Saturday, June 29, 2013

29/6/2013: Nama valuations update to May 2013

In the previous post I looked at the latest prices trends in Irish property markets. Now, as promised, an update on Nama valuations.

Note: these numbers are indicative, rather than exact estimates.

29/6/2013: Irish Residential Property Prices: May 2013

This week, CSO released Residential Property Price Index (RPPI) for May. Here's the update on trends and changes. Nama valuations update will be posted in a follow-up post.

Per CSO data, All properties RPPI rose marginally from 64.6 in April to 64.8 in May, 2013. The index is now in the range of 64.1-64.8 for four months in a row, suggesting no change to the overall flat trend at around 65.2. The flat is now running from February 2012, and we are currently below the trendline by about 0.6%.

Year on year, index is down 1.07% and in April it was down 1.22%. Over the last 3 months, All-RPPI rose 0.62% cumulatively, which reverses 1.22% loss on 3mo through April 2013. On 6mo basis, cumulative, All-RPPI is down 0.33% which is an improvement on 1.22 loss over 6 months through April 2013.

2013 is not shaping that great so far, as All-RPPI is down 1.52% since December 2012 end.

Overall, All-RPPI is down 50.34% on all-time peak and in May 2013 it was up only 1.09% on all-time low of 64.1 reached in March 2013.

Houses sub-index rose from 67.3 in April 2013 to 67.6 in May - another marginal improvement. Y/y index is down 0.88% and in April it was down 1.17%. 3mo cumulated gain through May 2013 was 0.9% and there was a 6mo cumulated loss of 2.17%. Relative to peak, the series are down 48.79% and the sub-index is 1.2% above the all-time low.

Per chart above, Apartments sub-index is again in decline, falling from 48.4 in April 2013 to 47.1 in May. Y/y sub-index is down 3.09% and previous y/y decline was 2.42%. 3mo cumulative move in May 2013 was -8.54%, while on 6mo basis, the index is up 3.06%. There is huge volatility in the index by historical standards, which suggests that the market is subject to some very concentrated volume swings in sales.

Dublin sub-index has been used before to drum up the evidence that Irish property markets are returning to life. Chart below shows a marginal positive sloping of the trend since the historic lows of H1 2012.

However, at 59.2, May reading came in only marginally better than 58.9 in April 2013. Year on year, Dublin sub-index is up 1.37 and on cumulated 3mo basis, May reading is down 0.17%. On cumulated 6mo basis, the decline is -1.33% through May. There is zero gain since the end of December 2012. 6mo average reading is now 59.2 - bang on with May 2013 reading. 12mo average is at 58.74, less than 0.8% away from the current reading. For all intent and purpose, current trend is flat at around 58.7-59.0 range. Overall, Dublin prices are down 55.99% on peak and are 3.32% up on absolute low.

29/6/2013: Research Funding Does Not Seem to Match Research Performance

Very interesting:

From the abstract: "Agencies that fund scientific research must choose: is it more effective to give large grants to a few elite researchers, or small grants to many researchers? Large grants would be more effective only if scientific impact increases as an accelerating function of grant size."

So, the paper examines "the scientific impact of individual university-based researchers in three disciplines funded by the Natural Sciences and Engineering Research Council of Canada (NSERC)", based on "four indices of scientific impact:

  • numbers of articles published, 
  • numbers of citations to those articles, 
  • the most cited article, and 
  • the number of highly cited articles."
All of the above parameters are "measured over a four-year period" and referenced against "the amount of NSERC funding received".

Core findings:

  • "Impact is positively, but only weakly, related to funding" - which is disturbing, as it suggests that funding allocation is not academically efficient. 
  • "Researchers who received additional funds from a second federal granting council, the Canadian Institutes for Health Research, were not more productive than those who received only NSERC funding." Which suggests that the most important agency has trouble identifying and signalling by its grants allocation the academic 'winners'.
  • "Impact was generally a decelerating function of funding." Which is really bad. In basic terms, the more funds were pumped the less was the positive marginal impact. So that "impact per dollar was therefore lower for large grant-holders". Which "is inconsistent with the hypothesis that larger grants lead to larger discoveries". 
  • "Further, the impact of researchers who received increases in funding did not predictably increase." So obtaining a larger grant did not lead to subsequent improvement of the researcher output! 
  • "We conclude that scientific impact (as reflected by publications) is only weakly limited by funding."
  • And a big Boom! "We suggest that funding strategies that target diversity, rather than “excellence”, are likely to prove to be more productive." 
Now, the last point is what all funding agencies around the world are trying to avoid. Everywhere, the policy in funding research is on more concentration and on more winner-picking. Not on funding broader research and research groups.

Incidentally, if you are interested in this topic - what and how should be funded and prioritised in research and education - read my Sunday Times article tomorrow.

29/6/2013: WLASze Part 2: Weekend Links on Arts, Sciences and Zero Economics

This is the second part of my usual Weekend Links on Arts, Sciences and zero economics (WLASze). The first part is linked here.

An insightful piece on what philosophers as a group believe in:
Very interesting and can be followed by the very brief (and as such not very deep, but still interesting)
and by brilliantly extensive .
The latter literally is a sort of a merger of art (of symbol or word or meaning) and sciences.
And while on the above topics, here's John Lennox of Oxford on science and belief…

Back to art-meets-science, a major mapping/visualization geek alert:
Love the images:
Laborious, but beautiful mapping, sadly in relatively low res only...

But blending cheeky with complex does not make it either art or science in the end, in my opinion, of course:
"And when you slice a scone in the shape of a cone, you get a sconic section – the latest craze in edible mathematics, a vibrant new culinary field" Err… not really. @pavelprokopchik great photo by Pavel Prokopchik for NY Times:

Sadly, only in low res quality, again...

Good review via @farnamstreet of a very interesting book on occasionally mindless fascination we hold for scientific explaining away of reality (or is this fascination itself an behavioural bias?):
Which makes me wonder, are biases endogenous to biases? Liam, your suggestions?!. And to MrsG a gentle suggestion: my birthday is coming up...

