Brexit – 9 (almost) inexorable consequences

Waving United Kingdom and European Union FlagLast Thursday British people decided to take their country away from the EU. No one knows (yet) how the economic relationship between those two areas will be shaped in the future – for those interested a governmental paper outlines the existing precedents in a very clear and interesting way.

In the meantime, looking at the market reaction, the situation has been seemingly well handled so far and stakeholders believe in a smooth transition rather than an abrupt ending. The CBOE Volatility Index, better known as ‘VIX’ or ‘fear index’, has reached levels which can be considered as modest relative to the ones witnessed in 2008 and is already on a downward trend. As I am writing those words the FTSE 100 is only 3.1% down compared with the 23/06 close and the pound has weakened but not collapsed against other major currencies.

Year-high levels reached by the VIX since 2000. Sources: Yahoo Finance, author analysis.
Year-high levels reached by the VIX since 2000. Sources: Yahoo Finance, author analysis.

In the long-term, however, the usual macroeconomic mechanisms will start acting – some of them are already noticeable. I do not have a crystal ball to tell you when and to which extent those trends will manifest themselves – and the ‘2-year window’ the UK benefits from after triggering article 50 adds to that uncertainty. Other future events could also change the course of action. This list of 9 items has therefore been prepared with the information made publicly available and the convictions I have at the time I write those lines. All in all, though, the picture looks relatively grim and one could fear that the UK is now sitting on a potential economic timebomb.

Credits: http://www.mattgoodwinlaw.com/
Credits: www.mattgoodwinlaw.com
  1. A weakened pound and potentially higher trade barriers will lift inflation. Goods and services from abroad will mechanically become more expensive once their price is translated into pounds – a phenomenon economists call ‘imported inflation’. On top of that, the UK has been enjoying non-existent or low trade barriers, both within and outside the EU,  and it is unlikely that it will be able to negotiate the same terms on its own. Higher trade barriers increase the ‘total cost of purchase’ and therefore inflation.
  2. Lower confidence will weight on growth. The uncertain period we are entering is reinforcing the anxiety-provoking environment in which the developed economies have been living in over the last few months. As a consequence, individuals are likely to save more and consume less and companies are tempted to defer non-essential investments. Thinner money flows ultimately impact GDP.
  3. Interest rates will rise, all other things remaining equal. The UK’s financial strength will decline as it leaves the EU – Standard & Poor’s has already downgraded the country’s credit rating to reflect this point. A weaker credit rating and creditworthiness translates into higher interest rates to reflect a higher probability of default (‘country risk’). I insist on the fact that this is the case all other things remaining equal since we will see later that the Bank of England is likely to have the final word through the benchmark rate.
  4. Rising trade barriers will mitigate the stimulating impact of currency devaluation. Usually, a currency devaluation means that exports are cheaper and therefore more in-demand all other things remaining equal. In our case nonetheless, and as highlighted in point 1, the devaluation comes jointly with an increase in trade barriers that will make exports ‘less more competitive’ than expected. As a result, it is possible that the currency devaluation triggers inflation (as pointed out in 1) without significantly reigniting the economic engine.
  5. There will be a few winners… Companies bearing costs in pounds but selling a large share of their products abroad will benefit from the currency devaluation. The Wall Street Journal mentions Diageo – whose product lines include Scottish whiskey – and pharma behemoths such as AstraZeneca and GSK – whose staff is largely headquartered in the UK while benefiting from a very global sales footprint. Again, this assumes no significant long-term change in the UK’s custom tariffs and policy.
  6. … but there will be many losers: Conversely companies manufacturing goods or providing services with a non-sterling cost base and then selling them in the UK will be negatively affected by the situation. Airlines are a typical example : costs are very often expressed in dollars but tickets are sold in local currencies. Banks got affected since they will not be able to enjoy their ‘passporting‘ right once the UK has exited the EU.
  7. Homeowners may have difficult nights ahead: After several years of continuous (and sometimes impressive) growth, housing prices are likely to flatten or even drop. Several corporations, primarily banks, are thinking about moving part of their operations outside of the UK. This move would impact the demand for housing and thus prices. On top of that, without Central Bank intervention, interest rates are likely to rise, negatively impacting the purchasing power of prospective buyers – and raising the burden on mortgage owners. Homeowners with recent mortgages living in areas where the drop in demand will be the most significant could end up in a ‘negative equity’ situation – a theoretical case where the sale of the house would not be enough to repay the mortgage.
  8. Mark Carney, Governor of the Bank of England
    Mark Carney, Governor of the Bank of England

