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Articles by Constantin Gurdgiev

12/3/19: S&P500 Concentration Risk over 10 years

March 12, 2019

More on increasing concentration risks in the U.S. equity markets: Goldman Sachs estimates that almost 1/4 of total return to S&P500 over the last 10 years came from just 10 stocks:

Of these, Apple alone accounted for almost 1/5th of total return to S&P500. 22% of total return was accounted for by ICT sector.

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10/3/19: Irish Residential Construction Sector 2018: A New ‘Recovery’ Low

March 10, 2019

It has been an ugly decade for Ireland’s building and construction industry. especially for housing. Following a historically massive bust in 2009-2012, indices of total production in the housing sub-sector fell from the pre-crisis high of 751.7 for value and 820 for volume, attained in 2006, to their lowest cyclical points of 57.9 and 59.5, respectively, in 2012. In other words, from 2006 through 2012, Irish residential building and construction production fell a massive, gargantuan, non-Solar-System-like 92.3% in value terms and 92.74% in volume terms. That was bad.The recovery has not been any better. Since the lowest point of the cycle in 2012, through 2018, based on the latest figures from CSO, value of production in residential construction sector rose to 186.6, an uplift of

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6/3/19: Expectations Sand Castles and Investors

March 6, 2019

As raging buybacks of shares and M&As have dropped the free float available in the markets over the recent years, Earnings per Share (EPS) continued to tank. Yet, S&P 500 valuations kept climbing:

Source: Factset 
As noted by the Factset: 1Q 2019 "marked the largest percentage decline in the bottom-up EPS estimate over the first two months of a quarter since Q1 2016 (-8.4%). At the sector level, all 11 sectors recorded a decline in their bottom-up EPS estimate during the first two months of the quarter… Overall, nine sectors recorded a larger decrease in their bottom-up EPS estimate relative to their five-year average, eight sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 10-year average, and seven sectors recorded a larger decrease in their

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4/3/19: BRIC Manufacturing PMI: January-February Trend

March 4, 2019

In January-February 2019, Global manufacturing PMI sunk to its lowest reading since 2Q 2016 averaging 50.7 over the first two months of the year. With it, the slowdown has also been impacting the BRIC economies, overall BRIC Manufacturing PMIs average 41.2 in 4Q 2018 based on each country share of the global GDP for 2018, below 51.83 average for Global Manufacturing PMI over the same period. In the first two months of 2019, BRIC Manufacturing PMI was around 50.8, statistically indistinguishable from the 50.7 Global PMI average.

As the chart above clearly indicates, poor BRIC performance was driven by a contraction-territory reading for China (49.1 in January-February 2019 as opposed to stagnation-signalling 50.0 in 4Q 2018), and Russia (50.5 for the first two months of 2019, against

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4/3/19: S&P 500 Share Price Support Scams are a Raging Trend

March 4, 2019

Having posted a record-breaking USD939 billion of shares repurchases in 2018, Corporate America is on track to set a new record-wrecking year of buybacks in 2019. per latest data from JPM (via @zerohedge), January-February 2019 saw USD187 billion worth of shares repurchases in S&P 500 index constituent companies.

This is a notch higher than in 2018 and almost 90 percent above 2017 period.

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1/3/19: U.S. PMI is not at a Crisis levels

March 1, 2019

My take on today’s ISM for Manufacturing data here: https://twitter.com/GTCost/status/1101512164584546304, with charts:

Chill-ax everyone… #ISM is not even close to signalling a serious trouble ahead… Not that it is a measure I would even consider for troubleshooting.
— Constantin Gurdgiev (@GTCost) March 1, 2019

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1/3/19: Australia is the New Ireland: How Property Hype Inflates Financial Bubbles

March 1, 2019

Australia – a country with the biggest property bubble of all times and of all countries – is retracing the exact mis-governance steps as its predecessor claimant of the title, Ireland. Just as in Ireland pre-2008 bust, Australian central and regional Government figures are adding to the hype of ‘real estate investment’, whipping up households’ enthusiasm for property spending, just as the market is starting to crate:

Source: https://wolfstreet.com/2019/02/28/home-prices-sydney-melbourne-australia-spiral-down-bust-spreads-imf-to-regulators-reinforce-financial-crisis-management/.