Bad news:

"Art Southampton Presented by Art Miami for Art Collectors NYC and In-Crowd East Coast with Cars Italia and Galleries Kitsch USA" for the crowd of those who think a horse bronze with polished detail is worth a silver metal couch and all that shines…
You can almost see the parallel to the previous screenshot: animate duo 'racing' to the cocktails counter with an enlightened look about them of a floodlight set to highlight the Maserati... being vs object - all denoting the same fake-ness of the art world that fits a dressed-up-white hangar… in dressed-up Hamptons… Watch the preview slideshow… it is frightening (and as such so anti-artistic as to become almost artful).

29/6/2013: Banks-Sovereign Contagion: It's Getting Worse in Europe

Two revealing charts from Ioan Smith @moved_average (h/t to @russian_market ): Government bonds volumes held by Italian and Spanish banks:


  • Italy EUR404bn (26% of 2013 GDP) up on EUR177bn at the end of 2008
  • Spain EUR303bn (29% of 2013 GDP) up on EUR107bn at the end of 2008
Now, recall that over the last few years:
  • European authorities and nation states have pushed for banks to 'play a greater role' in 'supporting recovery' - euphemism for forcing or incentivising (or both) banks to buy more Government debt to fund fiscal deficits (gross effect: increase holdings of Government by the banks, making banks even more too-big/important-to-fail); 
  • European authorities and nation states have pushed for separating the banks-sovereign contagion links, primarily by loading more contingent liabilities in the case of insolvency on investors, lenders and depositors (gross effect: attempting to decrease potential call on sovereigns from the defaulting banks);
  • European authorities and nation states have continued to treat Government bonds as zero risk-weighted 'safe' assets, while pushing for banks to hold more capital (the twin effect is the direct incentive for banks to increase, not decrease, their direct links to the states via bond holdings).
The net result: the contagion risk conduit is now bigger than ever, while the customer/investor security in the banking system is now weaker than ever. If someone wanted to purposefully design a system to destroy the European banking, they couldn't have dreamt up a better one than that...

Friday, June 28, 2013

28/6/2013: Expenditure Components of GDP: Q1 2013

Having looked at the recession/expansion dynamics in Irish economy on foot of Q1 2013 figures (here),  the dynamics in GDP and GNP in Ireland at the aggregate levels (here), and the mythology of the 'exports-led recovery' (here), let's round up the Q1 2013 QNA cover with a look at the expenditure-lined components of the GNP and GDP.

Below we look at the Seasonally-adjusted Current Market Prices data.

Personal Expenditure on Consumption Goods and Services fell 2.21% in Q1 2013 q/q and was up 0.01% y/y. This compares against much more benign drop of -0.07% q/q in Q4 2012 and a 1.15% rise y/y. Since Q1 2011, when the Coalition came to power, Personal Expenditure is down 1.55%. In terms of q/q changes, Q1 2013 marked second consecutive quarter of declines.

Net Government Expenditure on Current Goods and Services declined 0.1% q/q in Q1 2013 and was down 2.56% y/y. This marks moderation in declines recorded in Q4 2012 when q/q decline stood at -1.90% and y/y decline was running at -2.88%. Net Government Expenditure decline was the shallowest contributor to voerall economic contraction recorded in Q1 2013. Compared to Q1 2011, Net Government Expenditure on Current Goods & Services was down 3.98% in Q1 2013. In terms of q/q changes, Q1 2013 marked second consecutive quarter of declines.

Gross Fixed Capital Formation - the most devastated expenditure component of GNP to-date has fallen massive 7.32% in Q1 2013 in q/q terms and was down whooping 18.74% in y/y terms. This shows dramatic acceleration in decline from -2.16% drop in q/q terms in Q4 2012 and the reversal of the y/y rise of +4.31% recorded in Q4 2012. Relative to Q1 2011, Gross Fixed Capital Formation was down 14.25% in Q1 2013. In q/q terms, Q1 2013 marked second consecutive quarter of declines.

Exports excluding factor income shrunk 0.79% in Q4 2012 on q/q basis and there was 4.93% growth in y/y terms. This was then. In Q1 2013 exports of goods and services fell 4.59% q/q and were down 3.13% y/y. Relative to Q1 2011 exports of goods and services net of factor income payments were up 2.22% in Q1 2013, but we also marked two consecutive quarters of contraction here.

Imports of goods and services, net of factor income payments were down 2.12% q/q in Q1 2013 and -3.13% y/y. This marks significant shift 'South' in the series compared to Q4 2012 when imports shrunk 1.05% q/q and were up 4.57% in y/y terms. Imports are running -0.05% down on Q1 2011 and Q1 2013 marks the second consecutive quarter of q/q declines.

GDP at curent prices, seasonally adjusted fell 0.6% q/q in Q4 2012 and there was annual growth of 0.38%. In Q1 2013, GDP fell 2.16% q/q and there was annual decline of 2.09%. This marks third consecutive quarter of decline in GDP and thus officially, return of the recession is dated to Q4 2012. The average rate of recessionary decline in GDP in the current episode is so far -1.06% per quarter. This is shallower than the previous recessionary episode (Q4 2008-Q4 2009) when GDP contractions averaged 2.76% per quarter. Compared to Q1 2011, Q1 2013 GDP at current market prices stood at -1.04%, or put differently, gross domestic product in Ireland in Q1 2013 stood below the levels attained in Q1 2011 when the current Government came to power.

Net factor income from the rest of the world declined in both Q4 and Q1, with decline accelerating in Q1 2013 to 19.21% q/q from 2.92% in Q4 2012. As the result of this, GNP moved up, in the opposite direction of the GDP.

GNP at current market prices grew 0.68% q/q in Q1 2013, down on 1.18% expansion recored in Q4 2012. On y/y basis, GNP grew 4.12% in Q4 2012 and by 4.26% in Q1 2013. Compared to Q1 2011, GNP is now up 2.46%.

Both Final Domestic Demand and Total Domestic Demand posted second consecutive quarter of q/q contraction in Q1 2013.

To summarise, not a single line of expenditure posted an increase in the Q1 2013 in terms of q/q changes once seasonal adjustments are taken into the account. In other words, the sole positive improvement in the numbers - relating to GNP - was driven exclusively by reduced outflow of funds from MNCs.