    The situation will create monetary… We have seen that the Brexit could lead the UK into a period of ‘stagflation’, i.e. inflation with limited economic growth. The Bank of England could use monetary policy to either fight against inflation (by increasing benchmark rates) or stimulate growth (by decreasing the same rates). Whereas in the Eurozone the ECB has a clear mandate to focus solely on inflation (I am not saying that this is an optimal solution), the BoE has both growth and inflation management within its remit and will have to make a trade-off. The Telegraph indicates that growth may prevail as the market is not expecting any interest rate rise before 2020.

chart
Source: The Telegraph
George Osborne, (future ex?) Chancellor of the Exchequer
George Osborne, (future ex?) Chancellor of the Exchequer

9. … and fiscal dilemmas. Separately, the government will also have a difficult fiscal decision to make. With tax receipts dropping due to the lower activity, shall it aim for more austerity (and the political consequences attached) or for a fiscal stimulus? In any case, the fiscal and monetary policies will have to be fully aligned to avoid being trapped in the ‘worst of both worlds’ – a situation that some countries are currently facing.

Again, this is based on the assumptions that economic actors keep behaving rationally. Market volatility in the medium-term will indeed be driven less by the outcome of the negotiations than by the way they progress.

The 3 macroeconomic equations underpinning the theory behind this post's thinking.
The 3 macroeconomic equations underpinning the theory behind this post’s thinking. Sorry, couldn’t help myself.

Link(ed)In the dots

linkedin-and-microsoft-logosLast week Microsoft announced its intention to buy LinkedIn for a total consideration of $26bn. This is a big move, even bigger than the $22bn acquisition of Whatsapp by Facebook in 2014. The reason why I did not write earlier about it is that I was trying to understand the move. After a week thinking about it, I just cannot.

broken-linkedin
Credits: www.analyzingsocial.com

Well, for LinkedIn’s shareholders, the deal is hard to refuse: LinkedIn’s share price has been suffering since the beginning of the year as the market has become increasingly sceptical about the social network’s sustainable future growth rate. Worse, fundamental shortcomings have become more numerous and obvious: low user engagement (less than 25% of users connect more than once a month), unclear purpose (from networking the firm entered business news and professional education), struggling profitability (despite $3.2bn in sales, the company reported a negative net income of -$170m last year) penalised by low ad revenues (6 times lower than the ones generated by Facebook in the US) and a raising dependence on professional services as opposed to individuals (‘talent solutions’ now account for c.65% of the firm’s revenues, which will soon have a hard time justifying its ‘social network’ primary status). Microsoft’s offer, at a 50% premium over the pre-announcement share price, represents a godsend in that respect.

LinkedIn's share price evolution since 01/01/2016. Source: Yahoo Finance
LinkedIn’s share price evolution (in USD) since 01/01/2016. Source: Yahoo Finance

AAEAAQAAAAAAAAOIAAAAJGQzMGIwMWJmLTJlYjUtNDE2OC04YmE2LTkzZDJkNzJhZDhmMgTo justify this high price, Microsoft mentioned the competitive tension generated by the presence of Salesforce. One can never predict in advance how well an integration will work and to which extent synergies would have been delivered, but such a merger would have made more sense: the two firms serve the same purpose – i.e. connecting professionals, either individuals, marketers, recruiters or headhunters, in order to create business opportunities – and LinkedIn already integrates Salesforce’s Sales Navigator product. To close the loop, Microsoft made a $55bn offer for Salesforce last year, which was perceived as too low by the target’s Board of Directors.

In terms of valuation, LinkedIn’s forward PE ratio is one of the largest of the ‘web 2.0’ industry, only second to Yahoo! in the sample chosen below. This fact was true even before Microsoft made a move towards the ailing social network. Unfortunately, a forward PE ratio in the 40x+ area is a sign of perceived overvaluation, even for a tech firm – former holders of Yahoo! shares may not disagree on that one.

