Thursday, February 11, 2016

10/2/16: Slon.ru: "Чем хуже, тем лучше"


My latest column “Чем хуже, тем лучше. Откуда у российской экономики все больше сил“ for Slon.ru is out at https://slon.ru/posts/63670 in Russian.

This time, I am covering the topic of how Russian economy deleveraging leads to a future uplift in its potential growth, before tackling the cost of such deleveraging that is driving Russian public opinion of policies and direction of the State in a follow up column.


10/2/16: Was Resource Boom a Boom for Commodities Exporters?


While everyone is running around with the collapsed oil prices, economists with an eye for cycles and history are starting to digest the aftermath of the passed commodities price boom that started around the beginning of the century and lasted until 2011-2012.

The issues relating to that boom are non-trivial. Commodities prices are cyclical and just as the boom turns to bust, so will the bust turn to boom. Therefore, one should really try to understand what exactly happens in both.

Andrew Warner of the IMF has a very interesting, actually fascinating, paper on the effects of the past commodities booms (the 1970s and the more recent one) on countries that are large-scale exporters of commodities. The paper relates naturally to so-called Resource Curse thesis.


A Quick Summary

So this is my summary of the main conclusions, relating to the most recent commodities boom.

Per Warner, “The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge economic rents - rents which, once invested, were widely expected to promote productivity growth in other parts of the booming economies, creating a lasting legacy of the boom years. This paper asks whether this has happened.”

Warner strips out growth in the commodities sectors in these countries and focuses on other sectors, trying to identify whether there was more rapid growth in these sectors during the boom compared to the periods before the boom.

Broadly-Speaking, he finds that “despite having vast sums to invest, GDP growth per-capita outside of the booming sectors appears on average to have been no faster during the boom years than before. The paper finds no country in which (non-resource) growth per-person has been statistically significantly higher during the boom years. In some Gulf states, oil rents have financed a migration-facilitated economic expansion with small or negative productivity gains. Overall, there is little evidence the booms have left behind the anticipated productivity transformation in the domestic economies. It appears that current policies are, overall, proving insufficient to spur lasting development outside resource intensive sectors.”


A bit more specifics

In general, across all commodities boom-impacted economies (identified by Warner as 18 countries) “…estimates of the change in growth during the boom period, [show] that the majority of countries, 11 of the 18, have seen lower growth during the boom period than before. One of these is statistically significant (Bolivia). The remaining 7 countries have seen higher growth during the boom but none of these are statistically significant. Therefore the [results show] that there is little compelling evidence to reject the null of no change during the boom period. …If the presumption was that the Natural Resource bonanza would spark an economic boom in the rest of the economy, this expectation has been disappointed, as there is no statistically significant case of higher per-capita growth during the boom years than before.”


This is quite interesting. Investment should have boomed on foot of rising revenues from commodities extraction and this should have at least trickled down to non-commodities sectors. It turns out investment did not produce growth. Why? Maybe timing is an issue? Lags in time to invest and build new capital?

Warner goes on to check.

“An alternative way to summarize this result is to aggregate across countries. The data for all countries were synchronized not by calendar years but by years since the start of the boom. … [Data] shows that although total GDP rose strongly during the boom period, GDP for the rest of the economy has been essentially flat over the boom period. …Furthermore, it is apparent …that there has been no tendency for growth in non-resource GDP to accelerate during the later years of the boom, as would be expected had there been a lagged impact of investments made during the boom period. If overcoming the curse hinges on raising productivity in the rest of the economy, the data suggest that countries are not, as a rule, successfully overcoming the curse.”

Ok, may be slower growth in non-commodities economy was simply down to that - a period of slower growth overall? Warner tests for this and finds that actually data does not support the thesis that slower growth in non-commodities sectors was caused by a general slowdown in the rate of growth.

“The data suggest that …it is simply rare to find a case of fast growth in the non-resource economy. …It emerges that only 5 of the 18 countries show growth over 2 percent per year. Hence slow growth in the rest of the economy continues to be the norm in resource-intensive economies, even during boom periods.”

Again, a paradox: greater revenues from commodities sectors should translate into greater savings rates, which should still trigger greater investment.

Warner “…examines the extent to which the previous findings can be attributed to a lack of saving, a lack of public or private domestic investment
effort out of the saving or a lack of economic return from the investment effort.”

Savings rose. “The evidence on saving rates shows that, for the 16 countries with available data, mean saving rates rose strongly in the boom period compared with the counterfactual period, from 16 percent of non-resource GDP to 27 percent. Furthermore, the current account shifted towards surplus by approximately 5 percentage points of GDP, so a significant part of the boom was saved in foreign assets.”