Worse, not a single line in the determination of the GDP in Ireland was up in q/q terms in any quarter since the end of Q3 2012. We had, put differently, 6 months of across the board contractions in the economy, when we consider expenditure-based definition of GDP.

28/6/2013: Exports-led recovery: Q1 2013

I covered the headline numbers and trends for the GDP and GNP in previous two posts: here and here. Now, onto some more detailed analysis.

Remember, from the very beginning of the crisis, Irish and Troika leaders have been incessantly talking about the 'exports-led recovery'. Position on this blog concerning this thesis consistently remained that:

  1. Exports growth is great, but
  2. Exports growth is unlikely to be sufficient to lift the entire economy, and
  3. Exports growth projections were unrealistic, while
  4. Exports re-orientation toward services, away from goods was less conducive to delivering real growth in the economy.
Q1 2013 data continues to confirm my analysis.

In Q1 2013, based on real valuations (expressed in constant market prices),
  • Exports of Goods & Services shrunk 6.47% q/q and fell 4.09% y/y. This compares to +1.19% q/q growth in Q4 2012 and +1.28% expansion y/y. Compared to Q1 2011, when the current coalition took over the reigns in the Leinster House, total exports of goods and services are down 0.88% in real, inflation-adjusted terms. Troika sustainability projections envisioned growth of over 6% over the same period of time.
  • Imports of Goods and Services showed pretty much the same dynamics as exports in both Q4 2012 and Q1 2013, but owing to sharper contractions in 2011-2012 these are now down 4.34% compared to Q1 2011.
  • Exports of Goods fell in Q1 2013 by 3.83% q/q and 9.37% y/y, while there were declines of 2.68% q/q and 2.33% y/y in Q4 2012.
  • Exports of Services were down 8.75% q/q but up 1.27% y/y in Q1 2013, and these were up 4.77% q/q and 4.63% y/y in Q4 2012.

  • Trade Balance in Goods and Services fell 4.96% q/q and was down 3.63% y/y in Q1 2013, with Q4 2012 respective changes at -15.91% q/q and +0.98% y/y. Compared to Q1 2011, trade balance is up 15.91%
  • Trade Balance in Goods was down 6.63% q/q in Q4 2012 and this deteriorated to -10.73% growth in Q1 2013. Y/y, trade balance in goods contracted 0.05% in Q4 2012 and shrunk 10.59% in Q1 2013. On Q1 2011, trade balance in goods is down 14.04%.
  • Trade Balance in Services fell from EUR1,130mln in Q3 2012 to EUR132mln in Q4 2012 before improving to EUR601mln in Q1 2013. In Q1 2012 the balance stood at EUR28 million.

28/6/2013: Underlying dynamics in Irish GDP & GNP: Q1 2013

Q1 2013 National Accounts do not make for a pleasant reading. The implications from the business cycle perspective are pretty clear - we are in a continued (3rd quarter in a row) recession, which constitutes the fourth 'dip' since the onset of the Great Recession. The post summarising that evidence is linked here.

In this post, let's take a look at the GDP and GNP in constant prices.

On seasonally-adjusted basis (removing seasonal volatility),

  • GDP at constant factor cost (national output ex-taxes and subsidies) fell 0.65% q/q in Q1 2013, having contracted 0.12% q/q in previous quarter. On an annual basis, the GDP at factor cost declined 1.32% in Q1 2013, accelerating annual rate of decline relative to Q4 2012 when it fell 1.04%.
  • Compared to Q1 2011, when the current Government came to power, GDP at factor cost was 0.72% higher in Q1 2013.
  • Taxes rose 1.04% q/q in Q1 2013, after having posted a decline of 0.64% in Q4 2012. On an annual basis, taxes were down 0.79% in Q4 2012, but they rose 2.32% in Q1 2013.
  • Compared to Q1 2011, taxes were up 1.16% in Q1 2013.
  • To summarise the above, austerity is clearly biting. Taxes are rising at a 60% faster rate than economic activity.
  • Subsidies remained relatively constant in Q1 2013 on an annual basis, implying that net taxes rose strongly.
  • GDP at constant prices (accounting for taxes net of subsidies - the headline metric usually referenced as GDP) fell 0.58% q/q in Q1 2013, which follows a shallower contraction of 0.18% recorded in Q4 2012. On an annual basis, GDP contracted by 1.03% in Q1 2013, following a 1.02% contraction in Q4 2012.
  • Net factor income for the Rest of World (outflows to the rest of the world from factor payments, net of inflows of Irish incomes earned abroad) fell dramatically in Q1 2013, down 16.96% q/q, following a 3.22% decline q/q in Q4 2012. In year-on-year terms, net outflows fell 16.55% in Q4 2012 and by 27.58% in Q1 2013. 
  • It is impossible to tell from QNA the core drivers of the net outflows, however, from the balance of payments data we have reinvested earnings in Q1 2013 by the foreign companies in Ireland at EUR4,753 million, up on EUR4,010 million in Q4 2012 and down on EUR6,768 million in Q1 2012. The gap of Repatriations of earnings from Ireland are not provided for Q1 2013.
  • On foot of significantly reduced outflow of funds abroad, GNP at constant market prices rose in Q1 2013 rose 2.85% q/q and 5.46% y/y, beating growth of 0.51% q/q and 3.01% y/y recorded in Q4 2012. 
  • However, as analysis in the subsequent posts will show, this growth is entirely dependent on reduced outflows of funds abroad. Q/q, net expatriation of funds slowed down by EUR1,204 million, while earnings outflows abroad shrunk by EUR2,015 million.
  • Taking the average net factor payments abroad for Q1 2010-2012 in place of Q1 2013 figure, GNP growth controlling for net factor payments changes would have been around -0.01% y/y and -2.48% q/q.
Charts below summarise seasonally unadjusted series:

The chart below clearly shows that even in y/y terms, we are now in a solid, three-quarters long (so far_ recession.

