The World of ABC Economics

THE WORLD OF ABC ECONOMICS / Ideas shape the course of history / JULY 2016 / NO. 8 / abceconomics.com

Created, directed and edited by STEFANO FRANCESCO FUGAZZI (MEMBER OF THE NATIONAL UNION OF JOURNALISTS)

The World of ABC Economics – ABC Economics Magazine – Ideas shape the course of history – No. 8 – July 2016

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ABC Economics Magazine Ideas shape the course of history http://abceconomics.com/ No. 8 – 07/2016

In this month’s issue

COVER STORY / THE BREXIT DELUSION. INCOME INEQUALITY (NOT EUROPE) THE REAL ISSUE 2

ECONOMY / THE SCALE OF ECONOMIC INEQUALITY IN THE UK 3

ECONOMY / MORE MONETARY EASING TO DEVALUE THE POUND AND REDUCE THE CURRENT ACCOUNT DEFICIT 5

FINANCIAL MARKETS / SPOTTING INVESTMENT OPPORTUNITIES IN AN AGE OF UNCERTAINTY 6

FINANCIAL MARKETS / LA PAURA SFIDA NUOVI MASSIMI 7

TECHNICAL ANALYSIS / COMBINAZIONE MACD – STOCASTICO PER GESTIRE IL FOREX 9

ABC FOOD / ASPARAGUS AND LEEKS TAGLIATELLE 10

ABC WINE & SPIRITS / SAN MARZANO VERDECA 11

OBITUARY / JO COX 12

The World of ABC Economics. An ABC Economics creation. http://abceconomics.com/ Created, directed and edited by STEFANO FRANCESCO FUGAZZI (a risk management analyst and an associate member of the National Union of Journalists) – Email address: abc.economics@yahoo.com

Acknowledgements: Kate Paschal, 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 / THE BREXIT DELUSION. UK INCOME INEQUALITY (NOT EUROPE) THE REAL ISSUE

Stefano Francesco Fugazzi reports.

The unthinkable has happened. Britain has voted to leave the European Union (EU), triggering both local and global astonishment.

But who’s to blame for Britain’s historic decision? Is it the EU responsible for failing to tackle illegal immigration or is David Cameron to be held responsible for staging a referendum in the first place?

This column argues that the outcome of the referendum on the United Kingdom’s EU membership uncovers a gloomy picture of a country divided and getting increasingly frustrated with its government’s social and economic policies.

The truth is that, for some absurd reason, no one is willing to admit that the EU has been used as an excuse to mask more serious problems inherent in British politics and society.

If you look at the referendum results, you will notice that most London boroughs – and Scotland – voted to remain in the EU whilst rural areas backed the Leave camp.

Both Eurosceptic and pro-EU enthusiasts recognise the fact that Europe needs sustained reforms. However, should the issues have been with and within the EU, then we would have seen both the Capital and rural areas recording similar voting patterns.

By contrast, the referendum results show a disproportionate discrepancy between London and the rest of the country, as if the Brexit backers could not wait to take revenge on the financial élite of the City and the government for failing to distribute wealth equally across the United Kingdom.

According to the Organisation for Economic Co-operation and Development (OECD), in the United Kingdom the average income of the richest 10% is almost 10 times as large as for the poorest 10%. The OECD average is 9.5, in France and Germany it is around 7 and in the United States 16.

Between 2005 and 2011 the average income of the poorest 10% in the United Kingdom fell 2% in real terms. While the average household income in the UK is slightly lower than in Germany and France, the average income of the bottom 10% in the UK is much lower.

Income is also spread unequally across the UK’s regions and nations. The average household income in London is considerably higher than in the North East.

The EU cannot be held responsible for increasing income inequality in the UK.

The onus will now be on the Leave camp to demonstrate that they have what it takes to reunite a divided nation.

They will also face the difficult task of making a U-turn on the social and economic policies pursued over the past two decades by New Labour and the Conservative Party under leaders Tony Blair and David Cameron, respectively.

But establishing a fairer economy is going to be a tall order in the aftermath of a Brexit, as future governments will no longer qualify for EU regional funding programmes.

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ECONOMY / THE SCALE OF ECONOMIC INEQUALITY IN THE UK

The following report was sourced from The Equality Trust, a campaigning organisation founded in 2009 by Bill Kerry, Richard G. Wilkinson and Kate Pickett after the publication of Wikinson and Pickett's book “The Spirit Level: Why More Equal Societies Almost Always Do Better”.

According to research by The Equality Trust, the UK has a very high level of income inequality compared to other developed countries.