While Australian property investors should be heading for the hills, Australian voters should consider actively advocating that the country (regional, etc) Government should adopt a more responsible approach

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25/2/19: Europe’s TBTF Banks are only Bigger-to-Fail…

February 25, 2019

Since the start of the Global Financial Crisis (GFC) and through subsequent Euro area crises, the EU frameworks for reforming financial services have invariably been anchored to the need for reducing the extent of systemic risks in European banking. While it is patently clear that Euro area’s participation in the GFC has been based on the same meme of ‘too big to fail’ TBTF banks creating a toxic contagion channel from banks balance sheets to the real economy and the sovereigns, what has been less discussed in the context of the subsequent reforms is the degree of competition within European banking sector. So much so, that the Euro area statistical boffins even stopped reporting banking sector concentration indices for the entire Euro area (although they did continue reporting the same

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24/2/19: Eurozone’s Corporate Yields are not quite in a crisis territory… yet…

February 25, 2019

Euro area high yield corporate credit rates are under pressure to continue moving:

But they are far from being dramatic, even though banking sector margins have now surpassed ex-crises averages:

The problem, however, is what awaits on the horizon. So far, the ECB is planning on hiking rates in the second half of 2019. If it does, with one 25 bps hikes to the end of 2019, we are looking at high yield rates jumping close to a 7 percent mark:

That is a bit more testing than the current above-the-average yields.

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24/2/19: Europe of Divergence: Euro and the Crisis Aftermath

February 24, 2019

A promise of economic convergence was one of the core reasons behind the creation of the Euro. At no time in the Euro area history has this promise been more important than in the years following the series of the 2008-2013 crises, primarily because the crisis has significantly adversely impacted not only the ‘new member states’ (who may or may not have been on the ‘convergence path’ prior to the crisis onset), but also the ‘old member states’ (who were supposed to have been on the convergence path prior to the crisis). The latter group of states is the so-called Euro periphery: Greece, Italy, Spain and Portugal.So have the Euro delivered convergence for these states since the end of the Euro area crises, starting with 2014? The answer is firmly ‘No’.

 The chart above clearly shows

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24/2/19: Buybacks vs Capex

February 24, 2019

U.S. corporates spending or ‘investing’ over the last 10 years:CapEx ($6.4T), including often non-productive M&As
Buybacks ($4.9T) and 
Dividends ($3.4T) 

via @mbarna6Just another reminder why productivity growth is not being aided by cheap credit.

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22/2/19: Deutsche Bank’s New Old Losses: When a Candy Bites Back

February 22, 2019

Our good old friends at @DeutscheBankAG have been at it again… this time (h/t to @macromon) raking in $1.6 billion of freshly announced losses from pre-Global Financial Crisis trades in municipal bonds. Story at WSJ: https://www.wsj.com/articles/deutsche-bank-lost-1-6-billion-on-a-bond-bet-11550691086 (gated)In summary: "This transaction was unwound in 2016 as part of the closure of our Non-Core Operations", according to the spokeswoman email to the WSJ. DB ca $7.8 billion portfolio of 500 municipal bonds back in 2007. The bonds were insured by specialised mono-line insurers to protect against default. In March of 2008, the bank followed up the trade by buying additional default protection from Berkshire Hathaway for $140 million. Insure-and-forget, right?By the end of 2011, the bank

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20/2/19: Crack and Opioids of Corporate Finance

February 20, 2019

More addictive than crack or opioids, corporate debt is the sand-castle town’s equivalent of water: it holds the ‘marvels of castles’ together, util it no longer does…

Source: https://twitter.com/lisaabramowicz1/status/1098200828010287104/photo/1
Firstly, as @Lisaabramowicz correctly summarises: "American companies look cash-rich on paper, but average leverage ratios don’t tell the story. 5% of S&P 500 companies hold more than half the overall cash; the other 95% of corporations have cash-to-debt levels that are the lowest in data going back to 2004". Which is the happy outrun of the Fed and rest of the CBs’ exercises in Quantitive Hosing of the economies with cheap credit over the recent years. So much ‘excessive’ it hurts: a 1 percentage point climb in corporate debt yields, over

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20/2/19: Broader Measures of Irish Unemployment 4Q 2018