The GDP/GNP gap has, predictably - given the shrinking of net factor payments abroad - declined from 25-26 percent (seasonally-adjusted and unadjusted) in Q1 2012 to 17.3-17.5 percent in Q1 2013:

It is worth noting in the chart above a significant increase in volatility in the gap, which is reflective of the greater volatility in Ireland's GDP and GNP series as well as destabilisation in growth correlation between GDP and GNP. This new pattern is most pronounced starting with Q1 2008 and is associated with both - the crisis and the underlying re-distribution of growth drivers away from the domestic economy to services exports, especially during the 2010-2011 'recovery'.

Thursday, June 27, 2013

27/6/2013: Quadru-Sextu-ple-dip Recession in Ireland: Q1 2013

All you need to know about today's QNA data release (though it won't deter me from more detailed analysis later) is:
  • Ireland is in a quadruple-dip recession (chart below)
  • You and I are in a sextuple-dip recession (second chart below)

Incidentally, just in case you felt like previous 'expansion' (officially from Q1 2010 through Q2 2012) was not much of an expansion at all, then you live in the world we inhabit, closely related to the Gross Domestic Demand. If you felt things were just fine then, you might live in Australia, or read too much of the Department of Finance presentations on their web site, or... I have no idea...

As I commented on earlier post by Brian Lucey: That light at the end of the tunnel did turn out to be an incoming train...

Update: Meanwhile, Minister Noonan thinks that the above (3 consecutive quarters of contraction in the economy, official fourth dip in the Great Recession and 6th dip in Total Domestic Demand) is "certainly disappointing but it's one set of statistics" (link). How long till Enda pops up to greet us with Dude's famous return:

Wednesday, June 26, 2013

25/6/2013: ECR Latest scores

Euromoney Country Risk scores, latest changes (higher score implies lower risk):

Luxembourg score 87.21 up by (+0.22)
Canada score 82.47 up by (+0.12)
US score 75.53 up by (+0.10)
Chile score 75.18 up by (+0.06)
Belgium score 71.69 up by (+0.03)

Greece score 34.08 down by (-0.01)
Spain score 53.60 down by (-0.01)
Finland score 84.39 down by (-0.03)
Italy score 55.26 down by (-0.03)
Portugal score 50.81 down by (-0.03)
UK score 72.53 down by (-0.03)

Australia score 81.53 down by (-0.04)
Japan score 68.02 down by (-0.04)
India score 52.47 down by (-0.05)
Austria score 79.77 down by (-0.06)
Netherlands score 81.51 down by (-0.06)
Sweden score 86.55 down by (-0.07)

China score 59.49 down by (-0.10)
France score 71.93 down by (-0.10)
Malta score 66.30 down by (-0.21)
Brazil score 59.81 down by (-0.27)

26/6/2013: SVT was the only form of property tax promised to the Troika

The previous Government of the FF/GP did not shower itself in a glory of competence. However, someone recently sent me a document from the Department of Finance which clearly shows that when it came to structuring the tax changes under the Troika programme, the FF/GP Government did understand the arguments in favour of the Site Value Tax (as opposed to the Property Tax) that were presented to them by, among others, myself. page 2 contains a reference solely to the Site Value Tax and no reference to the property tax.

This implies that the Troika had no objection to the SVT being the only tax on real estate in Ireland, and that the currently instituted system of property taxation (that exempts large land ownership from tax and induces a system of charges wholly unrelated to economic, environmental and social costs of property) was installed based on the current Government decision absent any pressure or compulsion from the Troika.

You can read on the benefits of SVT over the traditional property tax here:

Tuesday, June 25, 2013

25/6/2013: IMHO Open Letter to Minister Noonan

Irish Mortgage Holders Organisation have published an open letter delivered to Minister for Finance, Michael Noonan, TD concerning the revised Code of Conduct. Here is the link to the letter:

This comes on foot of our earlier submission to the consultative process on the same, available here:

Disclosure: I am a director and one of five founders of the organisation.

25/6/2013: Planning Permissions in Ireland: Q1 2013

The latest data on Planning Permissions was released by the CSO under a rather cheerful headline: "Dwelling units approved up 24.7% in Q1 2013" which prompted me to start writing a positive note. However, having updated the database, I could not believe my eyes. Not until the third bullet point in the release do you get the sense as to what is really going on in the sector - the fact confirmed by looking at CSO data, rather than reading the CSO release which focuses the top points of analysis on positive side of select sub-components of the overall sector performance. So here are the facts, as conveyed to us by the data itself.

In Q1 2013, total number of planning permissions granted in Ireland for all types of construction stood at 3,275, which is 1.35% down on Q4 2012. This marks de-acceleration of seasonally-driven 17.96% q/q decline recorded in Q4 2012. However, on an annual basis, allowing for some seasonality controls, overall number of planning permissions granted in Q1 2013 was down 2.76%, which contrasts against an annual increase recorded in Q4 2012 of 1.13%.

In summary, things are not going well at all. Q1 2013 marks an absolute historic low for any quarter since Q1 1975! That's right: we hit an absolute historic low in 37 years and CSO release says things are 'up' by focusing on sub-series before it reports in the text the actual aggregates.

In charts below, I marked current sub-period (since Q1 2010) low against historic low before the current crisis. Take a look.

Note: in Q1 2013,

  • Total number of planning permissions hit a historic low (as mentioned above)
  • Total number of permissions for dwellings stood at 862, the second lowest after the historic low of 832 hit in Q4 2012.
  • Total number of permissions for 'other new construction ex-dwellings' stood at 785, which is above the historic low of 636, but still marks a decline q/q.
  • Number of permissions for extensions hit a historic low.
  • Number of Alterations, conversions, renovations etc hit a historic low. 
Again, I find little to cheer in the above...

25/6/2013: What the hell is going on in the markets?

Two charts from Pictet neatly illustrate the ongoing bonds markets correction:

My two cents on what's going on in the markets today:

Wednesday opening last week at the cusp of FOMC statements, US 10 years were  yielding ca 2.15%. and 4 trading days later, these were at 2.61% or 41 bps up. 30 years are up from the nadir of 2.83% on may 2 to 3.56% currently.

And what about the other QE-infused or enthused market? In just over 3 weeks, FTSE 100 is down 846 points, from 6,875 on 22 May.

Equities and bonds are moving same way? Why?

