The World of ABC Economics

THE WORLD OF ABC ECONOMICS / Ideas shape the course of history / MAY 2016 / NO. 6 / abceconomics.com

Created, directed and edited by STEFANO FRANCESCO FUGAZZI

The World of ABC Economics – ABC Economics Magazine – Ideas shape the course of history – No. 6 – May 2016

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ABC Economics Magazine Ideas shape the course of history http://abceconomics.com/ No. 6 – 05/2016

In this month’s issue

COVER STORY / AN INSIGHT INTO THE VATICAN BANK 2

ECONOMICS / BEYOND CAPITALISM: IS A THIRD WAY POSSIBLE? 5

UK POLITICS / FROM AUSTERITY TO EUROPE. HAVE CONSERVATIVES LOST THE PLOT? 6

UK ECONOMY / PEER-TO-PEER LENDING 7

ABC ECONOMICS RESEARCH / ECB STIMULUS LIFTS STOCKS AS BANKS ALWAYS

OUTPERFORM BENCHMARK INDEXES 8

MONETARY POLICY / THE INTEREST RATE DASHBOARD 11

TECHNICAL ANALYSIS / INCROCI RIALZISTI TRA MACD E STOCASTICO 13

ABC FOOD / CHICKEN “SALTIMBOCCA” 14

The World of ABC Economics. An ABC Economics creation. http://abceconomics.com/ Created, directed and edited by STEFANO FRANCESCO FUGAZZI – Email address: abc.economics@yahoo.com

Acknowledgements: John Wood, Italoeuropeo, London One Radio, Luadan Future Trade and this month’s contributors.

ABC Economics has been cited on several occasions by the media, making a splash on the front pages of Il Sole 24 Ore and Il Giornale, mentioned by Otto e Mezzo (a TV programme) and by a handful of Italian blogs, in addition to Wikipedia and a number of US news portals e.g. Zero Hedge, TV channels and UK radio stations. Additionally, some of our ABC Economics work was translated into and reported by French and Russian news portals.

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COVER STORY / AN INSIGHT INTO THE VATICAN BANK Stefano Francesco Fugazzi (founder of ABC Economics) reports.

With the Panama Papers story breaking cover, you may be inclined to presume that the World’s largest unregulated private bank is headquartered in an exotic location and stewarded by a ruthless capitalist.

The above may indeed make a great script for a blockbuster movie; however, the truth is that the World's largest unregulated bank is located in the heart of Rome and run by the Catholic Church.

The Istituto per le Opere di Religione (IOR), commonly known as the Vatican Bank, was established on 27 June 1942 by Papal Decree with the solemn duty to “serve the global mission of the Catholic Church by way of protecting and growing its customers’ assets and providing them with dedicated worldwide payment services.

“In order to comply with this noble task that has been entrusted to the IOR by the Holy Father, the Institute must at all times ensure high-quality products and services, while assuring compliance with financial regulation.”

‘Bona fide’ deregulation

Unlike most financial institutions, the IOR does not cooperate with the Basel Committee on banking supervisory matters, nor complies with Basel III capital and liquidity adequacy requirements.

The Vatican Bank only adheres to the Foreign Account Tax Compliance Act (FATCA), a United States federal law that requires U.S. persons, including individuals who live outside the United States, to report their financial accounts held outside of the United States to the U.S. Internal Revenue Service (IRS).

All other forms of regulatory and governance oversight are independently carried out by the Holy See in accordance with the Canon Law.

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Know your customer

According to the IOR’s latest set of published accounts, the Vatican Bank’s “customers are active in the mission or perform charitable works at institutions such as schools, hospitals or refugee camps.

“Other customers are Institutional counterparties, employees and pensioners of the Vatican, Institutes of Consecrated Life and Societies of Apostolic Life and Dioceses.”

The IOR does not formally take on individuals without a relationship to the Holy See as customers, nor does it accept corporate clients; even so, as at December 2014 a sizeable proportion of assets (40 percent) was in the name of clients who were neither dioceses or religious organisations.

Approximately 88 percent of clients were based either in Italy (63 percent of total) or within the Vatican City State (25 percent).