Price / Forward Earnings Benchmark using various LinkedIn share prices. Sources: CapitalIQ, Author analysis
Price / Forward Earnings Benchmark using various LinkedIn share prices. Sources: CapitalIQ, Author analysis

This deal is also haunted by Microsoft’s appalling track record in handling and integrating large acquisitions. Experts obviously have in mind the disastrous acquisition Microsoft did in 2014 when it acquired Nokia’s Devices and Services’ business for $7.3bn before writing-off almost the entirety of the acquisition assets less than 18 months later. At best, the Redmond firm managed to maintain a ‘status quo’, as it has done with Skype since 2011 – and questions about the rationale were already present at the time. As a consequence, Microsoft’s share price reacted negatively following the announcement – only a 2.6% drop, which nevertheless still represents $10.5bn of lost shareholder value.

Credits: www.cagle.com
Credits: www.cagle.com
Jeff Weiner
Jeff Weiner: a happy man

So why such an unexpected alliance? In terms of synergies, the pitch is not obvious either. Jeff Weiner, LinkedIn’s CEO, mentions in his email to staff that the deal will “massively [scale] the reach and engagement of LinkedIn by using the network to power the social and identity of Microsoft’s ecosystem of over one billion customers”. Not sure what that means beyond having Outlook download data from LinkedIn to give you information on people you will meet. More generally, and contrary to what the Financial Times may think, I doubt that Microsoft’s products, which are targeted at enhancing the work efficiency within organisations, will be able to gain much insight from LinkedIn’s vast amount of outside-in data.

Alternative hypothesis: is Microsoft betting on internal corporate networks? In-house social networks are indeed becoming increasingly trendy. Even McKinsey believes that social tools will help reshape the way businesses work in a number of ways – see chart below. But internal social networks struggle to gain momentum and more importantly LinkedIn is not one of those. Indeed, the tool is well designed to search for individuals working for a particular firm, but it is unable to tell you how the firm is internally structured.

Sans titre
Social tools carry a Prévert-style inventory of benefits

Another possibility is that Microsoft is trying to add content on top of its software offer. Social networks now represent the primary source of information for more than half of all online news consumers, and this trend comes with interesting ad revenues prospects attached. But LinkedIn is trailing Facebook or Youtube in that respect.

For me, the move was launched primarily to manage market perception. Microsoft is currently sitting on more than $100bn of cash & equivalents. This war chest cannot sit unused within the company for ever. There are only 3 solutions to that conundrum. One, Microsoft could pay hefty dividends as Apple did. The issue is that it would admit (as already highlighted on this blog) that Microsoft is running out of worthwhile investment opportunities. This is fine when you are Apple and sitting on hit products such as the iPhone, but much more worrying when you are Microsoft and holding onto an ageing operating system. Two, Microsoft could buy back some of its shares but this move would be uselessly expensive given that Microsoft’s shares trade near all-time highs. Three, Microsoft could pretend it is moving full steam ahead towards cloud computing, artificial intelligence and professional networking by making acquisitions. This is the path Satya Nadella and his team have chosen, a path similar to the one Marissa Mayer unsuccessfully led Yahoo! to, but targets in the space are scarce and, as the saying goes, “anything scarce should become expensive”. To make the bill more palatable, the acquisition is partly financed through debt which, given Microsoft’s AAA rating, represents a net cost savings – the tax shield amount more than largely offsetting the incremental debt interest costs.

Microsoft-LinkedIn-SlideShare
Credits: www.exoplatform.com

Although spectacular by its size, this acquisition strategy is not unique. Tech behemoths ‘of the past’ see that, after more than a decade of steady and healthy cash flows, the new wave of innovators, led by Facebook, Google and a tribe of unicorns, can in the relatively short-term jeopardise their business model. To fight against the new entrants, they cannot rely on their in-house innovation skills, which have aged together with the rest of the organisation. In a (final?) burst, they are now spreading their cash, hoping they will manage to integrate the right engines for future growth – think about Blackberry and its push in cybersecurity for instance. Massive war chests, overvalued (tech) stocks, cheap debt, ageing organisations: the perfect recipe for disaster and value destruction, sadly.

BSOD2

The 5 economic trends that worry me (2/2)

[Continued from Tuesday]

3. The hype around FinTech

Last year the rise of Financial Technology (‘FinTech’) software and apps led some experts to predict the ‘disruption of traditional banking. The new providers of financial services would maximise the agility and cost efficiency provided by technology and as a result would kick the incumbents plagued by legacy systems and excessive layers of staff.

LendingClub_logoLendingClub, founded in 2006, was perceived as one of the standard-bearers of that shift. As a P2P lending company it offered to put individuals or small businesses directly in touch with lenders through an online platform – a mix of Uber and Match.com. LendingClub was claiming that it would enable small businesses to get easier access to funding while providing lenders with an investment offering a (relatively) decent return.  LendingClub was just taking a percentage of the loan as a one-off fee and therefore was not taking any risk.