February 20, 2019

The latest Labour Force Survey for 4Q 2018 for Ireland, published by CSO, shows some decent employment increases over 2018, and a welcomed, but shallow, rise in the labour force participation rates. Alongside with a decrease (over FY 2018) in the headline unemployment rate, these are welcome changes, consistent with overall economic growth picture for the state.One, much less-reported in the media, set of metrics for labour markets performance is the set of broader unemployment measures provided by the CSO. These are known as Potential Labour Supply stats (PLS1-PLS4). The measures also show improvements over 2018, just in line with overall employment growth. However, these measures clearly indicate that after 11 years running, the 2008-2014 crises remain still evident in the labour

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18/2/19: U.S. Treasuries: Not Finding Much Love in Foreign Lands

February 18, 2019

In recent months, I have been warning about the cliff of new bonds issuance that is coming for the U.S. Treasuries in 2019, pressured by the declining interest in U.S. debt from the rest of the world. December 2018 figures are a further signal reinforcing the importance of this warning (see U.S. yields comparatives here: http://trueeconomics.blogspot.com/2019/02/15219-still-drowning-in-love-for-debt.html).In December 2018, foreign buyers cut back their purchases of the U.S. Treasuries by the net USD77.35 billion, following a net increase in purchases in November of USD13.2 billion. December net outflow was the largest since January 1978. On a positive note, Chinese holdings of U.S. Treasuries increased in December, after declining for six straight months. China held USD1.123 trillion in

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16/2/19: Deep Crises: past, present, future?

February 16, 2019

Venezuela’s economic (and political, social, public, etc) woes have been documented with exhaustion, although no one so far has produced a half-meaningful outline of solutions that are feasible and effective at the same time.Take for example, the @IIF pitch in: "Venezuela’s economic collapse is almost unprecedented in recent history. Zimbabwe in the last 20 years and the collapse of the Soviet Union are the only comparable episodes." This accompanied the following chart:

What is, however, remarkable in this exposition, is not Venezuela’s demise, which is impressive, but the experience of Russia and the contrasting experience of Ukraine in post-Soviet collapse era.Here is the data from the World Bank on post-USSR collapse recoveries, through 2017. It is the similar to the one used by

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16/2/19: Trump-o-rama taking a dip?

February 16, 2019

Summarizing the U.S. economic ‘themes’ of the last 21 years:

or put differently: 13 years of ‘ugly’, 8 years of ‘euphoric’.Source for the great chart (ex-my annotations): https://www.topdowncharts.com/.

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15/2/19: Nothing to Worry About for those Fiscally Conservative Republicans

February 15, 2019

H/T to @soberlook:

U.S. Federal deficit was up $192 billion y/y in December 2018. Nothing to worry about, as fiscal prudence has been the hallmark of the Republican party policies since… well… since some time back…  That, plus think of what fiscal surplus will be once Mexico pays for the Wall, and Europeans pay for the Nato.Soldier on, Donald.

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15/2/19: Euro area is sliding toward recession

February 15, 2019

Based on the latest data through January 2019, Eurozone’s economic problems are getting worse. In 4Q 2018, Euro area posted real GDP growth of just 0,.2% q/q – matching the print for 3Q 2018. Meanwhile, inflation has fallen from 1.7% in December 2018 to 1.6% in January 2018. And Eurocoin – a leading growth indicator for euro area GDP expansion slipped from 0.42 in December 2018 to 0.31 in January 2019. This marked the third consecutive month of decline in Eurocoin, and the steepest fall in 8 months. Worse, July 23016 was the last time Eurocoin was at this level.

Within the last 12 months, Eurozone growth has officially fallen from 0,.7% q/q in 4Q 2017 to 0.2% in 4Q 2018, HICP effectively stayed the same, with inflation at 1.6% in January 2018 agains 1.5% in January 2018. And forward

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7/2/19: Global Trade Indicators: Tanking

February 7, 2019

There is no reason to panic about global growth. None. None at all…

Source: topdowncharts.com with my annotations
Nothing to see here. Because, obviously, structurally and statistically lower growth in trade turning negative on foot of Baltic Dry Index literally collapsing over the last two weeks, while China data and stock markets signals remain negative, is just a glitch…

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5/2/19: The Myth of the Euro: Economic Convergence

February 5, 2019

The last eight years of Euro’s 20 years in existence have been a disaster for the thesis of economic convergence – the idea that the common currency is a necessary condition for delivering economic growth to the ‘peripheral’ euro area economies in the need of ‘convergence’ with the more advanced economies levels of economic development.The chart below plots annual rates of GDP growth for the original Eurozone 12 economies, broken into two groups: the more advanced EA8 economies and the so-called Club Med or the ‘peripheral’ economies.