In 2013 the IOR closed down over 3,000 customer accounts under pressure from international anti-money laundering regulators concerned about its use as a tax haven. In addition, 2,600 dormant customer relationships were ended in 2013 and a further 4,600 accounts were lost in 2014.

Yes, sometimes we can serve both God and Mammon

As at 31 December 2014, the Vatican Bank reported exposures in trading securities for EUR 1.7 billion, mostly in sovereign (39 percent of total) and corporate bonds (56 percent). A further EUR 0.6 billion was invested in assets held to maturity, mainly comprising government bonds issued by European countries and bonds issued by supranational financial entities.

Additionally, the IOR recorded investments in precious metals totalling EUR 34 million, two thirds of which in gold bullion.

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The Vatican Bank's pension fund on a Highway to Hell?

According to the Vatican Bank’s accounts, an actuarial loss of EUR 33 million was recorded in 2014, a deficit which brought the overall pension obligation liability to EUR 124 million.

In August 2009 the Pope Emeritus, Benedict XVI, approved a pension reform bill increasing the retirement age to 67 and 72 for public servants and ecclesiastical personnel, respectively.

In July 2014 the Holy See unveiled plans to overhaul the IOR’s pension fund “to ensure there are sufficient funds for future generations in a changing environment.

“In recent years, many Western countries – including the Vatican – have faced challenges in funding their pension system,” the Holy See concluded.

Profiting from bonds as “you can’t run the Church on Hail Marys”

In 2014, the IOR’s net profit was EUR 69.3 million (2013: EUR 2.9 million). The year-on-year movement was largely attributable to an increase in net trading income arising from securities coupled with a decline in extraordinary operating expenses.

The significant increase in net trading result was predominantly due to the positive performance of bond markets in 2014, compared to 2013, as a result of lower interest rates. Furthermore, in 2013 the IOR recorded significant unrealised losses on external investment funds, which were not repeated in 2014.

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ECONOMICS / BEYOND CAPITALISM: IS A THIRD WAY POSSIBLE?

Federico Giovanni Rega (SUNeconomist) and Stefano F. Fugazzi (ABC Economics) report.

The dichotomy between the two main approaches to economic organisation, the Anglo-Saxon model and Rhenish Capitalism, arose following the publication, in 1993, of Capitalism against Capitalism, a study by Michel Albert providing insight into the institutional and economic characteristics of capitalism in a number of English speaking countries.

In the Anglo-Saxon context there is an arm’s length relationship between shareholders and senior management. This distinction of roles and goals can give rise to a phenomenon known as the agency problem.

Shareholders tend to look at cash flows and the overall franchise viability of the firm whilst managers, who act on behalf of the owners, are responsible for running business operations and setting strategies, albeit their agenda may also include personal objectives such as career progression, status and bonuses.

By contrast, the Rhenish model is a social and economic system combining free market capitalism which supports private enterprise, alongside social policies which establish both fair competition within the market and a welfare state.

Present in Germany, France and in Northern Europe, with other peculiar variants in Japan, Rhine capitalism is an approach capable of striking a balance among stakeholders, overcoming the zero-sum game logic of the State versus Market tension in favour of a win-win approach.

The rise of the information age in the context of globalisation called into question the sustainability of the existing forms of capitalism.

As noted by the 2001 Nobel prize winner, Joseph Stiglitz, “we live in a process of globalisation, but we have no global institutions able to deal with its consequences. We have a system of global governance, but we do not have a global government.”

An alternative third way must be sought. Stiglitz is of the opinion that a middle-way solution retaining some aspects of both models is possible.

“Our economic system needs both the market and the state, going beyond the old conflict laissez faire – socialism. As a result, the solution is to find the right combination,” Stiglitz argues.

According to RM Phillips Professor in the Economics of Innovation at the University of Sussex, Mariana Mazzucato, this new approach would require the introduction of a novel form of capitalism where companies, State and employees work close together to support the creation of wealth and well-being.

The emblems of wealth in the age of the digital economy, from the iPhone to the Tesla S, have all relied on a strategic public sector that shoulders the burden of risks and uncertainties, working side by side with the private sector and willing to reinvest their profits in research and development (R&D) and in human resources development (HRD).