Investment rose (somewhat) too, in quantity: “Nevertheless, despite the rise in saving and particularly saving in foreign assets, domestic investment effort remained constant or even rose during the boom period. Focusing on the 16 countries with booms in the 2000’s, mean investment rates rose during the boom periods compared to the counterfactual periods from 22 to 27 percent of GDP. …Further, available evidence suggests that a large fraction of the investment effort during the booms in the 2000’s was domestic public investment. This is the investment that the state controls directly, and the evidence is that public investment rates remained roughly constant, rising slightly from a mean of 9 percent of GDP during the [pre boom] periods to 10 percent during the boom periods. Private investment also rose - from 14 to 18 percent of GDP. Since total GDP rose during the booms, this data suggests that, overall across the 16 economies, there remained a strong and significant effort to invest in the domestic economy.”

Conclusion? “Although investment data are not broken out [between commodities producing sectors and rest of the economy] it would be a rare occurrence if none of the extra investment fell on the non-resource economy. Therefore, although it is theoretically possible that the low impact on non-resource GDP growth is down to low investment rates, the available data do not support this view. They appear instead to point to low returns from the investment that was made.”

In other words: commodities boom revenues were wasted on poor quality investment projects that failed to boost non-commodities sectors productivity. And this includes public and private sectors investments.


Russia et al

As an aside, there is a fascinating discussion in Warner’s article about the specific group of commodities exporters - countries of the former USSR.

The reason this discussion warrants a separate treatment is the fact that “the resource-rich countries of the ex-Soviet Union require a method for testing for a curse that incorporates the special u-shaped pattern of GDP over time during the transition period. The u-shaped profile of total GDP is a natural outcome of a two-sector model in which one sector declines sharply (the state sector) while another rises gradually from a small base (the new private sector), as happened in all European post-socialist-planned economies.”

So Warner looks at Azerbaijan, Kazakhstan, Russia, and Turkmenistan. And finds that “against expectations, the results indicate that the five resource intensive countries experienced slower growth during their resource boom. Growth was statistically significantly slower than resource poor countries for all except Azerbaijan. This shows little evidence that the resource booms served to accelerate GDP growth above the levels experienced by other post-soviet economies. Based on this evidence it is difficult to claim that the resource booms served to raise the path of GDP above what it would have been without the booms.”

Wait a second. Common narrative, especially in the West, as it pertains to Russian and Kazakhstan, is that both countries have *only* grown because of higher commodities prices. This is what is normally used to explain the ‘Putin effect’ - rapid growth attained by Russia during the first two terms of the Putin Presidency. Alas, data, it seems speaks the opposite: rapid growth during the first two terms of the Putin Presidency is not consistent with the causality linked to the boom in commodities prices. And the actual boom period in commodities prices for Russia seems to be associated with slower, not faster growth, compared to non-commodities boom period (controlling for effects of economic transition) and to non-commodities exporting ex-Soviet counterparts.


You can read the whole paper here: Warner, Andrew, Natural Resource Booms in the Modern Era: Is the Curse Still Alive? (November 2015). IMF Working Paper No. 15/237: http://ssrn.com/abstract=2727182.


Wednesday, February 10, 2016

10/2/16: Ponzi Schemes? Bah! We've Got an ETP Problem, Roger...


An interesting story that Mark Markopolos of Madoff fame, via BusinessInsider, apparently unearthing a bunch of new Ponzi schemes on the Wall Street to rival Madoff's: http://www.businessinsider.com/harry-markopolos-ponzi-scheme-bigger-than-madoff-2016-2.

Several interesting and obvious things in the article. Assuming, of course, Markopolos is not talking about the Ponzi of all Ponzi Schemes, the 'fiat money' printers at the Central Banks. But one worth a note, the little piece relating to ETPs (Exchange Traded Products) that allegedly polluted the previously relatively clean universe of U.S. listed ETFs with the European disease of synthetics.

The crux of the issue is contained in this letter: https://www.sec.gov/comments/s7-16-15/s71615-60.pdf.

Choice quotes:

"With the mortgage-backed securities crisis... it was the bundled, flawed mortgage products that became a significant contributing factor to the negative financial events of 2008/2009. Some ETPs contain very similar characteristics to the illiquid mortgage-backed securities. Other ETPs are based on very risky trading and settlement processes that can produce systemic challenges to the ETP industry, thus the financial markets."

Dire stuff. We get more: "There has been an exponential growth rate in the number of ETPs since the financial crisis. Unfortunately, unlike mortgage-backed securities, which were sold to more professional investor classes, ETPs have been marketed on a large-scale to retail investors, their mutual and pension funds and financial advisors are advocating the products to even their retail customers." It's grannies and pensions, not Lehmans & Bears that are now at risk. Congratulations, folks: financial engineering, having plundered taxpayers and savers is now munching through retailers, aka ordinary folks, directly.