It is clear from the chart that in  growth terms, using annual rates or the averages over each decade, the Euro creation did not sustain significant enough convergence of the ‘peripheral’ economies of Greece, Italy, Portugal and Spain with the EA8 more

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17/1/19: Why limits to AI are VUCA-rich and human-centric

January 17, 2019

Why ethics, and proper understanding of VUCA environments (environments characterized by volatility/risk, uncertainty, complexity and ambiguity) will matter more in the future than they matter even today? Because AI will require human control, and that control won’t happen along programming skills axis, but will trace ethical and VUCA environments considerations.Here’s a neat intro: https://qz.com/1211313/artificial-intelligences-paper-clip-maximizer-metaphor-can-explain-humanitys-imminent-doom/. The examples are neat, but now consider one of them, touched in passim in the article: translation and interpretation. Near-perfect (native-level) language capabilities for AI are not only ‘visible on the horizon’, but are approaching us with a break-neck speed. Hardware – bio-tech link that

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17/1/19: 2019 Outlook

January 17, 2019

My post on economic outlook for 2019 is now available from the Focus Economics: https://www.focus-economics.com/blog/constantin-gurdgiev-thoughts-on-the-global-economy-for-2019

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17/1/19: U.S. Imports Demand and Final Household Consumption

January 17, 2019

A great post from the Federal Reserve Bank of San Francisco blog (https://www.frbsf.org/economic-research/publications/economic-letter/2019/january/how-much-do-we-spend-on-imports/) showing estimates for total imports content of the U.S. household consumption, with a break down of imports content across domestic value additive activities and foreign activities.Key results: “Our estimates show that nearly half the amount spent on goods and services made abroad stays in the United States, paying for the local component of the retail price of these goods. At the same time, imports of intermediate inputs make up about 5% of the cost of production of U.S. goods and services. Overall, about 11% of U.S. consumer spending can be traced to imported goods. This ratio has remained nearly unchanged

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17/1/19: Eurocoin December 2018 Reading Indicates a Structural Problem in the Euro Area Economy

January 17, 2019

December 2018 reading for Eurocoin, a lead growth indicator for euro area posted a second consecutive monthly decline, falling from 0.47 in November to 0.42 in December. December reading now puts Eurocoin at its lowest levels since October 2016.Charts below show dynamics of Eurocoin, set against actual and forecast growth rates in the euro area GDP and  inflation:

Per last chart above, the pick up in inflation, measured by the ECB’s target rate of HICP, from 1.4% at the end of 3Q 2017 to 1.7% in 3Q 2018 has been associated with decreasing growth momentum (Eurocoin falling from 0.67 q/q to 0.48, and growth falling from the recorded 0.7% q/q in 3Q 2017 to 0.2% q/q in 3Q 2018).With this significant downward pressure on growth happening even before any material monetary tightening by

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12/1/19: Global Liquidity Conditions

January 12, 2019

Things are getting ugly in the global liquidity environment.1) The U.S. Treasuries demand from foreign buyers is drifting down – a trend that has been on-going since mid-2016. As of mid-4Q 2018, the combined foreign institutional holdings of U.S. Treasuries was at its lowest levels since the start of 2015.2) The U.S. Dollar strength is now at its highest levels since early 2002.

Meanwhile, liquidity is falling:3) Global liquidity supply is turning down, having trended relatively flat since the start of 2015

This is not a good set of signs, especially as this data is not reflecting, yet, the ECB tightening.

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11/1/19: Herding: the steady state of the uncertain markets

January 12, 2019

Markets are herds. Care to believe in behavioral economics or not, safety is in liquidity and in benchmarking. Both mean that once large investors start rotating out of one asset class and into another, the herd follows, because what everyone is buying is liquid, and when everyone is buying, they are setting benchmark expected returns. If you, as a manager, perform in line with the market, you are safe at the times of uncertainty and ambiguity. In other words, it is better to bet on losing or underperforming alongside the crowd of others, than to bet on a more volatile expected returns, even though these might offer a higher upside.How does this work? Here:

Everyone loves Corporate debt, until everyone runs out of it and into Government debt. Everyone hates Government debt, until

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