Economics 2/7/10: The markets way of saying 'No'

Just in case anyone reading the vitriolic blogosphere stuff about my conclusions questioning the 'turn around' in the Irish economy based on the 'nominal data' (apparently there are people out there capable of commenting on economy, yet unable to read in plain English), here's another take on our 'turning the corner' path. This time from the bond markets: 10-year bond yields for Ireland (red) and Portugal (black) - hat tip to Brian:
Notice Ireland hanging above Portugal in the chart, and notice the path we took since January 2010.

My entire analysis of Irish data to date is consistent with the markets pricing of Irish economy. So either a couple of nameless commentators on Irish posting boards are off in their views of reality, or the entire market is plain wrong. What was it, that someone once said about doing something against the gale force wind?

Economcis 27/06/2010: US retail sector - lessons for Ireland?

A very interesting perspective on the consumer side of the US economy in a recent post on Seeking Alpha (here):

"Let’s compare and contrast 2007 and 2010:

• We have lost 7.8 million jobs since then.
• The unemployment rate is 9.7% versus 4.5%.
• Total unemployed workers are now 15.7 million versus 6.5 million.
• Real personal income less government transfers is lower by 6.5%, or $624 billion.
• Real retail sales have rebounded just 4% from their lows and are still down 9% from the 2007 peak.
• Consumer credit for February showed another sharp retrenchment of -5.6B.
• Consumer bankruptcies for March were the highest level since 2005.
• There is a glaring $1.5 TRILLION hole in the consumer balance sheet.
• Home foreclosures surged 19% last month and are at their highest level since 2005.
• The consumer’s largest asset (housing) is down 33% since 2007."

And a chart:
The index closed down at 89.49 this Friday.

This has three implications for Ireland:

1. US problems on consumer side pale in comparison with those found here. We had much deeper contractions in housing asset prices, much greater exposure to housing in the overall composition of household assets portfolios, much more severe acceleration in unemployment, much deeper collapse in disposable after-tax incomes (courtesy of twin forces: Government tax policies and indirect tax hikes, plus wages compressions), lack of compensating increases in Government transfers, more restrictive personal bankruptcy laws, greater consumer leveraging, and steeper fall-off in credit availability;
2. As I wrote before (here), household investment is the core leading indicator of recoveries and recessions; and
3. Our cohort of official commentariate on matter economic has been very eager to drum up the stories about 'return of consumer spending' in recent weeks.

To remind you - here are our latest retail sales stats:
In my view, what we are seeing is a temporary uplift in sales of some items that are overdue replacement (due to amortization) after 3 years of collapsed sales. This, folks, is not a recovery. It is a dead-cat-bounce... When you hit concrete at 100mphs, the bounce can be substantial. But it hardly qualifies as a 'structural improvement'. Looks like some folks might be deluding themselves...

Economics 30/05/2010: A gargantuan task ahead

As the Government continues to insist that the worst is over for Ireland Inc, let us consider some headline numbers on the structure of our public spending.

The figures reported below refer to 2008 comparisons, so they omit most of the horrific fall-out from the current economic crisis. as such, these comparisons relate more to the structural imbalances our state is running, not to the recessionary effects. This is worth keeping in mind, for it means that the differences between Ireland and other states reported below, as well as the adjustments required for us to reach sustainable long term equilibrium on spending and taxation sides will have to be put in place no matter what happens to our economy in years to come. It is also worth keeping in mind because the figures reported below underestimate the extent of our post-2008 imbalances compared to other countries that had experienced much less pronounced crisis over 2009.

All data is taken from the publicly available sources - the IMF and CSO - so the Government and our tax-and-spend crowd of Unions-led economists are fully aware of these. Plausible deniability does not apply, therefore, when it comes to our Government pronouncements about its policies and the current position of the Irish economy on international competitiveness scale.

Chart above plots Ireland's position vis-a-vis its peers in the developed world in terms of the overall size of the primary (non-capital) share of public expenditure in the economy. Two facts worth highlighting here:

• Ireland's Government spending as a share of our real economic income (GNP) is the second highest of all countries in the group, and is well in excess of the average for small open market economies (SOME). It is in excess of Germany (Berlin) and well ahead of the US (Boston).
  
