate Isn’t Over: Credit Suisse

A brief Credit Suisse note on corporate inversions, with an honourable mentioning for Ireland: over the story covered on this blog earlier (see background here including further links).

I especially like that little twist on tax optimisation that are inter-company loans: whilst the original inversion leads to a direct negative impact on tax revenues for our trading and investment partners, it adds a cherry on the proverbial cake by reducing companies' tax liabilities even further through lending to U.S.-based business.

OECD compliant, it all is...