Economics 12/8/10: Irish July CPI: Deflation is over, for the State sectors

“Consumer Prices in July, as measured by the CPI, remained unchanged in the month,” says CSO. Hurrah, the end of deflation then? “This compares to a decrease of 0.8% recorded in July of last year. As a result, prices on average, as measured by the CPI, were 0.1% lower in July compared with July 2009.”
Sounds like the good news. But… “The EU Harmonised Index of Consumer Prices (HICP) decreased by 0.1% in the month, compared to a decrease of 0.8% recorded in July of last year. As a result, prices on average, as measured by the HICP, were 1.2% lower in July compared with July 2009.”

Err, of course, HICP excludes the cost of housing. And the cost of housing has been going up in Ireland courtesy of the banks. So let me see:

• Deflation is bad, because it signals lower returns for businesses, induces consumers to save excessively and stops investment;
• Inflation is ok, then, as long as it reverses the three ‘bads’ caused by deflation.
  

So our ‘good news’ of the ending of deflation isn’t good at all, then. Why? Because, per CSO: most notable changes in the year were decreases in (see charts below)

• Clothing & Footwear (-8.5%) - competitive sector;
  
• Food & Non-Alcoholic Beverages (-3.8%) - relatively competitive sector; and
  
• Furnishings, Household Equipment & Routine Household Maintenance (-3.4%) - buyers' market.
  

There were increases in

• Education (+9.2%) - state controlled,
  
• Housing, Water, Electricity, Gas & Other Fuels (+5.5%) - state- and banks-controlled, and
  
• Transport (+2.7%) - state-controlled in terms of costs and charges.

Which of course means that prices have risen primarily in state- and banks- controlled sectors. These sectors inflation does not induce businesses to invest (as they are forced to pay higher costs and do not see increased revenue in their core activities), it does not induce people to consume (as they continue to save even more in anticipation of banks coming for their money through mortgages increases) and it does not result in increased returns to productive business activity (as higher costs shrink margins). The CPI excluding mortgage interest showed no change in the month and was down by 1.0% in the year.

Let’s plot that relationship between state-controlled prices and private sector prices, weighted by their respective weights in overall CPI basket:

No further comment needed, I presume.

Economcis 10/04/2010: Ireland's Competitiveness - not improving

Often overlooked today (in the usual media focus on credit flows), Ireland's Harmonized Competitiveness Indicators, published by the Central Bank are painting a really troubling picture.

The latest data, released this week in the CB's quarterly update shows that despite all the talk about wages, our competitiveness has not been improving at any significant rate during the current crisis.

Charts below illustrate:
First, the monthly figures above. It is clear that consumer price deflation acts as the only force that is inducing gains in competitiveness in Ireland. Even by this measure, improvements are not dramatic - over the course of the crisis so far, Ireland Inc has managed to improve its competitiveness only to the levels of August 2007! In other words - if 2007 was the year this economy was running on a toxic mixture of drugs and steroids, according to the CB figures, we are still reliant on the same toxic potion of uncompetitive prices and costs, except we are no longer capable of running at all.

Adjusted by unit labour costs, our competitiveness performance is even worse. We are, factoring out the seasonal effects, still in the economy geared to the boom.

The second chart shows quarterly changes:
This is really self-explanatory. Ireland Inc is absolutely out of touch, in economic terms, with its previous, competitive self. Having endured 4 years of unsustainable bubble (2004-2007), we are now lingering at close to the bottom of our historical competitiveness position.