• By this metric, Ireland simply does not qualify as a 'market' economy, as domestic private sector accounts here for less than 47% of GNP! In the USSR of the 1980's, private economy (black market) accounted for around 40% of the total GNP. Get the comparison?

Chart above shows that Irish public sector is clearly one of the most lavishly paid one in the entire developed world. In fact, our public sector wages and earnings swallow over 14.4% of our national income, making Ireland's PS workers the 5th highest paid (on aggregate) in the advanced world. The gap between Irish public sector earnings bill and that for the average SOME is a massive 4.47% of our GNP. Roughly speaking Irish public sector wages bill contains a roughly speaking 48% premium relative to the PS counterparts in similar economies around the world. Clearly, even the reductions in overall take home pay imposed on PS in Budgets 2009-2010 has not erased this premium, especially when one recognizes that since 2008 our GNP has contracted almost in line with the decline in PS pay.

Chart above maps Ireland relative to the US (Boston) and Germany (Berlin) to show just how absurd the whole notion of Ireland Inc being positioned between Boston and Berlin is in the real world. In reality, just one parameter - Social Benefits as a share of GDP/GNP - marks our relative position as being between Boston and Berlin. In every other parameter, we are a basket case of excessive public spending and taxation relative to both the US and Germany.

With the above data in mind, what adjustments in the budgetary positions will be required to bring Ireland into the exact position of being between US and Germany to reflect our stated competitive benefit of being an economy that can facilitate trade and investment flows between the two giants - the EU and US?
To restore our competitive balance we need:

• A cut of €23 billion in gross annual primary spending by the state (current expenditure) - some 14.7% of our GNP. Not €3bn as Brian Lenihan is doing, or €3.5bn as An Bord Snip Nua was suggesting. A whooping €23 billion, folks!
• The cut above cannot come from the capital budget side - where most of the cuts so far took place. It has to be cut from the current expenditure. The reason for this is simple - capital spending is one-off item of expenditure and it is associated, in theory, with a net positive return on investment. Current spending is permanent and yields no financial return.
  
• The cuts must include at the very least a €9.3bn reduction in the wages and pensions bill in the public sector (5.9% of GNP or almost 44% cut in the total PS wages bill, achievable through both reductions in numbers employed and wages paid and pensions benefits entitlements).
• Social benefits, at least in the long run, actually are in line with us being smack between Boston and Berlin, so no adjustment is needed here in the short term (given further deterioration in the fiscal position in Ireland since 2008, I would actually recommend a temporary cut here. Also, longer term reforms, to change the structure of welfare benefits and state pensions must be enacted, but for the reasons different from the budgetary considerations).
• Instead of raising tax revenue, Irish Government should engage in a dramatic reduction of tax burden on the economy. Generally, total tax take in the Irish economy exceeds the average Boston-Berlin position by 6.5% of GNP, requiring a reduction in overall tax burden of €10.3bn on 2008 numbers.
• This reduction in the tax burden should include a cut in personal income tax, CGT and personal gains/profits taxes of 2.1% of GNP or €3.3bn.

There is absolutely no ground for our Government and policy leaders' claims that Ireland is strongly positioned between the low(er) tax US and high(er) tax Germany as a competitive destination for exports and investment arbitrage. In fact, due to the Government-own policies, fiscal and tax imbalances created in this economy mean that we are, at a macroeconomic level, grossly uncompetitive relative to

• both the EU and the US,
  
• as well as relative to our main competitors world wide - the small open market economies.

Economics 25/09/2009: Don't believe 'our recovery plan' drivel

I like some of our brokers guys and gals, I really do – they are intelligent, ambitious, outwardly mobile in their outlook and hard working. They often spot the rat, although usually warn of its existence only privately. But the current Nama and Lisbon ‘debates’ are just too much for them to bear without assuming the usual 'hand in the sand' positions.

First Davy strategist was telling us all that everyone criticizing Nama is a ranting lunatic (at the very best) or a deceitful manipulator (at its worst). I obliged to reply here.