Worse: "...the most active ETPs are based on the important components of the U.S. capital markets, i.e. S&P 500 securities. A collapse or disturbance caused by these products could strike directly at the heart of the U.S. financial system during the next financial crisis through blue chip securities." Munching through ordinary folks requires levering more risks into core equities and asset markets too. So if you haven't bought the Killer White of risk yourself, via links to underlying equities and other retail assets,  the Killer White of risk bought you anyway.

What's the problem if they can just sell underlying and clear off the decks? Ah, that 'selling the underlying'. "The vast majority of ETPs have very low levels of assets under management and illiquid trading volumes. Many of these have illiquid underlying assets and a large group of ETPs are
based on derivatives that are not backed by physical assets such as stocks, bonds or commodities,
but rather swaps or other types of complex contracts."

Hello, Kitty... no wait... Kitty is a rabid tiger! Back in 2011 I wrote about these types of funds in relation to the European investors here: http://trueeconomics.blogspot.com/2011/08/14082011-warning-on-synthetic-etfs.html.

And the latest revelations are absolutely mirror image of the concerns raised in 2011: "Many of these products may have been designed to take what were originally illiquid assets from the books of operators, bundle them into an ETP to make them appear liquid and sell them off to unsuspecting investors. The data suggests this is evidenced by ETPs that are formed, have enough volume in the early stage of their existence to sell shares, but then barely trade again while still remaining listed for sale. This is reminiscent of the mortgage-backed securities bundles sold previous to the last financial crisis in 2008."

Garbage in. Balancesheet cleansed. You, retailer, holding the trash.

This can get very very ugly...

Note: in addition to the above letter, there are several other letters released by SEC detailing the problems in ETPs universe. Here are the links:

10/2/16: IMF to Ukraine: Sort Thyselves!


IMF on Ukraine (and it is narsty):


The only surprising bit is the tone. It is quite frankly unbelievable to think that the IMF were rationally expecting substantial and visible progress on such a tough and 'sticky' issue as corruption to be delivered within such a short span of time. Their key concern is, of course, warranted. But the sharpness of the tone suggests IMF is entering into an internal political dogfight between Ukrainian Presidency and the Government and it is siding, seemingly, with the President.

9/2/16: Currency Devaluation and Small Countries: Some Warning Shots for Ireland


In recent years, and especially since the start of the ECB QE programmes, euro depreciation vis-a-vis other key currencies, namely the USD, has been a major boost to Ireland, supporting (allegedly) exports growth and improving valuations of our exports. However, exports-led recovery has been rather problematic from the point of view of what has been happening on the ground, in the real economy. In part, this effect is down to the source of exports growth - the MNCs. But in part, it seems, the effect is also down to the very nature of our economy ex-MNCs.

Recent research from the IMF (see: Acevedo Mejia, Sebastian and Cebotari, Aliona and Greenidge, Kevin and Keim, Geoffrey N., External Devaluations: Are Small States Different? (November 2015). IMF Working Paper No. 15/240: http://ssrn.com/abstract=2727185) investigated “whether the macroeconomic effects of external devaluations have systematically different effects in small states, which are typically more open and less diversified than larger peers.”

Notice that this is about ‘external’ devaluations (via the exchange rate channel) as opposed to ‘internal’ devaluations (via real wages and costs channel). Also note, the data set for the study does not cover euro area or Ireland.

The study found “that the effects of devaluation on growth and external balances are not significantly different between small and large states, with both groups equally likely to experience expansionary [in case of devaluation] or contractionary [in case of appreciation] outcomes.” So far, so good.

But there is a kicker: “However, the transmission channels are different: devaluations in small states are more likely to affect demand through expenditure compression, rather than expenditure-switching channels. In particular, consumption tends to fall more sharply in small states due to adverse income effects, thereby reducing import demand.”