Economics 10/09/09: A dive into CPI discovers ESB and B Gais monsters

Consumer prices posted the first increase in August - up 0.4% mom on July or double the consensus forecast. This is the first monthly rise since September 2008. Prices rose helped by the nasty predictables, though:

• mortgage repayments were up 3.4% on average - although mortgage repayments are still down 48.2% yoy, the latest tick up is a clear sign that the banks are starting to 'repair' their margins and are driving cost of mortgage financing up - bad news for already demoralized consumers;
• the above trend is likely to accelerate: Irish banks' mortgage rates were the third lowest in the EU in June 2009 (only Portugal and Finland had lower average rates), but this is somewhat simplistic of a comparison as majority of current borrowers in Ireland are taking or holding variable rate or tracker mortgages. In contrast, in other countries of the Eurozone, much higher percentage of mortgages issued are in fixed terms of much longer duration than those in Ireland. But one has o be also concerned with the riskiness of Irish mortgages to the banks - Irish banks spot 173% average loans/deposits ratios and this is a mad level of leveraging for the sector, comparable to the worst 'offenders' - the poorly performing UK banks;
• a bit more on housing costs: "In the month, price increases were recorded for liquid fuels (i.e. home heating oil) (+9.4%) and mortgage interest (+3.4%). Price decreases were recorded for rents (-2.4%) and bottled gas (-0.4%)." Rents falling - bad news for housing markets then;
  
• ex-mortgages (HICP) was up 0.2% in August in mom terms (yoy term we are still in deflation at -2.4%, for comparison Euro area overall HICP is down 0.2% yoy in August - 12 times less than Ireland's);
• but this August things still were worse than a year ago - back in August 2008 mom inflation was 0.5%, this August it is lower at 0.4% despite a massive deflation since then.

In addition to the above main points, other worrying things are in the pipeline for inflation.

Transport costs rose 1.1% mom due to higher cost of fuel (as some analysts claimed in their rushed notes). Alas, CSO detailed sub-indices show that it was not petrol that was the main culprit: "In the month, price increases were recorded for air fares (+7.0%), bus fares (+3.8%), petrol (+1.7%), maintenance & repair (+1.4%), diesel (+1.2%), other vehicle costs (which includes parking fees and car rental charges) (+0.8%) and motor cars (+0.4%). Price decreases were recorded for other transport (-4.3%), spare parts & accessories (-1.8%), sea transport (-1.6%) and bicycles (-0.7%)." So in short - private sectors are still competing on price, but state bus monopoly is ripping off the customers, while airlines are scrambling to cover losses.

"Education costs decreased by 0.3% in the month and increased by 3.9% in the year to August 2009. This compares to an increase of 6.5% for the year to August 2008. A price decrease was recorded for other education & training (-0.7%)." No savings on third level or any level education in sight then which means - wait, CSO won't tell you this in their summary -

• cost of primary education in this country has gone up by 7.6% yoy in August 2008-August 2009 period;
• cost of secondary education went up 7.1% yoy;
• cost of third level education is up 4.5%

We really are doing everything possible to increase the level of educational attainment for kids and adults in Ireland, aren't we?

Of course there was no easing of costs of our two grand state monopolies: ESB and Bord Gais. Year on year, the former dropped 10.9% and the latter rose 6.5%, so given their weights in expenditure, the basket of these two energy sources lost roughly 5.2% of its value. But in the same period of time, oil dropped 36% and gas dropped 63%, so the actual spot market price savings on the basket should have been around 44.9%. Ok, allow for a profit margin of a whooping 10% (we are in a recession) and a cost margin of 15%. Still, you get something to the tune of 25-27% savings that is not being passed onto consumers by ESB and Bord Gais.

Ah, the costs of our glorious state monopolies. I know, some will stop reading here, but - folks, the Exchequer (the same one who is 'protecting' taxpayers interests in Nama, allegedly) is the sole owner of these rip-off monopolies! Shouldn't Brian Lenihan 'protect' taxpayers from their abuses? That would give him at least some credibility in claiming that he actually acts in the interest of this country's people...


I must confess - after Pat McArdle's retirement, I stopped quoting from the Ulster Bank notes. But here is a rare exception: "For the year as a whole we expect an average consumer price fall of 4.2% [CPI, I presume], which would represent the greatest decrease since the 6.4% drop in 1931". A nice piece of history, folks, and possible a good forecast target too.