In 2016 the picture is somewhat different, as Patrick Jenkins points out. Hedge funds and banks have replaced individuals and small businesses and have started securitising the loans – rings a bell? Poor credit risk assessment processes led to the first defaults, the departure of the CEO and a 25% share price drop. Compliance started to take its toll as the company grew. To command a technology startup valuation multiple, revenue growth requires LendingClub to accept an ever increasing volume of loans (new loans account for 90% of revenues), including riskier ones. And the company proved sensitive to credit cycles. As a solution, LendingClub started taking retail deposits to channel them towards its lending platform – basically what a traditional bank does, with a tiny bit of software on top. No quite disruptive any more.

Historical evolution of LendingClub's share price. A slow descent into hell... Sources: Yahoo Finance, author analysis
Historical evolution of LendingClub’s share price (in USD) since IPO. A slow descent into hell… Sources: Yahoo Finance, author analysis

In the meantime, regulators across the world are running behind and have not proposed a robust framework to monitor this new array of services yet – raising the risk to “systemic stability”.

 

4. Banks desperately looking for yield

Banks are by far the biggest losers of the negative interest rates policy implemented by Central Banks across the world. Their deposits do not generate any revenues any more. Worse, they are a source of cost. Given that very few banks have dared passing the cost through to the customer yet (i.e. charging current accounts), banks are now looking for more profitable investment to make up for the difference – notwithstanding the fact that banks have been massively streamlining their teams over the last 12 months. This implies taking more risks.

O&G companies for instance were granted higher quantums of debt at the time oil was getting close (or above) $150 a barrel – especially those involved in shale gas production. Those quantums backfired when the barrel dropped by more than 80% – shale gas then became almost unprofitable to produce. Despite the recent correction, the O&G industry has been suffering a series of bankruptcies as a result – 42 last year alone. In the US, car loans, student loans and credit cards balances and delinquency rates are also reaching abnormally high levels according to Le Figaro. By willing to invest at all cost, banks are becoming less and less concerned about the quality of their customers.

 

5. Housing market engineering is back in the game

I thought the 2008 mortgage subprime crisis would repel investors from the housing market for a while. I was wrong.

collapsinghouse
Credits: www.polizeros.com

According to TechCrunch, Opendoor, a company founded in 2014, “currently buys homes sight unseen when a home seller visits its site, asks for a quote, and accepts Opendoor’s bid, which the company comes up with based on public market information about historical home sales and its own proprietary data about market conditions”. Fortunately, the company selects its investments, not purchasing “any home built before 1960 [or] homes outside a $100k-$600k price range” – according to TechCrunch this still means that 90% of homes are eligible, so the criteria are not that drastic after all…

The startup’s balance sheet is currently worth “hundreds of millions of dollars”. Talking about profitability, its CEO “Opendoor isn’t focused on [profitability] just now”. Let us hope for them that the housing market does not decide to spiral down again.

 

Some hope: Investors seem to have learnt (part of) the lesson

After a euphoric 2015, investors seem to wake up (some of them hungover) and are becoming more realistic about the true potential of ‘disruptive’ investments.

First, raising equity has also proven increasingly difficult for startups since the beginning of the year, especially for those seeking very large cheques (greater than $100m). In Q1 2016 $25.5bn got invested in startups globally, an amount down 8% yoy. When they manage to do so, the financing package comes with increasing strings attached, even for well-established brand names. The bond Spotify issued in March contains an ‘bomb-ticking’ interest rate which strongly incentivises shareholders to look for an IPO in the short to medium-term – in substance, creditors are asking the company to become palatable for the stock market as a whole and not just a series of cherry-picked investors.

logoSecond, the ‘real’ value of existing investments is being re-assessed. BlackRock, for instance, decided to cut its valuation of DropBox by 20% last October. Rocket Internet, the controversial startup studio, lost 18.5% of its equity value in two days in April after it revised the valuation of some of its investments downwards. On a side note, Carl Icahn, the famous activist investor, recently revealed that his fund Icahn Enterprises had a net short position of 149%.

Donald_Trump_August_19,_2015_(cropped)Politics is also joining the party. In the US, the Presidential Election held later this year represents a clear source of uncertainty. Candidate Trump has already declared that “we [were] in a bubble right now” and has been criticising the role of the Fed in the construction of that bubble. The kind of mitigating action that Mr. Trump would implement to negate the bubble still remains unclear at this stage.