Which, per IMF team means that the governments of small open economies experiencing devaluation of their exchange rate (Ireland today) should do several things to minimise the adverse costs spillover from devaluation to households/consumers. These are:


  1. “Tight incomes policies after the devaluation ― such as tight monetary and government wage policies―are crucial for containing inflation and preventing the cost-push inflation from taking hold more permanently. …While tight wage policies are certainly important in the public sector as the largest employer in many small states, economy-wide consensus on the need for wage restraint is also desirable.” Let’s see: tight wages policies, including in public sector. Not in GE16 you won’t! So one responsive policy is out.
  2. “To avoid expenditure compression exacerbating poverty in the most vulnerable households, small countries should be particularly alert to these adverse effects and be ready to address them through appropriately targeted and efficient social safety nets.” Which means that you don’t quite slash and burn welfare system in times of devaluations. What’s the call on that for Ireland over the last few years? Not that great, in fairness.
  3. “With the pick-up in investment providing the strongest boost to growth in expansionary devaluations, structural reforms to remove bottlenecks and stimulate post-devaluation investment are important.” Investment? Why, sure we’d like to have some, but instead we are having continued boom in assets flipping by vultures and tax-shenanigans by MNCs paraded in our national accounts as ‘investment’. 
  4. “A favorable external environment is important in supporting growth following devaluations.” Good news, everyone - we’ve found one (so far) thing that Ireland does enjoy, courtesy of our links to the U.S. economy and courtesy of us having a huge base of MNCs ‘exporting’ to the U.S. and elsewhere around the world. Never mind this is all about tax optimisation. Exports are booming. 
  5. “The devaluation and supporting policies should be credible enough to stem market perceptions of any further devaluation or policy adjustments.” Why is it important to create strong market perception that further devaluations won’t take place? Because “…expectations of further devaluations or an increase in the sovereign risk premium would push domestic interest rates higher, imposing large costs in terms of investment, output contraction and financial instability.” Of course, we - as in Ireland - have zero control over both quantum of devaluation and its credibility, because devaluation is being driven by the ECB. But do note that, barring ‘sufficient’ devaluation, there will be costs in the form of higher cost of capital and government and real economic debt.It is worth noting that these costs will be spread not only onto Ireland, but across the entire euro area. Should we get ready for that eventuality? Or should we just continue to ignore the expected path of future interest rates, as we have been doing so far? 


I would ask your friendly GE16 candidates for their thoughts on the above… for the laughs…


9/2/16: We've Had a Record Year in M&As last... next, what?


Dealogic M&A Statshot for the end of December 2015 showed that global M&A volumes have increased for third year running, reaching USD5.03 trillion in 2015 through mid-December. Previous record, set in 2007, was USD4.6 trillion.

  • 2015 annual outrun was up 37% from 2014 (USD3.67 trillion) 
  • 2015 outrun was the first time in history that M&As volumes reached over USD5 trillion mark.
  • 4Q 2015 volume of deals was the highest quarterly outrun on record at USD1.61 trillion, marking acceleration in deals activity for the year
  • There is huge concentration of deals in mega-deal category of over USD10 billion, with 69 such deals in 2015, totalling USD1.9 trillion, more than double USD864 billion in such deals over 36 deals in 2014.
  • Even larger, USD50 billion and over, transactions accounted for record 16% share of the total M&As with 10 deals totalling in value at USD798.9 billion.
  • Pfizer’s USD160.0 billion merger with Allergan, officially an ‘Irish deal’, announced on November 23, is now the second largest M&A deal in history (see more on that here: http://trueeconomics.blogspot.com/2016/01/28116-irish-m-not-too-irish-mostly.html)


The hype of M&As as the form of ‘investment’ in a sales-less world (see here http://trueeconomics.blogspot.com/2016/02/9216-sales-and-capex-weaknesses-are-bad.html) is raging on and the big boys are all out with big wads of cash. Problem is:


The former, however, is trouble for investors, not management. The latter two are trouble for us, mere mortals, who want well-paying jobs. which brings us about to 'What's next?' question.

Given lack of organic revenue growth and profitability margins improvements, and given tightening of the corporate credit markets, one might assume that M&As craze will abate in 2016. Indeed, that would be rational. But I would not start banking on M&A slowdown returning companies to real capital spending. All surplus cash available for investment ex-amortisation and depreciation and ex-investment immediately anchored to demand growth (not opportunity-creating investment) will still go to M&As and share support schemes. And larger corporates, still able to tap credit markets, will continue racing to the top of the big deals. So moderation in M&As will likely be not as sharp as moderation in corporate lending, unless, of course, all the hell breaks loose in the risk markets.

Tuesday, February 9, 2016

9/2/16: Sales and Capex Weaknesses are Bad News for U.S. Jobs Growth


In a note from February 4, Moody Analytics have this two key messages about the U.S. economy, none pleasant:

  • Business sales are ‘mediocre’ outside energy sector, so that jobs growth singled by business sales outside energy sector should be slowing; and
  • Capex slowdown is about to smack jobs growth even further to the downside.

Take their numbers with a gulp of some oxygen.