Now, Bloxham folks lined up to spout nonsense as well. Here is an example from today’s morning note: “A Yes vote [in Lisbon Referendum] would be seen as positive [one assumes by the markets] and would keep recovery plans on track ahead of the critical NAMA vote…”

I don’t give a damn how Bloxham modeled their assertion on the markets' assessment of an outcome of the Lisbon vote. The Wall Street Journal disagreed with them. Studies performed on sovereign default spreads in the Eurozone and bond spreads are inconclusive one way or the other. But one thing is certain when it comes to spotting a lie in their statement: an assertion that either Lisbon or Nama or both can ‘keep [Irish] recovery plans on track’.

This is a first class bullshit.

One minor point why this statement makes absolutely no sense is that the 'distance' between the Lisbon vote and Nama vote is going to take place within a couple of weeks there after, around October 14-16. If Irish economy is so critically sick that a difference of two weeks can push it off the track, I wonder if Lisbon vote would be of any priority for our stock brokers at all.

Now to a bigger lie in the above statement:

In order to keep plans on track, one must first have a plan. Or at least and inkling of one. A handful of morsels of thought saying: we want to do A to achieve B… and a short list of actions to be taken to get there. This is a starting point for any logical ‘keeping on track’. And, guess what, unless you are smoking the same stuff folks at Bloxham are, there are no plans. Let me repeat: there is no plan for an Irish economic recovery.

Fiscal crisis: this is Government’s own backyard, so we should expect that at the very least here the Cabinet has done some homework on getting a plan for recovery started. Nope. McCarthy Report and Taxation Commission Report – two key pieces of policy strategy are now largely binned by the Government. It is clear that there is no will in our Triumvirate to do anything serious about the expenditure side of the fiscal crisis. Even Bloxham guys would probably agree that in the current conditions there isn't anything new they can do on tax side of things either - short of turning us all into serfs. The fiscal stabilization ‘plan’ presented officially by DofF following the Supplementary Budget 2009 was a re-hashing of the exactly identical ‘plan’ from January 2009 which was rehashing the ‘plan’ from October 2008 Budget. All three were not realistic in their assumptions and expectations and all three had not a single year of declining nominal current public expenditure between 2008 and 2013.

Economic crisis (domestic economy): this Government produced only one strategy document on domestic economy. Don’t call it a policy document, for it is too vague and lofty to be a policy. Their vision of the future of Ireland Inc was, and remains, in a nutshell, a combination of lab coats with Petri dishes in hands growing thoughts and knowledge in the foreground and windmills spinning out green energy in the background. The ESB is in existence too, with new sparkling headquarters and, one assumes, smokestacks belching CO2 to offset green energy from the windmills. If Bloxham folks think this drivel passes for a plan, good luck to them. Domestic consumption is being killed off by reckless tax increases. Domestic investment is being kept below the water line by absurd taxes on capital, charges on capital-intensive activities and depressed savings of the households. Households are prevented by the Government from de-leveraging and will be facing increasing costs of mortgages and credit post-Nama due to banks hiking up charges and margins.

Economic crisis (external economy): apart from IDA’s advertising campaign launched last week by our unfortunate choice of a Tanaiste, there is no plan for improving competitiveness of Ireland Inc vis-à-vis foreign investors and domestic exporters. There are no reforms in the pipeline to help improve their operating costs, capital costs, costs of electricity, gas, water supply, costs of currency risks on sterling and dollar side, costs of labour, health & safety, costs of buying out trade unions into agreement not to derail investment and production, costs of state-controlled and regulated transportation, energy, communications, etc services.

Financial crisis: half-thought through idea of Nama is unlikely to do anything significant to improve flow of credit in this economy – I wrote on many occasions about the risk of capital being transferred out of the country and about banks’ incentives to pay down inter-bank lenders, plus about potentially zombie banks and development markets, dormant / dead property market and other potential downsides to Nama, so no need to repeat this here.