Because of three factors:
1) When bonds go down, with them goes down capital. Mandated investment vehicles and banks take a bit of a shower.
2) When US or other advanced economies bonds take a shower, Emerging Markets take a bath because of liquidity pull out to cover leveraged losses elsewhere.
3) When EMs and bonds tank, capital-backed leverage falls, so liquidity falls in the advanced markets too, dragging down all risk assets.

These are the tripartite consequences of a liquidity trap, whereby intermediated short-term funding underpins investment activities. Put differently, when humans have less cash (real economy slow recovery, coupled with tax and financial repression), while banks and other institutions have more cash (including, for the latter, via access to banks leverage against Central Banks funding), markets become correlated, even where hedges existed before, correlations turn positive. Where there is contrasting access to the same asset via both financial paper and physical or real assets (e.g. gold vs gold coins), the two diverge, with financialised asset moving in synch with other financial assets, while real/physical asset moving in the opposite direction.

Thus, Brazil's 30-year bonds (dollar-denominated) are down now more than 25% in recent weeks, and instead of flowing into safe havens or rather 'safer hells', the cash is being tucked away into reduced leverage, leading to the US bonds compression down and UK gilts erasing all gains made since October 2011 (when QE2 kicked in).

The only thing that behaves predictably so far is VIX, which has gone from low-flat around 13.6-14.0 between March 24th and May 24th to over 20 average since June 20th through today. Short term VXX index is up from 18.03 on May 17th to 22.81 today.

Not quite panic, but pressure… and pressure is a trigger. And FOMC, and the rest of the Impossible Monetary Dilemma, are triggers too. The point is, given the recent drama in bond markets and equities and EMs, triggers are dangerous in trigger-happy times. When you have lots of capital tied up in 'safe assets' and lots of leverage tied up on top of that capital, pulling the rug from underneath capital quality leads to accelerating cascades across the board.

This is bad news for strategies over the short-term, as traditional allocations based on previously stable relations between asset classes are broken down. Gold co-moves with equities and bonds and currencies. The good news: once financialisation of the long positions is unwound, leverage is reduced and repricing of 'bubble'-like assets (aka financialised assets as opposed to real assets) is finished, the stable relations will return. In the long run, we all are… well, in the long run.

Monday, June 24, 2013

24/6/2013: The Great (Credit) Wall of China

China is now in the anteroom of the 'This Time is Different' sauna... hot seat awaiting:

Keep in mind, in China total credit increased from USD9 trillion in 2008 to USD23 trillion now. Credit to GDP ratio went up ca 95% and now stands at 221% of GDP. In the US, in 2002-2007 period, credit/GDP ratio grew by 40 percentage points. And we have no real idea just how deep the real rabbit hole goes:

Here's the contagion trigger: once China gets seated on the hot bench in the TTisD sauna, Chinese purchases of US and euro area bonds will evaporate. With this, yields will be going up even if current QE is retained by the Fed. And what the cost? BIS estimated last 1 trillion. And with yields rising across the board, 15-35 percent of GDP can go up in smoke in France, Italy, the UK and Japan.

Meanwhile, the euro area banks are sitting on a massive pile of dodgy assets ( backed by funding secured against... right... the aforementioned government bonds.

In this blog parlance, the Impossible Monetary Dilemma will then hit the Great Wall of China. And there are no airbags...

24/6/2013: Anglo 2008 Annual Report is out. Call your broker, presto!

All going swimmingly... nothing to look at here... move on folks...
H/T to @KarlWhelan

Oh, yes, do fill your boots with them shares...

A pearl:
"Following the introduction of the Government guarantee on 30 September 2008 the Bank experienced growth in retail deposits and access to other funding markets gradually improved. However, the reputational damage to the Bank resulting from a number of recent disclosures together with  adverse ratings actions have significantly weakened the Bank’s competitive funding position at a time when global markets continue to deteriorate and overall sentiment is negative."

Thus, clearly, barring some bad publicity and bad-bad-bad-n-worse Ratings Agencies intransigence, the bank would have been just fine, thank you...

And as per future, a gem:
"We are determined as part of our long term strategy to rebuild trust and confidence. A key priority of the new Board is to ensure we regain our position in the corporate, wholesale and debt capital markets and over time enhance the quality of funding, building on our diversified international platforms. ...The Bank’s ambition is to expand its retail franchise by targeting new and existing markets with competitively priced transparent products."

The Happy Times, they are coming back...

Obviously, there is no one to blame, but bad PR and bad-bad-bad-n-worse Ratings Agencies:
"I continue to be impressed by the tremendously loyal and professional staff in all areas of the Bank who deserve great credit for their dedication and commitment. Like all stakeholders, staff members across the Group have been deeply impacted and disappointed by recent events. They share the Board’s determination to restore confidence and trust in the Bank. The Board has great faith in the ability and strength of our people and they will play a critical role in ensuring the future viability of the Bank."

In other words, neither the staff, nor the Board had any idea of these bad things that have happened... it is, therefore, 'carry on across all decks' moment... But just in case you don't get this tingling sensation of excitement for the future from above, here it is in full glory:
"...a comprehensive business plan is being developed which will ensure the Bank’s long term viability.

...We will look at evolving from our existing structure to a broader more diversified business bank. The Bank’s customer service ethos and ability to provide effective and efficient service will help us meet the needs of sole traders, SMEs and larger businesses.

The Board is resolute in its determination to ensure that the Bank emerges from its current situation as a strong and viable institution and one that stakeholders feel proud of."


NB: Judging by objectives set out above, the Board and the senior management of the bank have by now failed in achieving the goals set out by themselves for themselves back in 2008-2009. Anyone to be held responsible?.. other than bad PR and bad-bad-bad-n-worse Ratings Agencies?..

NB2: Karl's reaction - and I am in agreement with him on it:

24/6/2013: Ifo Business Climate Survey for Germany: June 2013

German economy continues to grow, per latest Ifo Business Climate Survey for June 2013:

Basically, all three core indicators are above the water (>100), with

  • Business Climate reading at 105.9, up on 105.7 in May and 105.1 in June 2012. 
  • Business Situation reading slipped slightly to 109.4 in June from 110.0 in May and is down on 113.8 recorded in June 2012.
  • Business Expectations forward are actually relatively soft at 102.5 in June, up on sluggish 101.6 a month ago and up on contractionary 97.1 in June 2012.
  • Dynamics wise, Climate and Expectations readings in June were ahead of their 12mo average through May 2013, but Situation reading is basically flat. On 6mo average through May comparative, all indices are ahead of the average in June, save Climate which is flat.
Of four core subsectors, however, only Manufacturing is above water on expectations side. 