Daily Economics 10/04/09: Rappers want Euros

Taxpayer champions?
An excellent argument by David Quinn on the need for someone to step out of the shadows and become a taxpayers champion (here). FG to the front, suggests David. Most likely. But in the end, in my view, even Sinn Fein will do? Or a backbenchers'-led revolt in the FF. The country is now at its knees and the ZanuFF's leadership is so out of touch with reality, Cowen is telling us - private sector workers battered by unemployment, wage cuts, higher taxes and unbearable debts - that public sector employees know pain endured by the economy first hand. "I believe that the reality of the crisis we face as a society is particularly evident to public servants who are dealing at first-hand with the consequences – personal, social and economic – of our current difficulties,” said our out of touch leader (here). Tell me Brian - how? Through their jobs-for-life, strike-for-any-reason, guaranteed-pensions, increments-wage-rises, Partnership-giveaways, excessive-holidays, take-your-time-to-do-anything positions?


Consumer prices... deflation is of little help to the consumers: Per yesterday's figures on Irish CPI, see my comment in today's Irish Independent (here). And a quick comment to the Wall Street Journal from me relating to the latest Gov plan for a 'bad' bank (here).


And Gerard O'Neill has an excellent post on Partnership (here). Stockholm Syndrome at the IBEC and:
"Oh, I forgot: there's the Enterprise Stabilisation Fund - a grand total of €50 million this year. Let's work it out: say there's 1,000 companies eligible for support (about par with the numbers Enterprise Ireland works with every year). That equates to €50,000 in support - or stabilisation - for each company. Jaysus lads, this time next year we'll be millionaires..."
Actually it is even worse - of the €50mln, only €25mln is in new allocations to DETE, the other €25mln is coming from somewhere else - already in existence. And there was no support for export credits - a mad lunacy of the Government that is willing to waste billions on bad developer loans, but pinches an odd €10mln to provide short-term credit to companies with exports waiting at the dock and willing buyers on the other end. Instead of this virtually risk-free financing, we have the net 'stimulus package' is €25mln - a slap in the face to private sector Ireland and a clear indication of the arrogance and incompetence at the head of DETE.


A solution at hand for Cowen, Lenihan and Coughlan... Here is an excerpt from the post (here) by a celebrity masseuse, Doctor Dot:
"Tonight... I massaged the best looking President on earth, Mikheil Saakashvili... He is the President of Georgia and super fun to talk to. He originally wanted only a 30 minute massage but 90 minutes later, he told me my massage is "the best massage I have had in my life so far". Mikheil had body gaurds [sic] outside the massage room the whole time, who were all over 6 feet tall and like 4 feet wide. One spoke English really well and told me his favorite group is Metallica. Ha. He said "I am a rocker!" so we got along fine, whilst waiting for the President to finish his work out. I was excited to finally get to massage a President. I have massaged the Prince of Saudi Arabia before and a few Mayors, but this was the first President for me."

Thus we have a prescription to presidential joy: get your economy demolished, country demoralised, make some spectacularly disastrous decisions across the board, appease your cronies, get your country into debt to the EU and then, get a massage...

Doctor Dot, we have three Saakashvilli equivalents here in Ireland - not as good looking and with less pleasing body guards, but otherwise, even more spectacular disasters... Massage sessions on taxpayers' bill?


Inflation cometh... Here is an excellent recent blog post from Marc Faber on the issue of upcoming inflation (and a related blog here). I've spotted the risk a while ago (here), so I am happy to report that we are now seeing more and more commentators beginning to concerns themselves with the obvious problem: where can all the liquidity that the Fed and other Central Banks are pumping into the global economy go. From the point of view of the long-term policy consistency for the Irish Government, this is a proper conundrum.

Having raised taxes in 2008-2009, what will Brian do when we have externally imported inflation hammering households, the ECB hiking rates killing off scores of Irish homeowners and we have no control over tax levers (because we have borrowed so much that rising interest rates will simply make it impossible to cut tax rates as the inflationary spiral uncoils)? Oh, I get it - he will simply remind us all of our patriotic duty to keep paying his wages.