Credits: www.fineartamerica.com
Credits: www.fineartamerica.com

What’s next? Because of the excessive amount of liquidity in our economy, value destruction has reached a scale never witnessed before. This is clearly not sustainable. When the liquidity tap will stop flowing, there will be boats left stranded on the shore. But to which extent? Will we ever come back to a pre-crisis environment? I do not believe so either. As I mentioned in an earlier post, I think the answer is in-between: we need to give birth to a ‘new normal’. I fear, however, that the delivery will not be painless.

The 5 economic trends that worry me (1/2)

Normal-Rockwell-Boy-on-High-DiveMany experts agree to say that the current economic environment is something we have never witnessed before. Despite negative interest rates – $10tn in total, now including some high-quality corporate securities – global growth is expected to remain limited – only 2.4% forecast in 2016 according to the latest World Bank report – as well as inflation – for 2016 the OECD forecasts 0.06% in France, 0.43% for Great Britain and 1.07% for the USA despite encouraging unemployment figures. This environment makes the hunt for growth significantly more challenging than in the past and has thus favoured the emergence of behaviours that, taken together, may well threaten the stability of the economy in the medium-term. Although the reader may find many more, I have taken 5 examples which have particularly struck me over the last few months.

 

  1. Stock markets reaching all-time highs despite weak macro indicators

The weak growth prospects expressed in my introduction have not deterred investors from massively buying stocks. Last week the S&P500 reached a level only 0.5% below its all-time high, lifted by a slight recovery in oil prices and the increased likelihood of a Fed Reserve rate ‘status-quo’ in June. This has come on top of the second longest bull run in the S&P’s history – the longest lasted from 1987 to 2000. And yet it is difficult to identify the ‘hard facts’ that investors base their bullish assessment on.

theres-a-new-most-bearish-strategist-on-wall-street“If you look at U.S. stocks on a global perspective, to be touching or near that high is pretty phenomenal. “Yet when we look forward, we’re struggling to find that next source of growth. Maybe the drag has passed, but where is the growth going to come from?” (Gina Martin Adams, Wells Fargo Securities LLC)

As Benjamin Graham, the famous value investor, claims in his book The Intelligent Investor, we may have switched from an investment strategy, where people believe in the true intrinsic capabilities of the firm they invest in, to a speculative strategy, where people believe that they will be able to sell their shares to someone who puts a higher valuation on them, irrespective of the company’s performance. The former is characteristic of a potential bubble.

 

2. Unicorns and unicorpses: party like it is 2000

the-18-billion-london-tech-unicorn-thats-struggling-to-pay-its-staff-is-worried-about-going-bustFor those unaware, ‘unicorns’ are companies which have managed to raise equity with an implied valuation exceeding $1bn. Not so long ago, the ‘unicorn’ club was made of a handful of companies with (i) proven business models, (ii) established profitability and (iii) huge opportunities for global growth. Today, the ‘club’ has grown to 150 members or so, all of which cannot claim to tick the three boxes mentioned above.

First, entrepreneurs have realised that being labelled a ‘unicorn’ could turn out to be a real marketing tool and business booster. Some of them decided to enter through the service door by actually raising a relatively limited amount of equity (let us say in the single-digit millions) for an even smaller share of the capital (let us say 0.1%). As a consequence, the firm manages to qualify for the ‘unicorn’ label, even if clearly no investor would be willing to pay close to $1bn for the entirety of the company.

Furthermore, to make up for the lack of revenues, entrepreneurs have come back to the non financial-related KPIs made famous in the late 1990s to support what ended up being the ‘dot-com bubble’: number of users, number of clicks, number of hours of videos uploaded on website etc. Growth is not about top line or EBITDA anymore as taught in corporate finance classes but measured by the notion of ‘increased engagement’ and ‘scale’ instead. Spotify, for example, managed to raise equity last year based on a $8.4bn valuation despite not having made a profit yet. This is easier than in the 2000s given that, as rightly pointed out by Terence Fung, the new ‘Web 2.0’ is mainly about B2C applications rather than B2B software which contributed to the ‘dot-com’ firms’ reputation.

20150210005716!Slack_IconFinally, some startups benefit from potentially inflated growth prospects. Slack has managed to raise $200m of equity based on a $3.6bn valuation in April. The company is nonetheless far from shaking the industry at the moment. It offers a simple chat app and is currently used by 2.7m daily active workplace users, only 800k of which are paying at present. Each paying customer is therefore implicitly valued at $4,500.

