29/9/19: Divided ECB


Divided they stand…

Source: https://www.bloomberg.com/news/articles/2019-09-29/lagarde-inherits-ecb-tinged-by-bitterness-of-draghi-stimulus

The ECB is more divided than ever on the ‘new’ direction of QE policies announced earlier this month, as its severely restricted ‘political mandate’ comes hard against the reality of VUCA environment the euro area is facing, with:

  1.  Reduced forward growth forecasts (net positive uncertainty factor for QE)
  2. Anaemic inflation expectations (net positive risk factor for QE), but reduced expectations as to the effectiveness of the QE measures in their ability to lift these expectations (net negative uncertainty factor)
  3. Low unemployment and long duration of the current recovery period (net negative uncertainty factor for QE)
  4. Relative strength of the euro, as per chart below, going into QE (net positive risk factor for QE)
  5. Related to (5), deteriorating global growth and trade outlooks, with the euro area being a beneficiary of the Trump Trade Wars so far (ambiguous support for QE)
  6. Expectations concerning the Fed, Bank of Japan, Bank of England etc policy directions (a complexity factor in favour of QE), and
  7. Expectations concerning the potential impact of Brexit on euro area economy (another complexity factor supporting QE).

Here is a chart showing exchange rate evolution for the euro area, and key QE programs timings (higher values denote stronger euro):

Meanwhile, for the measures of monetary policy effectiveness (lack thereof) see upcoming analysis of the forward forecasts for euro area growth on this blog in relation to Eurocoin data.

28/9/19: Evidence of Systemic Risk from Major Cybersecurity Breaches


In our post for Columbia Law School’s CLS Blue Sky Blog, myself and Shaen Corbet explain in non-technical terms our ground-breaking findings on systemic nature of cybersecurity risks in financial markets:

Our study is the first in the literature showing evidence of systemic contagion from cyber attacks on one company to other companies and stock exchanges.

Based on these findings, we have a chapter forthcoming in an academic volume on the future of regulation, proposing a novel mechanism for regulatory detection, monitoring and enforcement of cybersecurity risks. We will post this chapter when it goes to print, so stay tuned.

10 Alternate Ways to Pay for Long-Term Care

10 Alternate Ways to Pay for Long-Term Care

Don’t count on Medicare to pay for nursing home, assisted living or ongoing home health care. Medicare benefits for that type of care are typically only available after a hospitalization or injury and for a limited duration. While Medicare isn’t an option, here are 10 alternatives that are:

• Group Long-Term Care Insurance

• Short-Term Care Insurance

• Life/Long-Term Care Insurance

• Health Savings Accounts

• Long-Term Care Annuities

• Life Plan Communities

• Veterans Benefits

• Home Equity

• Pensions or Social Security

• Medicaid

Source: https://money.usnews.com/money/personal-finance/family-finance/articles/the-high-cost-of-long-term-care-insurance-and-what-to-use-instead

How to afford college

“COLLEGE STUDENTS who borrow graduate with an average $37,000 in loans. While many people believe loans are the only way to finance a college education, that’s simply not the case.”
Author Kristine Hayes is a departmental manager at a small, liberal arts college.

Here are five ways to get an advanced education while minimizing debt:”

1. Stay close to home.

2. Comparison shop. On paper, private schools typically appear to cost more than public institutions, but it’s worth digging into the details.

3. Scholarships. Billions of dollars in scholarships are given to college students every year.

4. Condensed degree programs.

5. Tap your employer. Some employers offer tuition reimbursement programs

“Many hospitals offer these types of programs for students interested in nursing. It’s even possible to attend medical school for free. Kaiser Permanente recently announced that the first five cohorts of students to attend its new medical school will pay no tuition. With medical doctors typically graduating with nearly $200,000 in debt, Kaiser’s program will no doubt generate significant interest.”

Read the full article for details: https://humbledollar.com/2019/09/educated-consumers/

20/9/19: New paper: Systematic risk contagion from cyber events


Our new paper, “What the hack: Systematic risk contagion from cyber events” is now available at International Review of Financial Analysis in pre-print version here: https://www.sciencedirect.com/science/article/pii/S1057521919300274.

Highlights include:

  • We examine the impact of cybercrime and hacking events on equity market volatility across publicly traded corporations.
  • The volatility generated due to cybercrime events is shown to be dependent on the number of clients exposed.
  • Significantly large volatility effects are presented for companies who find themselves exposed to hacking events.
  • Corporations with large data breaches are punished substantially in the form of stock market volatility and significantly reduced abnormal stock returns.
  • Companies with lower levels of market capitalisation are found to be most susceptible to share price reductions.
  • Minor data breaches appear to be relatively unpunished by the stock market.