Net: strong performance, given prevailing conditions in the global and euro area economies, but no massive fireworks.

Sunday, June 23, 2013

23/6/2013: Sindo & Indo: "'Bondholders are f***ing us up the arse' – Anglo"

With slow drip of a freshly leaking faucet, we are getting more and more granularity on the events surrounding Anglo collapse and the events leading up to the Guarantee. Here's the latest instalment:

It is impossible to assume that this information, in pretty much the same words, was not conveyed to the Taoiseach and the Minister for Finance before the issuance of the Guarantee. Which, of confirmed, would imply wilful act on their behalf in securing the payouts to the bondholders against all information available.

It is also virtually impossible to imagine, given this information, that the IL&P did not know well in advance of the fated 'deposits'-'loans' swap of late September 2008 that its funding arrangements with Anglo were high risk and not exactly kosher. Which implies that the Irish Fin Reg also knew the same. If the Fin Reg did not know this, its lack of awareness would signify an absolute level of incompetence that would be staggering even by the pretty high bars for incompetence set during Bertie Era.

In short, the two material bits in the article linked above are... well... staggering in their importance.

Updated: more on the same from 
now down on tapes and making the case for accusing Anglo senior staff of knowingly manipulating the bank relationship with the CBofI/FinReg!

So while Bondholders were 'f***ing up Anglo', Anglo was f***ing up the entire financial system of Ireland with Ireland's financial system cheerful approval. The only ones who got f***ed up in the end were... Irish taxpayers. Happy times!

Updated: ZeroHedge on the same:

And Anglo 2008 accounts have been released:

23/6/2013: On Dealing with Mortgages Arrears: Adverts v Process

A reply to @cbolgerr regarding the issue of contacting your bank when experiencing financial pressure in relation to mortgages:

In simple term (omitting some considerations), prior to the crisis people were mis-sold mortgages by the banks. Many mortgages were mis-sold on the basis of poor risk pricing by the banks - the job that the banks are paid to do. There was so much mis-selling that the problem of unsustainable mortgages is now structural.

People who mis-sold them these mortgages are still in the banks and are now the same people working on 'resolving' the problems. There were no involuntary layoffs of banking staff and there was no clearing of the banks lending officers or risk management staff on a systemic basis to match the problems in the lending markets. Hence, these staff members are still there. And accepting that they have no new lending to do, these are now the staff working on resolving the mortgages problems. As such, they have neither ability, nor credibility, nor incentives, nor compassion to do anything to repair the damage they have done.

In this environment, and provided the information and power asymmetries awarded to the banks by the Government & Regulator at the expense of mortgagees, the only thing that mortgagees should do is, simultaneously:
1) continue contributing to servicing their mortgages to the extent feasible,
2) prepare as much relevant financial information as possible in order to be able to file FSS,
3) identify an independent, properly regulated and knowledgeable/experienced representation for their case,
4) treat any engagement with the bank as potentially hostile and detrimental to them.

Their first step should be to seek independent advice and representation in the process. Unfortunately, the PIP system put forward by the state is itself at risk of being biased in favour of the banks. Still, it is better than following through on the banks advertising and contacting them before securing independent representation.

There are very few practitioners who have any relevant experience in dealing with the banks. And fewer still willing to help with advice before securing large payments from the homeowners. Care must be given to how the banks and the PIP system are approached.

Key issue, however, is that any mortgage holder under stress should continue engaging with servicing the loan to establish 'good will'. The banks are not required to establish any 'good will' toward borrowers, so the system in inherently unfair and asymmetric, but that is the reality of the fundamentally unjust legal framework established by the government and, for now - until challenged and changed - it has to be obeyed. 

Saturday, June 22, 2013

22/6/2013: Weekend Reading Links: Part 3 of 3

This is the third and the last post of my regular weekly feature of the Weekend Reading Links On Arts, Sciences and Zero Economics (see the first post here: and the second one here:

Just awesome, tireless in its brilliance and time-invested poignance, the encounter that took decades to shape and seconds to execute. If it were a performance, it qualifies for an Oscar :  h/t to @sherqui for reminding us about it. One question, though, how on earth could have followed Ulay to that chair?!.

Chile's Pezo von Ellrichshausen Architectshas finished Solo Pezo property - part of the Solo Houses project in Matarraña, south of Barcelona:

Solo Pezo is a concrete structure lifted to the landscape's natural ceiling of tree-tops on a monolithic square platform. Views and light are maximized. There is a deep pool in the roofless central space as a visual tension point between sky and earth. Good slidshow of images is here:

As a lecturer myself, I know that students are not only canvases for us to shape (actually, they are not that at all, but the traditional teacher-student nexus implies transmission of value to the recipient of it, hence the hierarchical implicit structure) but they are also a source of inspiration. Here's a sample - a MICA retrospective:
Brilliant works across the space. Enjoy!

Moscow Art Fair 2013 is coming up in September and, unless plans change, I will miss it this year (Irish trade mission is not being planned for that time, so I will not have an excuse to travel...) Here are some pics from 2011 show I love this one from 2008:

And more links from 2011 show 2012 show images: gotta love the irony:

And on these two humorous/sarcastic notes, have a fabulous weekend.

22/6/2013: Weekend Reading Links: Part 2 of 3

The second post (of three) of my regular weekly feature of the Weekend Reading Links On Arts, Sciences and Zero Economics (see the first post here:

Some interesting long-exposure photos: These remind me of the dynamics of Hurst's spin paintings series and a circular geometry with fractal qualities of Frantisek Kupka.

Some stunning architecture next:
That 'gabriel orozco house', roca blanca, mexico, 2008 project evokes Casa Malaparte. my favourite house in all of the world... well, one of the most favourite ones, because it has to compete with Neutra(s) and Mies Van Der Rohe(s) and so on...