Point 1: Business sales

The old-fashioned statistics don’t quite fudge stuff as well as the more modern hoopla about users, unique visits and signups deployed in the ICT sector. So here we go:

“Don’t fall into the trap of believing all is well outside of oil & gas. According to Bloomberg News, the 52% of the S&P 500 that has reported for 2015’s final quarter incurred over-year setbacks of -4.9% for sales and -5.7% for operating income. To a considerable degree, the declines were skewed lower by annual plunges of -34.2% for the sales and -64.2% for the operating profits of the latest sample’s 18 energy companies. For the 53% of the S&P 500’s non-energy companies that have reported for Q4-2015, sales barely rose by 0.6% annually, while the 2.6% increase by operating income fell considerably short of long-term profits growth of 6.5%.”

You’ve heard it right: in a recovery the U.S. is having, sales are up 0.6% y/y. Know of any real business that lives off something other than sales? I don’t.

Based on the Commerce Department broad estimate of business sales “that sums the sales of manufacturers, retailers and wholesalers. …even after excluding sales of identifiable energy products, what I refer to as core business sales posted annual increases of merely +2.1% for 2015 and +1.0% for Q4-2015”.

“…payrolls have been surprisingly resilient to the slowest growth by business sales excluding energy products since Q4-2009.” But, based on 3-mo average payrolls correlation with 12-mo average business sales data (estimated by Moody’s at 0.87), 2015 figures for sales suggest “…the average increase of private sector payrolls may descend from 2015’s 213,000 new jobs per month to 42,000 new jobs per month. Unless core business sales accelerate, 2016’s macro risks are most definitely to the downside.”

A handy chart:



Point 2: Capex headwind for jobs growth

“Business outlays on staff and capital spending are highly correlated. Over the past 33 years, the yearly percent change of payrolls revealed a strong correlation of 0.84 with the yearly percent change of real business investment spending.”

So, based on 2015 yearly increase in capital spending private sector payrolls “should have approximated 0.8% instead of the actual 1.9%. In other words, Q4-2015’s 1.6% yearly increase by real business investment spending favored a 91,000 average monthly increase by 2015’s payrolls, which was considerably less than the actual average monthly increase of 221,000 jobs.”


All of which puts into perspective what I wrote recently about the U.S. non farm payroll numbers here: http://trueeconomics.blogspot.com/2016/02/5216-three-facts-from-us-labor-markets.html

You really have to wonder, just how long can the U.S. economy continue raising the bar on additional bar staff hiring before choking on shortages of sales and capital investment?

9/2/16: Echoes of 2011 at Deutsche?


Almost 4 and a half years ago, I wrote about the systemic weaknesses in the Deutsche Bank balancesheet: http://trueeconomics.blogspot.com/2011/09/13092011-german-and-french-banks.html, And now we are seeing these weaknesses coming to the front.

It is not quite Europe's Lehman Moment, yet, but if Deutsche goes to the wall at the rates implied by its CDS, we are into more than Lehman-deep pool of the proverbial...

Source: @Schuldensuehner 

Monday, February 8, 2016

7/2/16: You Gotta Have Some Heart: Baltic Dry Index


As the global growth prospects are apparently and allegedly improving, and the world is busy printing money left right and centre with currency devaluations rounds stimulating the fabled 'competitiveness', the world trade indicators are no longer flashing red. They are, frankly, in a free fall.

Remember Baltic Dry Index? The one that reflects volumes of goods trade flows? And the one that was testing new record lows almost daily around the end of December 2015 through January 2016?

Behold the latest record: Baltic Dry is now below 300

H/T to @soberlook

Time for IMF eagles to fly some forecasting models to tell us things are just going fine at 5% annual global growth click... Yes, yes... that is, to repeat gain, Baltic Dry at its lowest level in its history.

PS: Ireland's exports are, of course, insulated from all this global nonsense... because when times get tougher in the markets, tax optimisation becomes even more important to MNCs.

Saturday, February 6, 2016

6/2/16: Down the Ruble Hole? Russian Opinions & Russian Economy


Latest Russian figures on wages and earnings, rounding up 2015, are pretty horrific. In USD terms, average wage is now down more than 30 percent in a year through December, falling to around USD560 per month at year end.

Wages Woes?

In Ruble terms, things are more palatable. Nominal wages are up 4.5 percent to RUB34,000, which means that real wages have fallen roughly 9.5 percent in 12 months through December. The average salary was down to RUB30,311 (USD381) per month, from end of September average of RUB32,911 (USD463). Rate of real wages decline accelerated in December compared to full year averages to 10 percent compared to December 2014.

However, average real incomes excluding wages, but including private business income and state payments, were down 4% y/y in 2015. One sign of the fiscal policy direction is that President Putin signed off on a minimum wage hike for 2016 that raised (as of January 1st) the minimum wage to RUB6,204 (USD87) a month, up on RUB5,965 or USD84 per month in 2015.