Retirement Income Security Evaluation Score (RISE Score™)

Retirement Income Security Evaluation (RISE)
https://www.cnbc.com/2019/09/16/this-score-can-tell-how-financially-prepared-you-are-for-retirement.html
“evaluates just where you fall in terms of having steady income in retirement, much like a credit score, on a zero to 850 scale.”
“Consumers can access the tool online. After inputting factors such as the Social Security income you expect, any pension income you may have, how much you have saved and your monthly living and medical expenses, you can see how well you will fare financially in retirement.”
The tool is aimed at individuals ages 45 and up with investable assets of $75,000 to $2 million.
Check out the RISE score at: https://www.retireyourrisk.org/rise-score/
“The purpose of the Retirement Income Security Evaluation Score (RISE Score™) is to provide you with an estimated measure of income security to help you determine whether you’re on track with your current retirement income plans. The RISE Score™ can help you assess how well your retirement portfolio will cover basic living expenses and health care costs in retirement. The RISE Score™ is also designed to help answer this simple question: How can my retirement security potentially be improved through the addition of lifetime income solutions in my retirement planning strategy?”

6/9/19: Small Cap Stocks EPS: racing to the bottom of the MAGA barrel


Everything is going just plain swimmingly in the Land of MAGA, where American companies are now expected to do their duty by President Trump’s agenda for investment in the U.S. because, you know, this:

As ‘share’ part of the EPS ratio has shrunk (thanks to buybacks and M&As tsunami of recent vintage), earnings per share should have gone up… and up… and up. Instead, small cap stocks’ EPS has collapsed. To the lowest levels since the 2007-2008 crisis.

But never mind, more money printing by the Fed will surely cure it all.

Source for the above chart: @soberlook and WSJ.

9/9/19: Ireland and OECD: Income Tax Rates Comparatives


Based on the OECD data for 2018, Ireland is the second worst OECD country to earn income from work at the upper margin of earnings (167% of the average annual gross wage earnings of adult, full-time manual and non manual workers in the industry), compared to lower earners (67% of the average wage earnings). And although this story is not new (we were in the same position back in 2014), the gap in effective marginal taxes charged on the higher earners relative to lower earners is getting worse.

Here is the chart for 2014 data:


And a comparative 2018 data:

Back in 2014, nine of the OECD countries had zero or negative upper marginal tax rate penalty on higher wage earners. In 2018, the number rose to ten. In 2014, seven countries, including Ireland, had a tax rate penalty on higher wage earners in excess of 10 percentage points. In 2018, that number rose to eight. Ireland ranked second in terms of tax penalty on higher labour income tax burden relative to lower income in both 2014 and 2018. In 2014, our relative penalty stood at 18.961 percentage points, 2.753 percentage points below Sweden. In 2018, our relative penalty was 20.974 percent, 3.04 percentage points below Sweden. The OECD average penalty was 5.31 percentage points in 2018, down from 5.57 percentage points in 2014.

It is worth noting that in Ireland, voluntary spending on healthcare (indirect tax) is roughly 50 percent higher than it is in Sweden (https://data.oecd.org/healthres/health-spending.htm). Ireland spends less than half what Sweden does on early childhood education per pupil, and about 60 percent of what Sweden spends on tertiary education per pupil (https://data.oecd.org/eduresource/education-spending.htm). In other words, higher taxes on higher earners in Sweden seem to be purchasing substantially more services for taxpayers than they do in Ireland. Sweden also has older demographics and a somewhat functional military. Ireland has younger (lower health spending) demographics and not much in terms of a military expenditure. Of course, Swedish parliamentarians earned EUR 6,269 per month salary in 2918, when their Irish counterparts were paid EUR 7,878, but that hardly explains the gaps in spending and taxation systems.

So where all this tax penalty or surcharge on the higher earners levied on Irish residents is being spent? Clearly not on better financed education or health services, and not on military.

Another interesting way of looking at the figures is by comparing the actual tax rates. For those on 67% of average labour income, Ireland’s rate of taxation in 2014 was 37.7 percent or 3.92 percentage points below the OECD average,. This fell in Ireland to 35.72 percent in 2018, while the gap with OECD average rose to 6.29 percentage points. If you consider OECD average to be a realistic metric for tax burden on lower earners, Irish lower earners were more substantially undertaxed in 2018 than they were in 2014. For higher earners, disregarding the fact that Irish upper marginal tax rates kick in at an absurdly low level, for wage earners of 167% of the average wage, Irish tax rates were 56.66% and 56.70 percent in 2014 and 2018, respectively. This means that in 2014, Irish higher earners tax rates were 9.34 percentage points above the OECD average and in 2018 these were 9.38 percentage points above the OECD average. In both cases, higher earners were taxed more severely in Ireland when compared to the OECD average. The matters are similar if we were to run a comparative between Ireland and OECD median tax rates, so there is no point of arguing that OECD data includes ‘outlier’ countries.

On a personal note, I do not think comparatives between Sweden and Ireland paint the latter in any better terms than the former. However, if one were to look at the OECD figures as some objective measures of tax burdens, Irish lower and higher earners (labour income) are overtaxed by the OECD ‘norms’ (average and median). When one takes into the account a relatively scarce supply of services to the taxpayers as well as a relatively higher out-of-pocket costs of the services supplied, things appear to be even worse. This is not a value judgement. It simply down to the plain numbers.