Same forceful linear projection into the landscape, same blending into the physical geometry of the landscape and same play on contrast of height and angularity:

Where science meets art: Images of Cosmographic Maps Chart Galaxies and Superclusters in Local Universe via @wiredscience and @adamspacemann
I love the term 'local universe'...  Awesome maps show you galaxies and cosmic clusters... and wonkishly clinical 'flow' map... of the 'local universe'

Back on Earth, 'local universes' are moving, again...
Just as G8 announced bringing closer (via trade) North America and Europe, so in geology the process of driving Europe closer to the USofA et al is on... so non-economic quote of the day is "This break-up and reformation of supercontinents has happened at least three times, over more than four billion years, on Earth. The Iberian subduction will gradually pull Iberia towards the United States over approximately 220 million years." I dare say, those visas one day will be done with and then Dublin Airport US immigration clearance desks will have to be abandoned. is hosting an exhibition on Liffey: A boulevard of rooms + corridors This really is worth much more than just few web pages, so let's hope the folks at Urban Nexus get their act together and produce a killer site with images, interaction etc...
As Joseph Brodsky noted:
"What do you love most of all?
Rivers and streets - the long things of life"
Liffey is a tortured river, defaced by modern and contemporary ugliness and decay in places, as well as by spots of rather banal old architecture too, yet highlighted by moments of beauty and by more recent city efforts to bring it to life. It is alive and it is stunningly beautiful as a counterpoint to and reaffirmation of what we, humans, have wrecked around it: good and bad. It is one of the three core natural attractors that create a physically visual pull of Dublin (the other two being Wicklow mountains and the Dublin Bay, the latter being equally defaced by our inability to stop abusing the commons of nature).

The third post of links for this weekend (I warned you I have many this time around) is coming up, so stay tuned.

21/6/2013: Weekend Reading Links: Part 1

The first post of my regular weekly feature of the Weekend Reading Links On Arts, Sciences and Zero Economics:

Let's hit science bit (ok, rather technology) first: IBM's famed Watson is getting into a museum:
I remember being at IBM when Watson played the Jeopardy rounds. It was amazing. I also recall working on Watson's capabilities and deployment in finance for deep risk pricing. As my memory tells me, the code for Watson's brilliance was written by a team from Ireland.

I know, I avoid dealing with economics here, so treat this as not a note about how art is a fantastic example of high value-added exports, but as a story about globalization of art's language and acquisition and exchange of knowledge

Art meets design
I was supposed to speak about the economic dimensions of design (including industrial design) at this week, but had to withdraw for personal reasons. Really bummed!

An amazingly consistently thoughtful inversions of Jan Kriwol:

A simple trick of inverting the focal point to create a juxtaposition between expectation and realization. Pure orthogonality works.

Is it art? Well, I am not sure. But it has meaning. It has its own language, its own semiotics, its own passions, beliefs etc. So is it art?
I am not sure. But I do recall how much amazement I experienced when I first time looked at prison tattoos from the point of view of attempting to understand them. For years, seeing them on beaches around the USSR, I grew up on a steady diet of rejecting these expressions of personal lives as being vulgar, invalid, something to be permanently kept below my domain (all consisten positions of the Russian intelligentsia's conservativism in the face of both reality and modernity). And then, years later, there I was in a UCLA classroom of Professor Mascaro, reading about Russian prison tattoos and writing an essay on the link between liner logic and their compositions... Still remember that! And the strangely correlated across time and space St Pat's day when myself and Professor Mascaro were the only two people in a class, not wearing green... Many years fast forward, here I am in my Dublin kitchen posting about prison tattoos, remembering Professor Mascaro and wondering... is this art?..

A.A. Gill is a form of narrative that is art. And here he is with a thesis of America the Marvelous
Worth a read, as always.

I wrote before about light art, Dan Flavin (here) in particular. Here's James Turrell - another master of the medium - and he is

Back in 1999 myself and MrsG had a joint entry at a group exhibition in Baltimore, using light as part of installation. The tile was Mutatis Mutandis, if I recall correctly, and it lived for about 5 minutes, subsequently knocking out lights in the entire multistory building in downtown Baltimore... the party went on... Turrell's work is striking enough to knock daylights out of your senses of space and dimension. If in NYC - a must see!

Guggenheim's show completes an unprecedented sequence of installations undertaken by Turrell that started with LA's LACMA, followed by Houston's MFA within a month and then onto NYC to Guggenheim - all across the impossible span of just 3 months. Impossible, because the entire installation of this retrospective requires rebuilding rooms, halls, spaces spanning 92,000 sq feet.

Here's an image from Houston:

Let me end this post on accidental art
The first image is fantastic. Absolutely, Gursky-like (link). As is number 9 and number 12 and 13. And number 7 is Missoni-like or better yet Morris Louis in gamma and linearity of the core movements. Yes, yes, Michael Wolf deals with density, especially in his Hong Kong series... that, perhaps, next week?

End of this post... stay tuned for the second part tomorrow and read...

Friday, June 21, 2013

21/6/2013: Irish Mortgages Arrears Q1 2013

At last, with a delay of some 4 weeks we have the Mortgages Arrears data for Ireland for Q1 2013. The delay was caused by (my sources tell me) a reporting glitch from one of the institutions. 

At any rate, the CBofI release of the data does not seem to fit any of the conspiracies theories bandied about, so let's assume that it was a glitch. That raises a question - what sort of a glitch can disrupt reporting of something as simple as arrears without having any effect whatsoever on any lender's other operations? I shall leave this question for you to ponder.

What do the figures tell us? As usual, my suggestion is - ignore the spin in the media, read CBofI own release, read position (due tomorrow am) and let's focus on raw numbers here.

In Q1 2013, number of outstanding mortgages accounts relating to principal dwelling houses/residences (PDH) stood at 774,109, down on 792,096 in Q4 2012 - a decline of 2.27% q/q, but an increase of 1.3% y/y. With BTLs added, total number of residential mortgages in the country stood at 923,504 or 2.01% below Q4 2012 and 20.9% above Q2 2012 when reporting began. Much of changes in the total numbers of mortgages in recent quarters is accounted for by classification changes.

While the number of mortgages outstanding dropped by 2.27% for PDH, volumes of loans relating to mortgages decline by far smaller 0.79%.