Regions and countries that have succeeded in achieving innovation-led growth have also benefited from long-term visions and forward-looking policies.

The involvement of public sector agencies was pivotal to their success, with investments being dispensed in public good areas, like basic research, but also across the entire innovation chain (basic research, applied research, early-stage funding of companies), giving rise to the creation of new technologies and, ultimately, achieving economic development through the creation of new sectors.

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UK POLITICS / FROM AUSTERITY TO EUROPE. HAVE CONSERVATIVES LOST THE PLOT?

Massimo Morelli reports.

Twelve months after winning the general elections, David Cameron’s Conservative Party has come under fire over following backlash over its economic policies and a string of financial scandals.

Since coming into power in 2010, the austerity measures announced by George Osborne, the Chancellor of the Exchequer, did little to curb government spending. Public debt has continued relentlessly to rise; budget deficit is still wide whilst the goal of achieving a surplus by 2020 is now looking increasingly unlikely.

The Conservative Government has attracted criticisms for selling off public assets at knockdown prices (Royal Mail and RBS), in addition to committing billions of taxpayers’ money in wasteful investments, such as the nuclear plant at Hinckley and the Trident programme.

In the meantime, welfare reforms, aimed at simplifying the housing and benefit systems through universal credit, have proven to be ineffective, expensive and unfair.

The Department for Work and Pensions (DWP) is said to employ over 3,000 officers to tackle benefits fraud whilst the HMRC only had 300 officers investigating tax evasion. Yet, almost £30 billion worth of tax revenues are lost every year whereas benefit frauds are estimated to cost ‘only’ £1 billion.

The mastermind of DWP policies, Iain Duncan Smith, was recently affected by a sudden moral awakening and resigned in protest over further cuts to the weekly allowance for disabled people. The resignation follows the former minister’s decision to support the Brexit campaign, a move which highlights turmoil within the Conservative Party over the Government’s pro-EU stance.

The growing dissatisfaction over the Prime Minister is tearing the so-called Bullingdon Club apart, with Boris Johnson, soon-to-be former Mayor of London, openly challenging David Cameron for the top job.

But how did we get to this EU quagmire? In order to please the Eurosceptic Tories, in the election manifesto Cameron pledged to stage a referendum on Britain's membership of the European Union. He then used the referendum as a bargaining chip to renegotiate the British position in the EU.

Although the deal was rather dull – comprising some allowances on EU citizens receiving UK benefits and the guarantee to opt out of any further monetary or political integration – Cameron claimed it to be a stunning masterpiece of diplomacy.

The Government initially deployed the so-called Project Fear to persuade Britain to stay in Europe, a propaganda strategy which proved successful in the case of Scottish Independence Referendum.

Then they tried to convey a positive pro-European message by spending more than £9 million on an anti-Brexit leaflet which was sent to every UK household.

However, the timing was unfortunate as the postal campaign happened the same week the Panama Papers scandal hit the press. Several Tory party members were named, including the Prime Minister’s deceased father who, for several years, used a company specialising in setting up offshore tax avoidance schemes.

After evading personal questions about the matter, Mr Cameron eventually admitted that he had also gained from his father’s tax free offshore investments.

The First-Past-the-Post electoral system, which prevents a multipolar political structure in Britain, has so far been the miracle superglue keeping the Tories ‘all in it together’. However, this may well change at the end of June. No matter what the outcome of the EU referendum is, the Tories are in danger of imploding, or worse still, compromising Britain’s long-term prospects.

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UK ECONOMY / PEER-TO-PEER LENDING

Source: Bank of England, Staff Working Paper No. 598, 29 April 2016, “Peer-to-peer lending and financial innovation in the United Kingdom”

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Stefano Francesco Fugazzi (founder of ABC Economics) reports.

The research unit of ABC Economics is pleased to present the conclusions of an event study which observed the creation of abnormal of returns in the Italian stock market indexes around the ECB announcement of the Targeted Long Term Refinancing Operations I and II.

Hypotheses

Hypothesis 1 – The Italian stock market responds positively to the announcement of monetary easing programmes.

Hypothesis 2 – Bank stocks generate higher returns than non-bank stocks around the ECB announcement of monetary easing programmes.