So, my dear friends at Bloxham, what is the exact ‘plan for recovery’ that we will 'keep on track' if we vote Yes to Lisbon and/or Yes to Nama? Name one, please…

Daft, Capital, I-Stocks: Daily Economics 06/04/09

Update: This country is in a crisis. The Government is about to put out a major Budget. It itself is in crisis facing the questions as to whether they have a mandate to rule. And amidst all of this, Mr Cowen puts forward Willie O'Dea to advocate Cabinet's positions on the economy? banks? public finances? What O'Dea has shown in this performance - a mixture of remarkable ineptitude (in addressing the real issues faced by the economy) and arrogance (in espousing the belief that his Government can get away with the squander of funds and disastrous policies have marked and still mark years in power) - was embarrassing and insulting. It is time for this Government to resign. Now! No renewal or regeneration or recovery of any kind can take place as long as the failed leadership and ministerial 'talents' like Willie O'Dea and Mary Coughlan remain in place.


Daft.ie report is out on house prices and given that the media has covered the results, I would just post the link to the report (here).

Liam Delaney has an excellent essay/intro commentary to the report. Here is a quote:
"This report - combined with the recent labour force figures - indicates considerable hardship for those in once solid middle-class jobs that are now facing a potential double-whammy. People will inevitably feel even worse when they see neighbours and friends who are in better situations. Consider the position of a college graduate who purchased in Dublin in 2006, based on the income from his financial services job (now gone), to the position of his neighbour who secured a public sector position on leaving college and purchased in 2001. While neither is laughing, the latter must at least be considering himself the better off of the two. They are certainly not in the same boat and the widening rift in society being generated by asset price decline and employment uncertainty is the defining theme of our time."

All I can add to this is that of course the public sector worker is also protected by Messrs Cowen and Lenihan who are working hard to make sure the unions are pleased and appeased. The private sector worker is screwed. Most likely, due to her high income in the past, she is considered rich by our Government and given that she worked in the financial services she is described as pariah by the unions and the Left. Monetary loss, job loss, tax hikes, moral abuse by the Fintain O'Toole-Joe Higgins crowds, and negative equity... and more tax hikes... this is her lot in the 'Fair Society' that is Ireland of Brian, Brian, Mary and the Bearded Men of SIPTU/ICTU.


Capital Assets Acquisitions (CAA) report was out today from the CSO, showing that industry CAA in Q4 2008 reached €1,298.2m down on €1,441.3m in Q4 2007.

Machinery & Equipment acquisitions led with €779.1m in Q4 2008, down on 2007 level of €933.5m. Electricity & Gas Supply category accounted for almost a half of the entire pool of acquisitions in this sector - €376.7m in Q4 2008. Surprisingly, Land & Buildings acquisitions were €291.0m, up on €232.3m in the Q4 2007. In a potential sign that some companies are in distress, total Capital Sales were €112.2m, compared with €73.4m in Q4 2007.

Capital Acquisitions of Computer Hardware & Software in Industry were down from €217.1m in the full year 2007 to €146.4m in 2008. Machinery & Equipment went from €3066.5m in 2007 to €3,136.0m in 2008. Land & Buildings acquisitions were up from €671.4 in the entire 2007 to €1,198.1m in 2008. Vehicles & Other Assets fell from €538.1m to €499.7m between 2007 and 2008. How can this discrepancy - declining productive capital acquisitions and rising property/land acquisitions - be explained?

Here we have to speculate, but Publishing & Printing and Chemical Products were the only two sectors with significant new acquisitions over 2008. Now, the former is small in absolute terms, the latter is not. Both are not exactly the sectors where large land banks held off-the-balance sheet could have been brought back via an acquisition. Both sectors, however recorded no matching increases in other capital acquisitions. So this not a story of growth either. I would suspect that on Chemical Products sector side, there could be some capital plays involving transfer pricing.

Industrial Stocks data was also out today. Chart below (courtesy of CSO) illustrates the rate of production slowdown catch up with demand collapse in Q4 2008.
Notice a distinct ramp up in total industrial stocks between Q1-Q3 2008? This was the denial stage - companies kept churning out vast amounts of stuff that found fewer and fewer buyers. Then Q4 2008 hit - jobs cuts, shorter work days etc and you have a fall off in stocks. Now, this is clearly not a leading indicator of things to come, but... the thing to watch is whether the stocks recover to positive growth territory in Q1 2009. If they do, given the levels of layoffs in January-February 2009, there will be no quick rebound in the economy, as return to positive growth in stocks would imply that diminished productive capacity is not restoring supply-demand equilibrium. A strong bounce in Q1 2009 will potentially signal further layoffs down the road...