Hopes are rising?.. No, not in Ireland, but my hedge funds networking group website has been inundated with jobs offers - sales, technical, trading etc - from US headhunters. For the first time since early 2008, the usual daily page of posts has been dominated not by 'distressed assets for sale' or 'looking for a position' memos, but by jobs offers. May, just may be, should jobs situation abroad stabilise, by the mid 2009 we will have that Irish solution to an Irish problem - emigration - becoming available to Irish financial sector professionals. Then we'll truly arrive in the 1980s scenario.


On the US data: Yesterday's data from the US is painting an interesting, and cautiously encouraging picture.

First, the jobs front. First-time claims for unemployment benefits fell a seasonally adjusted 20,000 to 654,000 in the week ended April 4. The level of first-time claims is 83% higher than the same period in 2008. The four-week average of th2 initial claims fell 750 to 657,250. However, for the week ended March 28, the number of people collecting state unemployment benefits reached yet another new record, up 95,000 to 5.84mln - double the level in 2008. Per Marketwatch, "continuing claims have gained for 12 consecutive weeks, and have reached new weekly records since late January." The 4-week average of continuing claims was up 146,750 to a record 5.65mln. The insured unemployment rate - the proportion of covered workers who are receiving benefits - rose to 4.4% from 4.3%, reaching the highest level since April 1983. All of this signals that while the new unemployment may be bottoming out, workers are not seeing an increase in new jobs availability. Of course, unemployment itself is a lagging indicator relative to, say, capital investment. Inventories declines, posted in recent days, have probably more to say about the underlying dynamics, signalling potentially a flattening of the downward trend in economic activity.

Corporate earnings... Two major corporates announced pre-reporting updates last night. Wells Fargo & Co surprised the markets yesterday with the Q1 2009 earnings note claiming that earnings will rise to $3bn - ahead of analysts forecasts - on the back of falling impairments and rising mortgage lending. Earnings figures were quoted net of dividends on preferred securities, including $372mln due to the Treasury Department. Analysts expected earnings of ca $1.94bn.

Total net charges will be $3.3bn, compared with Q4 2008 net charges of $2.8bn. Wachovia - purchased by Wells Fargo on December 31, 2008, will see net charges of $3.3bn. Provisions will be about $4.6bn in the quarter compared to $8.4bn in provisions during Q4 2008.The news drove US financials to significant gains yesterday as the markets were delighted to see the bank finding a way of generating profits out of free Federal money it received. Who could have thought that possible.

Aptly, US stocks jumped higher across the board, with the Dow Jones Industrial closing its first five-week stretch of gains since October 2007, rising 246.27 points, or 3.1%, to finish at 8,083.38, up 0.8% for the week. The S&P 500 added 31.40 points, or 3.8%, to end at 856.56, a 1.7% rise in the week. The Nasdaq Composite climbed 61.88 points, or 3.9%, to 1,652.54, a weekly rise of 1.9%.

But there were some side-line noises from the real (i.e non-financial) side of the US economy when Chevron and Boeing issued earnings warnings on the back of lower oil prices, high production costs and falling demand for aircraft respectively. No free money from the taxpayers in their sectors has meant that the real economy continues to push lower.

World's new reserve currency... We have arrived - the Euro is becoming a reserve currency. The dollar is toast per BBC's latest report (here). And no, Euro's gains are not just in the market for Russian mafia wealth (remember those €1,000 bills issued in hope of diverting some of 'cash' reserves away from dollars). In fact, it is well diversified. As BBC reports, for some time already there has been a strong movement of US rappers out of dollars into euro. And there has been growing trade in services for euro-based money laundering by the drug cartels. At last, the hopes for a reserve currency challenge on the dollar are being realised.

I am of course being sarcastic - a disclaimer I have to put up for all Brusselcrats so concerned about any criticism of the euro. But to be honest, do we know how much of the EU paper been stuffed into the black markets? Seriously: rappers, mafia, drug barons... and Chinese Government - all think euro is the best thing since sliced bread... we've arrived.


And here is the latest take on the Budget (hat tip J):