Beyond this, underlying labour markets trends, despite sharp cuts to employment reported in all surveys of PMIs for Services and Manufacturing over the last 24 months, official unemployment remains benign at 5.8 percent. This masks vast regional variation. In the Central Federal District, which includes Moscow, unemployment is below 4 percent, against, per BOFIT data, 12 percent in North Caucasus. BOFIT reports figure for Inigushetia at  30 percent. Unemployment rate for under-20 years of age is at around 20 percent.

2016 is expected to be another hard year for wage earners, as Korn Ferry — Hay Group forecast that Russian companies will increase salaries on average by only 7 percent in 2016. Given expected inflation in 14.6 percent range this will entail another 7.5 percent cut to real wages.



Feeding Rising Cutbacks by Households

Notably, economy, salaries and inflation have been identified as the main economic concerns in this week’s survey by state-run pollster VTsIOM. Low salaries were raised as concern by 13 percent of respondents in January survey. 12 percent of Russians were concerned about rising inflation in December 2015 and this rose to 20 percent in January data. Another 12 percent of respondents said they were concerned about unemployment.

These trends are feeding into decline in consumer demand. Based on state-run VTsIOM poll published earlier this week, as of the end of December 2015, some 63 percent of Russians have cut back purchases of goods over the last 6 months. 59 percent are substituting in favour of cheaper goods and 26 percent are dipping into personal savings to make ends meet.

In another poll, published at the end of December, covering the period of mid-December, VTsIOM, Russians are reporting lower social well-being with the welfare Self-Estimate Index reporting own conditions of the respondents falling to the lows of 2009 and 24 percent of Russians estimating their own financial situation as being “bad”. The Social Optimism Index was showing that only 27 percent of Russians think their lives are going to improve in 2016, and 33 percent of Russians said the economic situation in the country was bad.

That said, for now at least, 45 percent of Russians positively assess country’s overall development path and only 17 percent of respondents disagree with this view.

Still, based on yet a third poll (also from December and also by VTsIOM), if in August 2014 introduction of the food imports embargo against the Western countries was opposed by only 9 percent of Russians, by mid-November 2015, some 20 percent of respondents expressed opposition to the embargo. Still, as shown by the poll results, the majority of Russian citizens continue to support the ban on food imports, although the number of those supporting it falling from 84 percent to 73 percent since the introduction of the embargo. In line with this, fewer Russians consider the food embargo to be an effective measure: down from 80 percent in August 2014 to 63 percent mid-November 2015.



And Touching the Values Systems

In a way, all of this translates into some serious fodder for political analysts (apart from us, economists). You see, much of Russian system legitimacy rests on two factors: immense economic gains over the period of 2000-2012 or 2013 (depending on timings of the crisis) and national (not quite nationalist) aspirations for a historical revival.

Back in July 2015, Levada Centre - probably Russia’s most reputable polling organisation - found that 42 percent of Russians said they preferred "decent" wages and pensions over the freedom of speech and the opportunity to travel abroad. 49 percent, though said they won’t. The results in July 2015 (data was collected in June) were similar to those in 2013 survey (43 percent preferred financial stability over the opportunity to travel abroad and the right to free speech, against 46 percent who opposed such  trade off). But this still marked a big change on 2008 when only 35 percent of Russians were willing to trade freedoms for income and 54 percent of Russians opted for freedom of speech and travel ahead of pensions and salaries.

While the above figures suggest that large share of population is closely anchored to financial and economic fortunes of the country, there are preciously few signs that those adversely impacted by the crisis are willing to take up the issue with authorities. Levada Centre July poll found that 69 percent of Russians would tend to avoid any interactions with the authorities and only 23 percent were determined to press authorities to deliver on promises. Not surprisingly, 60 percent of Russians do not believe that people can hold authorities to account and 22 percent believe they can. Subsequently, only 18 percent of the Russian population thought that mass protests are likely to arise as the result of the ongoing crisis and only 14 percent of respondents expressed willingness to participate in protests.

Yet, for all their imperfections, opinion polls are showing some tremors in the facade of the public support for state policies and institutions.

Obshchestvennoye Mnenie Foundation poll published on February 5th showed that 54 percent of Russians see economy as being in a crisis. 41 percent said the economic situation in Russia is satisfactory and only 3 percent of the participants said that the economy is in a good state. The number of Russians that have a negative view on the state of the economy is increasing, and rapidly so: just 43 percent of the respondents in December last year felt the economy was in bad shape and only 30 percent did so in May of 2015. And 58 percent now think that the economic situation in the country is worsening, while a month ago this answer was given by 41 percent of people. Which flies in the face of many analysts and the Government view that the economic crisis has bottomed out. Note: it is worth noting that in general, public opinion on timing of bottoming out of the recessions lags actual underlying numbers. Still, for a ’stabilising’ economy, only 9 percent of Russians currently believe that the economic situation is improving.