Research methods

We collected secondary data to assess the generation of abnormal return (AR) and cumulative abnormal return (CAR).

To test Hypothesis 1 we benchmarked the FTSE MIB against the EURO STOXX 50.

To test Hypothesis 2 we compared the FTSE MIB index to his banking sector subset, the FTSE ITALY BANKS (IT8300.MI).

To calculate both ARs and CARs we considered an estimation window of 252 trading days, from 11 to 262 days prior to events.

We utilised an event window of 21 trading days, -/+10 days around the selected events.

Observed events

We observed the AR and CAR patterns around two dates:

RESEARCH / ECB STIMULUS LIFTS STOCKS AS BANKS ALWAYS OUTPERFORM BENCHMARK INDEXES

5 June 2014: the ECB announced a series of targeted longer-term refinancing operations (TLTROs) aimed at improving bank lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a window of two years.

10 March 2016: the ECB announced four new targeted longer-term refinancing operations (TLTRO II) to reinforce the ECB’s accommodative monetary policy stance and to foster new lending. The new operations will be conducted from June 2016 to March 2017 at a quarterly frequency. All the new operations will have a four-year maturity, with the possibility of repayment after two years.

TLTRO results (5 June 2014)

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TLTRO II results (10 March 2016)

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Conclusions

Hypothesis 1 validated. In line with our expectations and current economic literature, markets have responded positively to the announcement of monetary easing programmes.

A combination of factors including Draghi’s comments prior to the announcements and market expectations led to the generation of positive cumulative abnormal returns (CAR) prior to the actual events (TLTRO: day -6 and TLTRO II: day -10).

Hypothesis 2 validated. On average, banking stocks reacted more positively to the ECB announcements. The FTSE ITALY BANKS index outperformed the FTSE MIB in both instances, recording higher CARs between days -9 and +3 in the case of the first TLTRO and between day -6 and day +9 around the time of the announcement of TLTRO II.

Our t-test assessment returned a p-value below 0.05, suggesting a close correlation between the stock indexes’ movements.

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Country | Policy Rate Name (last variation) Latest Rate (Latest Change)

Country | Policy Rate Name (last variation) Latest Rate (Latest Change)

ARGENTINA | Reverse Repo Rate 1d (Aug 03, 2014) 13.00 % (+ 4.00) JAPAN | Call Rate (Oct 05, 2010) 0-0.10 % (- 0.10)

AUSTRALIA | Cash Rate (May 05, 2015) 2.00 % (- 0.25) MEXICO | Benchmark Rate (Feb 17, 2015) 3.75 % (+ 0.50)

BRAZIL | Selic Rate (Jul 30, 2015) 14.25 % (+ 0.50) NEW ZEALAND | Cash Rate (Mar 10, 2016) 2.25 % (- 0.25)

CANADA | Target ON Rate (Jul 15, 2015) 0.50 % (- 0.25) NORWAY | Key Policy Rate (Mar 17, 2016) 0.50 % (- 0.25)

CHILE | Monetary Policy Rate (Dec 17, 2015) 3.50 % (+ 0.25) POLAND | Reference Rate (Mar 04, 2015) 1.50 % (- 0.50)

CHINA | Lending Rate (Oct 23, 2015) 4.35 % (- 0.25) RUSSIA | Key Rate (Jul 31, 2015) 11.00 % (- 0.50)

CZECH REPUBLIC | Repo Rate (Nov 01, 2012) 0.05 % (- 0.20) SAUDI ARABIA | Repurchase Rate (Jan 19, 2009) 2.00 % (- 0.50)

DENMARK | Lending Rate (Jan 19, 2015) 0.05 % (- 0.15) SOUTH KOREA | Base Rate (Jun 11, 2015) 1.50 % (- 0.25)

EUROZONE | Key Interest Rate (Mar 10, 2016) 0.00 % (- 0.05) SOUTH AFRICA | Repurchase Rate (Mar 17, 2016) 7.00 % (+ 0.25)

HUNGARY | Base Rate (Apr 26, 2016) 1.05 % (- 0.15) SWEDEN | Repo Rate (Feb 11, 2016) -0.50 % (- 0.15)