People in the bottom 10% of the population have on average a net income of £8,468. The top 10% have net incomes almost ten times that (£79,042). As can be seen from the graph, income inequality is much starker at the top of the income scale, with the group with the 9th highest incomes making only 60% of the top 10%’s income. Inequality is much higher amongst original income than net income with the poorest 10% having on average an original income of £3,738 whilst the top 10% have an original income over 27 times larger (£102,366).

The top 1% have incomes substantially higher than the rest of those in the top 10%. In 2012, the top 1% had an average income of £259,917 and the top 0.1% had an average income of £941,582.

How Income is Shared

The graph below shows how income is shared amongst households. The poorest fifth of society have only 8% of the total income, whereas the top fifth have 40%.

Income Spread Between the UK’s Regions and Nations

Income is also spread unequally across the UK’s regions and nations. The average household income in London is considerably higher than in the North East.

GB Wealth Inequality

Wealth in Great Britain is even more unequally divided than income. The richest 10% of households hold 45% of all wealth. The poorest 50%, by contrast, own just 8.7%.

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Wealth Spread Between Great Britain's Regions and Nations

Wealth is also unevenly spread across Great Britain. An average household in the South East has almost twice (183%) the amount of wealth of an average household in Scotland.

How Does the UK Compare to Other Countries?

Compared to the other OECD countries the UK has a relatively equal distribution of wealth. The UK has a wealth GINI coefficient of 67.8% compared to an OECD average of 71.8%.

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ECONOMY / MORE MONETARY EASING TO DEVALUE THE POUND AND REDUCE THE CURRENT ACCOUNT DEFICIT

Stefano Francesco Fugazzi reports.

According to a number of leading economists, the British pound is too strong, hurting both exports and current account balance.

In the aftermath of the Brexit vote, the British pound lost ground against the euro and the US dollar. Some economists believe that this is exactly what the UK needs in order to address its current account deficit.

“In our opinion, GBP is overvalued as GBP-supportive interest rate and yield differentials are inadequate to help to fund the UK’s 7% GDP current account deficit,” said Morgan Stanley in a client debrief.

The current account deficit has been a cause of concern for many economists who have been trying to project the value of the pound.

The current account can be expressed as the difference between the value of exports of goods and services and the value of imports of goods and services. A deficit then means that the country is importing more goods and services than it is exporting—although the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid), which are usually a small fraction of the total.

An importer would have demand for the currency of the exporting country. If we look at the UK’s trade balance we can see the UK is clearly a net importer, implying that Britain has a greater demand for foreign currency than does its counterpart which would mean the value of the currency must ultimately fall according to principles of supply and demand.

However, sterling is priced higher than this trade-based dynamic because foreign investors pour money into UK-based investment opportunities. Therefore, the exchange rate is higher than the level implied by trade dynamics.

On 30 June, Bank of England governor Mark Carney said that it was likely “some monetary policy easing” would be required in response to the Brexit vote.

The promise of additional easing would most likely be delivered on at the next meeting of the Monetary Policy Committee on August 4th with most analysts predicting a 25 basis point cut to the interest rate and some suggesting an expansion of the quantitative easing programme will also be announced.

A rate cut would increase the money supply causing the currency to devaluate. As the sterling is currently overpriced, well above its ideal equilibrium level, this will be a good news, supporting exports and, hopefully, cutting the current account deficit.

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FINANCIAL MARKETS / SPOTTING INVESTMENT OPPORTUNITIES IN AN AGE OF UNCERTAINTY

Paul Casson (Artemis Pan-European Absolute Return Fund) reports.

No doubt there will be many more updates in the coming weeks as we try to interpret what we know, divine what comes next and search for those inevitable unintended consequences. So what I say below will evolve.

The Brexit shock. We always knew it was a possibility but of course the betting and financial markets were positioned for ‘Remain'. Hence part of the markets’ moves represent an unwinding of that positioning, particularly in the currency market where sterling had strengthened.

Shocks of course are nothing new. Financial markets react quickly to price in risk and fear. They also go too far. This time is unlikely to be any different; and over the coming days many stocks and sectors will fall well below fair value. It is up to us to take advantage of that as best we can. The short term will be uncomfortable, certainly. February 2009 was exactly that but it brought great opportunity. Summer 2011 was the same. We all know what happened next.

Some of our shorts will be closed, booking heavy profits. We will be adding to long positions and looking for new opportunities to lay down the foundations for future returns. In doing so our hands are free. Gross exposure in the fund is below 100%. This means in theory that we can double the capital we allocate to the best ideas we can find. At times of stress the worst feeling must be an inability to take advantage of opportunities which present themselves because there is no capital available to do so. This is not the position your fund is in: we have plenty of firepower to deploy in the coming weeks.