2015 witnessed soaring unicorn valuations but 2016 and 2017 may bring those valuations down to earth, a forecast trend that has given birth to the term ‘Unicorpse.

[To be continued on Thursday…]

After 100,000 Euro championships, the winner is…

Logo_UEFA_Euro_2016Football fans have been waiting for months (actually, since the end of the last World Cup) for the UEFA Euro 2016 to start. On Friday, Romania will defy France in Paris’ Stade de France in the first of the 51 games scheduled over a 4-week period. For the UEFA in particular and football governing bodies in general, this festive break will be more than welcome given the succession of corruption affairs that have emerged over the last 18 months.

Credits: uefa.com
Spain winning the 2012 trophy Credits: uefa.com

This post will leave aside political and judicial considerations to focus on the ‘beauty of the game’ and an essential question: Who will win and succeed Spain, the 2012 winner? To try to answer this crucial enigma, I have checked two ‘highly-regarded’ sources of data: Betfair obviously, and more surprisingly Goldman Sachs’ report on the topic.

Indeed, over the last few years the famous investment bank has got into the habit of mobilising part of its macroeconomic research team to run an econometric simulation prior to any major international football event. In 2014 the model correctly forecast 3 out of the 4 semi-finalists, although it predicted the victory of Brazil, which got crushed 7-1 by Germany in semi-final.

Siméon Denis Poisson was not a footballer
Siméon Denis Poisson was not a footballer

The model relies on a series of factors to estimate the Poisson distribution factors for each game – if you are keen to uncover how central the Poisson distribution is to sports betting in general, you can buy my book. Then the team runs the simulation a high number of times to compute how often each team wins the competition – this method is known as the ‘Monte Carlo simulation’. In this exercise, the exact result of each game is obviously less interesting than the high-level result distribution – actually the algorithm produces a abnormally high level of 1-1 draws. For Betfair, the way to obtain the winning probabilities for each team is more straightforward as it can be derived from the current odds – the market is liquid enough and £4.2m of bets have been matched as of today.

So, what is the answer? Both sources are relatively consistent. France is the favourite with a c.22-23% perceived probability of winning and Germany and Spain not far behind. England, Belgium and Portugal stand as longer-shot outsiders. Albanian and Hungarian fans will remember that their team benefits from better odds than Leicester City at the beginning of the last Premier League season.

Team winning odds according to Goldman Sachs and Betfair
Team winning odds according to Goldman Sachs and Betfair

I will not spend time on detailing why France is perceived as the strongest team in this competition – and as a Frenchman, I can only hope that the model and punters are accurate. I will instead focus on the teams where the two sources diverge rather significantly, as per the chart below.

Absolute difference in probabilities between Goldman Sachs and Betfair implied odds
Absolute difference in probabilities between Goldman Sachs and Betfair implied odds
Heroes or zeroes?
Heroes or zeroes?

Italy is the most enigmatic team, perceived as credible outsiders by punters but believed by Goldman Sachs to be closer to the likes of Turkey and Poland. According to Olivier Sclavo, football expert and co-author of the blog www.offside.fr, Italy’s very defensive and close style of play makes the team’s strength difficult to assess, although results gathered over the last decades tend to show that the ‘Squadra Azzura’ almost always performs in international tournaments. Italy’s first round challenge (against Belgium, Ireland and Sweden) can furthermore be considered as a ‘make-or-break’ – and yet the Goldman Sachs algorithm only partly takes the group composition into account. Other ‘mysterious’ teams include Germany (historically strong), Portugal (whose overall weakness is partly hidden by world-class players such as Ronaldo and Pepe) or Spain (which has initiated a generational transition after the 2014 World Cup).

English readers will notice that the team’s chances are consistently believed to be around 10%. I qualitatively discuss this result on Offside.

Unfortunately for us, and fortunately for the game, probabilities get close to real life only when the same situation happens a very large number of times – Goldman Sachs ran the equivalent of 100,000 Euro tournaments to compute its probabilities. One championship should already generate enough action (and suspense) to keep us in front of our screens for the month to come.

41j2SXHBItLP.S.: For those into football and maths, the recently released Soccermatics is worth a read. Economists will prefer to give their attention to the infamous Soccernomics which has been a ‘must-have’ in the field for years.