ICELAND | 7-d Deposit Rate (Nov 04, 2015) 5.75 % (+ 0.25) SWITZERLAND | SNB-Target Range (Jan 15, 2015 -1.25% to -0.25 %

INDIA | Policy Repo Rate (Apr 5, 2016) 6.50 % (- 0.25) TURKEY | Repo Rate (Feb 24, 2015) 7.50 % (- 0.25)

INDONESIA | Benchmark Rate (Mar 17, 2016) 6.75 % (- 0.25) UNITED KINGDOM | Bank Rate (Mar 05, 2009) 0.50 % (- 0.50)

ISRAEL | Benchmark Rate (Feb, 23, 2015) 0.10 % (- 0.15) USA | Funds Rate (Dec 16, 2015) 0.25-0.50 (+0.25)

MONETARY POLICY / THE INTEREST RATE DASHBOARD

ABC Economics infographics based on cbrates.com data

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TECHNICAL ANALYSIS / INCROCI RIALZISTI TRA MACD E STOCASTICO

A cura di GIORGIO MARCHI (autore presso Jobtrading.it).

Come di consueto, anche per la newsletter di questo mese presenteremo una tecnica di trading. In questo caso, una combinazione tra uno tra i più famosi indicatori di analisi tecnica, il MACD, ed un altrettanto famoso oscillatore della medesima disciplina, lo Stocastico. Prima di addentrarci è tuttavia necessario illustrare un concetto introduttivo: il Crossover. Con questo termine si indica meramente un incrocio che può verificarsi tra il prezzo di uno strumento finanziario ed un indicatore di analisi tecnica (per esempio una media mobile) o tra più strumenti di analisi. Ovviamente un crossover genera segnali che possono essere rialzisti o ribassisti in base al tipo di incrocio. La combinazione tra i due risulta particolarmente funzionante poiché lo Stocastico compara il prezzo di chiusura dello strumento con il range degli ultimi periodi mentre il MACD evidenzia eventuali convergenze e divergenze tra medie mobili. La strategia si fonda sull’apertura di posizioni long nel momento in cui entrambi gli strumenti inviano segnali rialzisti dati da, nel caso dello Stocastico, la linea %K che taglia al rialzo la linea %D, e, nel caso del MACD, l’istogramma che diventa positivo. L’invio di segnali simultanei è alquanto raro. Per ovviare a questo limite si può incrementare, modificando i settaggi di default, la reattività di uno o di ambo gli strumenti. Altrimenti, si può entrare long al primo segnale ed aspettare che si verifichi il secondo (con tutti i rischi del caso e considerando che in un grafico giornaliero il secondo segnale dovrebbe arrivare entro 2 o comunque pochi periodi).

Una condizione di supporto ma non necessariamente valida è che il prezzo si muova sopra la sua media mobile di lungo termine a 200 periodi. Si possono aggiungere altri oscillatori. Una valida aggiunta (od addirittura un valido sostituto per lo Stocastico) è l’RSI. Da tenere a mente però che più strumenti usiamo più sarà raro e ritardato (ma attendibile) il segnale long. Quindi: maggiore certezza per minor rendimento. Tutte queste considerazioni effettuate di logica long possono essere specularmente usate anche in logica short.

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ABC FOOD / CHICKEN “SALTIMBOCCA”

CLAUDIA ARMANI reports.

"Saltimbocca" are a typical Roman recipe. They are usually made with veal, but in this case, I used chicken for a nice variation and because it is much more easily available than veal. I chose to accompany them with some wilted spinach, cooked very only for a few minutes to retain more flavour and nutrients. Ingredients (serve 4)

4 chicken breast escalope 4 slices of Parma ham extra virgin olive oil 2 cloves of garlic a dash of white wine (optional) few sage leaves a big packet of baby spinach some dried chilli flakes sea salt to taste

Method Place a slice of ham and a bit of sage on top of each escalopes, fold them in two and seal them with a toothpick. Sprinkle some olive oil in a non-stickpan, place the escalopes, and let them cook adding some white wine half way through. Mix the garlic and few chilli flakes in a bigger pan, let the oil warm up and then add the washed spinach. let them cook for a few minutes and serve!