Attractive investment options. Interest rate rises in Europe are a distant prospect. That’s very bad for banks. Investors’ patience with feeble companies will wear thin, giving us the chance to capitalise on the short side.

The pattern of 2016 is being repeated today in energy and resources, sectors in which investors are underweight. That they can outperform at times like this is testimony to the recovery underway. They also earn in USD, which is very helpful. We intend to stay long and keep adding. Ryanair will still fly the masses to sun and cities.

There is plenty to find attractive all across the market but there is also good reason to be patient. The fund will deploy capital step-by-step to take advantage, not too early and not all at once.

Politics will return to the fore. Spain had an election on Sunday, and Italy has an upcoming referendum of her own. Germany and France face national elections in 2017.

These days politics rarely has a positive short term effect on markets; but as the dust settles, the equity risk premium falls and stocks’ fundamentals again come to the fore.

This happens time after time and each episode brings fresh doubts which are dispelled when the fear recedes. Europe is not a perfect place but volatile markets are the reason we get opportunities, not cause to give up and go home.

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FINANCIAL MARKETS / LA PAURA SFIDA NUOVI MASSIMI

A cura di Federico Izzi.

In questi ultimi giorni abbiamo assistito ad un raro evento che possiamo definire storico. Non mi riferisco ai forti ribassi registrati dai listini azionari, ma all’indice di volatilità statunitense chiamato VIX, meglio conosciuto come indice della paura (già citato nel precedente articolo di aprile ‘Universi Paralleli’) salito oltre il valore dei 20 punti; dato che mette in allarme perché indica la ‘soglia di attenzione’ per gli operatori finanziari.

Dopo aver assistito ad un lungo periodo dove le oscillazioni registrate somigliavano ad un encefalogramma piatto, dalla seconda settimana di giugno iniziavano a scorgersi i primi segnali di nervosismo fino ad evidenziare un movimento tanto anomalo quanto raro nei giorni del 22 e 23 giugno, poche ore prima dell’esito del referendum britannico. Nulla a confronto di quanto accaduto poi nei giorni successivi registrando un movimento al rialzo come poche volte accaduto nel passato. Come si può osservare dal grafico, in soli tre giorni il VIX ha segnato un rialzo superiore al +50%, il secondo migliore dal 1950, per poi nuovamente flettere con una intensità contraria e superiore nei tre giorni successivi segnando il più forte declino della storia su base settimanale (-42,7%). Se una lettura prettamente tecnica del grafico evidenzia il nervosismo degli investitori, dall’altra conferma come una fetta enorme di operatori finanziari non avrebbe atteso sprovvedutamente l’esito del referendum britannico. Infatti, nei due giorni direttamente precedenti alla data destinata a cambiare le sorti del futuro dell’Unione Europa, sui derivati legati alla volatilità si sono registrati volumi di scambio 40 volte superiore alla media storica, condizionando il movimento anomalo descritto. Il rialzo registrato dai mercati azionari statunitensi nell’ultima settimana di giugno ha riportato i valori ai livelli pre-Brexit, risollevando nuovamente in positivo il saldo annuale provvisorio dell’S&P500.

Solamente una volta l’indice VIX ha registrato un balzo maggiore del 50% con l’indice azionario S&P500 rimasto sui massimi di periodo (gennaio 1999). Situazione che favorì un allungo dell’azionario nei tre mesi successivi con le quotazioni che segnarono un rialzo superiore al 10%. Condizione che potrebbe ripetersi ma che, al contrario di 17 anni fa, vede in questi giorni registrare nuovi massimi annuali per la maggior parte delle azioni statunitensi ed un indice del Cigno Nero che ha toccato i suoi massimi storici assoluti. Meglio fare attenzione alle incantatrici sirene rialziste. Il loro canto ammaliatore potrebbe nascondere il corpo dell’orso con la testa di un toro dalle corna spuntate.

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TECHNICAL ANALYSIS / COMBINAZIONE MACD – STOCASTICO PER GESTIRE IL FOREX

A cura di Giorgio Marchi (autore presso Jobtrading.it).

In questi giorni di estrema volatilità ed incertezza, una tecnica di trading affidabile è quanto mai centrale per l’operatività di un trader.

L’esito del referendum sulla Brexit ha causato un crollo della sterlina sul dollaro, con perdite oltre il 10 per cento, le più alte degli ultimi 30 anni. Le principali borse europee hanno avuto perdite consistenti a causa delle incertezze sui mercati.

In quest’articolo presenteremo una tecnica di trading basata sull’utilizzo contemporaneo dell’indicatore MACD e dell’oscillatore Stocastico che si adatta particolarmente bene al mercato valutario, il Forex.

