Monday, May 21, 2018

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:

Source: https://wolfstreet.com/2018/04/23/an-orderly-unwind-of-stock-market-leverage/.

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 (http://www.finra.org/investors/margin-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" http://www.cell.com/joule/fulltext/S2542-4351(18)30177-6.

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: https://macromon.wordpress.com/2018/05/15/deconstructing-the-u-s-jobs-market/.

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!

Source: https://macromon.wordpress.com/2018/05/15/deconstructing-the-u-s-jobs-market/

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: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033949), 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: https://www.businesspost.ie/business/beware-myth-europes-renaissance-416318. 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 https://www.intelligenteconomist.com/economics-blogs/. Huge thanks to all my readers for making this possible!