Levada Centre poll published at the end of January found that 45 percent of Russians believed that the country was “moving in the right direction”, down from 64 percent in June 2015, and from 56 percent in December 2015. January marks the first time for over a year that the state policy approval rating fell below 50 percent mark. Meanwhile, those who feel that the country was on a “wrong route” rose to 34% in January poll compared to 22 percent back in June 2015 and to 27 percent in December 2015.

President Putin's personal approval rating fell to 82 percent in January, compared to a record high of 89 percent in June 2015 and to 85 percent in December 2015. The proportion of respondents who named him among the politicians they trust also declined. This currently stands at 58 percent, down on 64 percent in June 2015 and 60 percent in December 2015.



What Does All of This Mean?

All of the above adds up to a picture in which the country is sliding gradually toward becoming un-anchored from the key driver for social cohesion: economic normalisation (compared to the 1990s) delivered during the so-called Putin Era. While the ongoing geopolitical revival still compensates for the negative economic momentum, that compensation is starting to fade.

One reason for it - cumulative losses on the economy front. Key responses to the crisis have been: devaluation of the Ruble, push toward imports substitution and conservative push back against the pressures on capital account side. All were necessary and rather successful. But all of them also transferred large amounts of pain onto the shoulders of the households and SMEs working in the private sector. Public sector employment and wages have been better shielded from the crisis, but there too, strains are starting to appear. As the result, real, tangible and compounded pain is now feeding through to the ordinary folks.

The other reason is the weakening of the geopolitical dividends perceived by the ordinary Russians. Crimea was the high point of 'return to roots' in Russian psyche - a point of reversal of perceived historical injustice inherent from the Soviet times and a point of a payback for years (since 1991) of virulent anti-Russian rhetoric across the majority of the former USSR states, including Ukraine. These were perceptions of the average Russian (do not confuse them with my own views). The conflict spillover into Eastern Ukraine was already a step away from the Crimean narrative, but it was a proximate one. And hence it had weaker, but nonetheless significant, support on the ground in Russia. But Russian push into Syria has completely divorced the country geopolitical strategy from the hearts-and-minds of the Russians on the ground. Syria is a foreign land, with alien religious strife and probably more reminiscent of Chechnya to an average Russian, than of the traditional spheres of Russian interest.

The twin factors: increased economic pressures and weakening geopolitical dividends, are now working through public perceptions. The outcome of these is far from predictable. Current lack of serious discontent is likely to persist over time: Russia is not Ukraine and it will not opt (socially) for the convulsions of knee-jerk 'revolutions' . But, if the economic crisis continues unabated, there will be political 'blood'. One way or the other.



A note to the above: Surveys in Russia — even those conducted by reputable pollsters such as Levada Center — need to be taken with a pinch of salt. Reliance on polls is a tricky thing, especially for polls in societies highly skeptical of social researchers and authorities, like Russia. Here is a good article on some problems identified in some recent polls: http://www.themoscowtimes.com/news/article/what-do-russians-really-think-the-truth-behind-the-polls/558537.html.

Friday, February 5, 2016

5/2/16: Ifo Economic Climate Index for Euro area: 1Q 2016


Ifo Economic Climate Index in the Euro Area has posted another contraction at the start of 1Q 2016 marking the third consecutive quarter of declines and reaching the lowest level since 1Q 2015. IFO Economic Climate Index (the headline index for the series) for the Euro area fell to 118.9 in 1Q 2016 from 122.0 in 4Q 2015. Activity signalled by the index, however, remains above the historical average at 107.5 an well above downturns-consistent average of 84.8.

The chart below shows index trends:


As highlighted in the chart above, EU Commission own sentiment index for economic activity is also pointing to weakening growth conditions in 1Q 2015. The EU Commission Sentiment Index was un a divergence to the Ifo index since the start of 2015.

Two core components of the Index also moderated in 1Q 2016. Present Situation sub-index fell from 153.8 for 4Q 2015 to 151.0 in 1Q 2016, marking the first quarter of contraction after four consecutive quarters of increases. The sub-index remains firmly ahead of the historical average of 127.5.

Perhaps the most worrying is the decline in Expectations for the next 6 months sub-index which fell from 103.3 in 4Q 2015 to 100.0 in 1Q 2016. This marks third consecutive quarter of declines in expectations and the index level currently is closer to the historical average of 95.8.