Per prima cosa bisogna definire un crossover come la semplice intersezione tra due line. Il crossover sarà centrale per l’utilizzo di questa strategia poiché una posizione long dovrà essere aperta solo a seguito del verificarsi di un duplice crossover, sia tra le due linee del MACD che tra la %K e %D dello Stocastico.

Come mostrato nel grafico, entrambi i crossover si sono verificati quando il cambio EurGbp ha toccato i valori minimi.

Con questa strategia di trading individuiamo ottimi livelli di entrata ma non sempre altrettanto buoni livelli di uscita. Ogni trader dovrà indipendentemente affiancare a questa strategia validi ragionamenti per l’individuazione di un Target Price e quindi per la chiusura della posizione.

Per una maggiore efficacia della strategia, è necessario che il crossover sul MACD si verifichi nella metà inferiore del suo canale di oscillazione, ossia quando ambo le linee fluttuano in territorio negativo.

Spesso i due segnali non arrivano perfettamente in contemporanea. Nel caso in cui il secondo dovesse tardare più di 2-3 giorni nel verificarsi, la strategia qui esposta perde di validità.

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ABC FOOD / ASPARAGUS AND LEEKS TAGLIATELLE

Claudia Armani reports.

An easy to-do-make recipe that utilises some of the most common vegetables in British gardens: leeks and asparagus.

Rich in fibres and Vitamin K, folate, vitamins B, manganese, and other nutrients, asparagus are also rich in a particular fibre called inulin, that act as a pre-biotic, for a healthier gut.

I suggest opting for a good quality dried Italian pasta, as it is more convenient and of more consistent quality.

Ingredients (serves 2)

130 grams of dried eggs tagliatelle 1 bunch of asparagus 1-2 leeks Extra virgin olive oil Grana Padano cheese to taste ( optional) Sea salt

Wash and finely slice the leeks, and put them in the non-stick pan with some olive oil. Let them sweat at low heat for a few minutes.

In the meantime cook the washed asparagus for 4-5 min in boiling water, then chop them up and add them to the leeks.

Keep on sweating the vegetables for a further 5 min, adding a little water if necessary.

Cook the pasta in boiling water according to the packet instructions, and when ready add it to the pan with the vegetables, and stir it well, adding some freshly grated Grana Padano cheese.

Serve and enjoy!

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ABC WINE & SPIRITS / SAN MARZANO VERDECA

Daniela Damiano reports.

We are in Apulia, the heel of the “Italian boot”, in the heart of the acclaimed D.O.P “Primitivo di Manduria” area, a strip of land between two seas, the Ionian and the Adriatic, in the province of Taranto and Brindisi where vines and olive trees flourish side by side on a red soil surface.

A Mediterranean climate and a predominance of soils well suited to grape growing have created an ideal viticultural environment.

The Winery: Cantine San Marzano (Apulia)

In 1962 few small vine growers from San Marzano village, combined their efforts to establish “Cantine San Marzano”.

Through the decades this cooperative has grown significantly, attracting over 1200 vine growers, using modern and technologically advanced plants and producing elegant wines without forgetting the obligation to the very old Apulian wine tradition.

The Vineyard area is about 100 meters above sea level and benefits from great diurnal temperature variations.

The wine: Talo Verdeca Apulia

Verdeca is a local grape variety with a great personality. While its origin is unclear, it is certainly a grape of venerable age. In the past, Verdeca was mainly utilised for the production of liqueur wines traditional to the area and of vermouth.

Today, it is the primary variety of white blends and monovarietal wines are also being produced. As the climate permits a quick maturation of sugar, Verdeca Grapes are harvested second half of August followed by a Pre-fermentation cold maceration for 6-8 hours and the alcoholic fermentation in French oak. Barrel aged for at least 3 months with periodical bâtonnage.

Tasting Notes and Food matching

On the appearance the colour is Straw yellow with golden reflections, on the nose intense aromas of white flowers and vanilla. The taste is fresh and mineral, pleasantly flavoured in the end.

It is best served with seafood, shellfish and boiled fish dishes with light sauces at a serving temperature of about 12-14°C.

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OBITUARY / JO COX

Helen Joanne "Jo" Cox (22 June 1974 – 16 June 2016) was a British Labour Party politician.

She was the Member of Parliament (MP) for the Batley and Spen constituency from her election in May 2015 until her death 13 months later in June 2016, having won the seat with an increased majority for Labour in the 2015 general election.

On 16 June 2016, Cox died shortly after being shot and stabbed multiple times in Birstall, where she had been due to hold a constituency surgery. A 52-year-old man was charged with her murder and will stand trial under terrorism protocols.

Text: Wikipedia. Photograph: Stefano Francesco Fugazzi