So observation 1: exits remain based predominantly on pay downs of older vintage, smaller mortgages, leaving the remaining pool of mortgages more toxic.

Total number of accounts in arrears in relation to PDH stood at 142,118 in Q1 2013, down 1.2% from 143,851 accounts in Q4 2012, but up 15.6% y/y. Total outstanding amounts relating to PDH accounts in arrears was up 2.85% q/q at EUR25.485 billion (up 11.21% y/y) and underlying volumes of accumulated arrears rose to EUR1.932 billion (up 7.81% q/q and 39.87% y/y).

Observation 2: Marginal decrease in arrears-impacted mortgages accounts was associated with deeper deterioration in terms of the volumes of PDH mortgages impacted by arrears. The problem got slightly more concentrated and much more toxic.

Number of accounts in arrears in relation to BTL rose to 39,371 in Q1 2013, up 3.73% q/q and up 13.4% y/y. Total outstanding amounts relating to BTL accounts in arrears was up 2.84% q/q at EUR10.891 billion (up 10.94% y/y) and underlying volumes of accumulated arrears were at EUR1.178 billion (down 1.29% q/q and up 40.13% y/y). Note: y/y comparatives for BTLs are only referencing 9 months period since the end of Q2 2012 - the first period for which we have data available.

Observation 3: BTLs continued to tank across the board, although cumulated arrears amounts did decline q/q. Assuming there were no reclassifications, this suggests some write-offs by the banks of defaulted loans.

Total (PDH+BTL) number of accounts in arrears stood at 181.489 in Q1 2013, down 0.17% from 181,806 accounts in Q4 2012, but up 11.4% on Q2 2012 - the earliest for which we have data available for BTL. Total outstanding amounts relating to all mortgages accounts in arrears was up 2.85% q/q at EUR36.376 billion a rise of 9.02% on Q2 2012. However, the core number, relating to cumulated arrears has jumped significantly more than any other arrears-related parameter. This rose to EUR3.11 billion in Q1 2013 up 4.17% q/q and +33.83% on Q2 2012.

Observation 4: across all residential mortgages, the problem of arrears became slightly marginally more concentrated and significantly more toxic.

In Q1 2013, 185,263 PDH mortgages accounts were either at risk of default or defaulting (the category that includes, per my methodology, all mortgages in arrears, all repossessions and all mortgages that are restructured and currently are not in arrears), which is 0.81% down on Q4 2012 and +13.97% up on Q1 2012. At the same time, there were 52,991 BTL accounts at risk or defaulting, up 2.15% q/q and up 14.74% y/y. Which means that across all mortgages, the number of accounts at risk of default or defaulting declined marginally from 238,663 to 238, 254 between Q4 2012 and Q1 2013. The number was up 10.53% y/y.

At the end of Q1 2013, 20.1% of all PDH mortgages accounts were at risk of default or defaulting, up on 19.8% in Q4 2012. The percentage of BTL mortgages that were at risk of default or defaulting in Q1 2013 was 35.5%, up on 34.5% in Q4 2012. 

Among all residential mortgages in Ireland, in Q1 2013 25.8% were at risk of default or defaulting, up on 25.3% in Q4 2012. 9 months ago that percentage stood at 23.6%, implying a swing up of 2.2 percentage points in 9 months or an annualised rate of increase in the incidence of risk of default or defaulting of 2.94 percentage points.

Update:  Here is a link to IMHO statement on today's data:

21/6/2013: Most Important Charts in the World, June 2013

Business Insider produced another set of charts, under the usual heading of "Most Important Charts in the World":

Obviously (shameless self-promotion alert) number 22 worth a look...

Here it is reproduced from my file:
You can click on the image to enlarge.

Note, the same relationship exists for Government debt or Household debt taken alone and the individual relationships are actually even stronger (adjR2 in the range of 43-44% against 38% for the combined debt relationship).

21/6/2013: Dukascopy TV interview

My interview with Dukascopy TV, Switzerland on Fed's FOMC and monetary policy dilemma, G8 and its implications for Europe and Ireland, and the Russian economy: and

21/6/2013: McKinsey Economic conditions Survey for H2 2013

Couple of interesting charts from the McKinsey Survey on global economic conditions (see full set of results here:

So the percentage of those who are saying the global economy is performing substantially better at the end of Q2 2013 is 36%, which is down on 43% in Q1 2013, signalling deterioration in the conditions. Percent of those who see any improvement in the global economy is down from 79% to 75% q/q. In terms of expectations forward:

Things are not going all too well in expectations 6mo forward either. 41% of all respondents are upbeat in expecting an improvement in global growth of H2 2013. Now, keep in mind, most of the official forecasts factor in significant uplifts in economic conditions in H2 2013 to deliver on annual targets set for 2013 at the end of 2012. Let's take a look at regions where H2 expectations were the most optimistic on the official side: 49% Eurozone executives expect things to improve, Asia-Pacific (especially China) 38% and North America 32%. Hmmm... nowhere over 50%. Sample biases are probably working toward reporting firms having more robust expectations, as the survey covers larger companies, with bigger investment pipelines, usually consistent with upside to expectations.

For their own countries:

Better vs Same/Worse percentages:

  • Asia-Pacific: 42% vs 59% in Q2 2012, against 38% vs 61% in Q1 2012. Own-country conditions confirm a 'no expansion' expectation in H2 2013
  • Developing markets: 35% vs 64% in Q2 against 47% vs 53% in Q1. Own-country conditions confirm a 'no expansion' expectation in H2 2013
  • Eurozone: 32% vs 68% in Q2 against 34% vs 66% in Q1. Own-country conditions confirm a 'no expansion' expectation in H2 2013
  • India: 45% vs 55% in Q2 against 60% vs 40% in Q1. Own-country conditions confirm a 'no expansion' expectation in H2 2013
  • North America: 54% vs 46% in Q2 against 43% vs 57% in Q1. Own-country conditions confirm a 'expansion' expectation in H2 2013
So of all regions, with exception of North America, own-executives signal no gains in growth in Q3-Q4 that is assumed ex ante in the official forecasts... time to go 'hmmmm...'