Overall, the gap between expectations forward and present conditions assessment has declined. Gap index (my own calculation) is now at 66.2 for 1Q 2016 against 67.2 in 4Q 2015. This suggests that weaker expectations are now starting to feed through to weaker present assessments.

A chart below illustrates the trends for sub-indices:


Per Ifo release: “Assessments of the current economic situation were most negative in Greece and Finland, but the current economic situation also remains strained in France, Italy and Cyprus. The situation was only slightly better in Spain, Portugal and Austria; but assessments for Austria were far less negative than last quarter. The sharpest recovery was seen in Ireland, where survey participants assessed the current economic situation as very good. In Germany the economic situation is considered to be good, although assessments were somewhat less favourable than last quarter.

The six-month economic outlook remains positive nearly everywhere. Economic expectations brightened in Austria, France, the Netherlands, Estonia and Latvia. In the other countries the outlook either remains unchanged, or is somewhat less positive. WES experts were only slight pessimistic about Greece, Portugal and Spain.”

5/2/16: Three Facts from the U.S. Labor Markets & Reality of the U.S. Economy


Three interesting snapshots of the U.S. economy: Non-Farm Payrolls, Initial jobless claims and Labour Productivity. Individually - they are important to traders. Jointly, they are important to investors.

But, first, what has been happening.

Let’s start with jobless claims. Initial jobless claims rose in the last week of January by 8,000 to a (seasonally-adjusted) 285,000. This was worse than consensus forecast by some 5,000 jobs. And worse, 4-week average rose to 284,750 at the end of January, up 2,000.

For history wonks, numbers below 300,000 are considered a sign of tight labour market, so no surprise here that claims can rise with a bit greater volatility when the labour markets are running some overheating.

But last two weeks of January also marked something that has not happened in the markets in some three years - they marked two consecutive weeks of y/y increases in new claims. As always, weather is being blamed, and as always, two weeks are just two weeks. So far, nothing hugely significant. Just a hiccup.

Which brings us to today’s release of NFP. Going into it, consensus forecast was for a ca 180,000 new jobs print (Marketwatch) and ca 190,000 (Bloomberg & Reuters) for January, to compensate for a large 292,000 print in December. What was delivered? Revised December Non-farm payroll figure to 262,000 and January figure of 151,000. Revision to December was large, but smaller than under-shooting in January. January preliminary estimate came as third weakest preliminary figure printed in the last 13 months.

Yes, everyone is running around with 4.9% unemployment figure - sub-5% expected. Good news. However, U-5 unemployment (Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force) rose on seasonally-adjusted basis from 6.1% in November and December 2015 to 6.2% in January. And U-6 Unemployment (U-5, plus all employed part time for economic reasons) was static at 9.9% for the third month in a row, having previously been at 9.8% in October 2015.

And average hourly earnings up 2.5% y/y (same as previous month growth) and m/m growth of 0.5% (better than 0.3% consensus forecast and way better than 0% growth in December). These look like positives. Another positive is labour force participation - up to 62.7% in January, against 62.6% in December. But this positive is questionable: not seasonally adjusted participation rate in January 2016 was 62.3% which is lower than same for January 2015 at 62.5%.

So now we have: wages up, unemployment rate down, claims down by a lot less than expected, and participation rate is virtually flat. All at high levels of employment. 

Which gets us around to the last bit: productivity. Per U.S. latest data, non-farm labour productivity has fallen a whooping 3% y/y in 4Q 2015 - third biggest decline in productivity for any period since 1Q 2007 and the largest 4Q decline in productivity over the same period. Consensus was for 1.8% drop on foot of 2.2% rise in 3Q 2015. The Unit labour costs went up 4.5% over the same period of time (against consensus forecast of 3.9% rise and up on 1.8% increase in 3Q 2015). Labour costs were up in three quarters of 2015.

Problems with productivity growth have been plaguing the U.S. recovery - in 2015, non-farm productivity was up only 0.6%, which is massively below historical averages (more than x3 2015 rate of expansion).

Here’s the real problem, folks: U.S. economy is struggling to sustain growth absent real investment and absent new technological improvements. It is that simple. And the jobs markets are starting to show the strains of this. Productivity growth being weak, while employment rising and remaining high amidst rising labour costs means only one thing: the U.S. is currently running above its potential rates of growth. It is, in other words, overheating. And that at roughly 2% annual growth rates against pre-crisis averages above 3%. One of two things will have to happen:

  • One: employment moderates and labour costs growth abates; or
  • Two: business investment has to rise (note: explicitly not public investment, because raising public investment in these labour markets conditions will simply exacerbate the twin problem of tighter labour markets and low productivity growth).

Good luck taking an investment strategy on one. Which leaves us with taking a strategy on two… or going defensive on an expectation that stagnation will be setting in...