13/1/2013: Decoupling: US v Euro Area 2011-2060

Another interesting chart that speaks volumes about the topic I have been highlighting now since ca 2002-2003. The topic is the concept of 'decoupling' from growth momentum. Back prior to the crisis, European media loved the theory of China (or Emerging Economies, etc) displacing the US as the core drivers of global growth and, ultimately, as the centre of global economic power. At the same time, Brussels 'leaders' were keen stressing the theory of the European Century - the 21st century as the period of revival of Europe.

My reply to that was, and still is, that while the US share of global output is shrinking against rising EMs and BRICS share (S for South Africa) and while this trend is likely to continue into the future, it is the EU (more significantly, the euro area) that is dropping out of the global story by outpacing the decline of the US relative predominance. Much of this born out in the IMF projections. And here is a nice and concise OECD graphic for that:

So between 2011 and 2060 (yes, I know - time horizon very vast and thus forecasts very tentative), the US share of global GDP is expected to drop significantly: from 23% to 16% - a decline of under 38.5%. In the same period, euro area share is expected to shrink from 17% to 9% - a decline of just under 47.1%. Of course, Japan's importance to the global economy is likely to fall even more - by over 57.1%.

All in, the 'decoupling' (and I don't really like this term, because it implies removal of the OECD economies activity out of global activity, which is not happening) will take US, EA17 and Japan share of global output from 47% in 2011 to 28% in 2060 according to the OECD projections. 42.1% of this decline will be accounted for by the EA17, 36.8% by the US and 21.1% by Japan.

I don't think the 21st Century is shaping up to be the Age of the Euro...

13/1/2013: OECD charts the Great Recession

A nice chart from the OECD's latest Economic Outlook ppt presentation comparing recoveries in previous recessions with the current one:

Notice that the 1970s recession looks more like a U-shaped in terms of recovery trajectory, while the 1980s recession shows long-lasting rotated J-shape. Current one is at L-shape so far. Also, note that the 1980s recession did not recover the pre-recession peak activity levels before the subsequent recession hit.

Now, do give some contemplation to the current recession, together with the OECD forecasts for two scenarios: baseline (main forecast) and the scenario of continued euro area crisis:

This pretty well shows the tear-away speed of the US recovery expected in 2013-2014, compared to the euro area and Japan, as well as to the OECD overall. It also shows the degree of the US economy (forecast) resilience vis the euro area crisis.

12/1/2013: House Prices Valuations via The Economist

An interesting table from The Economist (link) on house prices in select countries (H/T to @greentak ):

Note, obviously, Ireland. Not the bits on changes in prices, but the -1% under-valuation on rents side and -5% under-valuation on disposable income side. This is interesting because, in my opinion, the prices currently are in a 'bounce-along-the-bottom' pattern.

Here are some points of thought:

• Usually, house prices over-correct, overshooting the longer-term equilibrium levels. This implies that if we are currently close to the bottoming-out of prices (I am not saying we are), then there is a fundamentals-driven upside of small proportion. 1-5% might be a reasonable range.
• Another feature is the gap in 'under-valuation' between rents-implied and incomes-implied. We have no idea what disposable income The Economist has in mind (GNI? earnings? etc - and these are non-trivial), but we do know they have 'per person' metric. Per person of working age? or children counted in as well? Setting these and other issues aside, the gap between the two is, roughly, reflected in probably two main factors: supply of rentable accommodation relative to demand (which is keeping rents lower, relative to income) and distribution of income (with more potential renters in lower income brackets, while more existent homeowners in higher, implying that renters can't convert into purchasers, while feasible purchasers have no need to go into the market). In other words, the gap is very wide and is significant, in my view, of the tenuous nature of income-based price assessments.
• The 1-5% undervaluation today, on the slope as steep (-49.4% since 2007) is highly unlikely to be the range of reasonable overshooting of the longer-term prices. In other words, if past experiences are a guide, Irish house prices can easily fall another 10% or more even if we consider the above table-listed drivers alone.

Now, as per arguments that these under-valuations are going to drive the market up, just look at Germany. According to The Economist, German house prices have an upside of 17% both on rental valuations and income valuations bases. Good luck, if you expect that to materialise. 

In short, I am not so sure the above table is meaningful in any sense. Nice to see that someone out there thinks Irish housing markets are undervalued, but I am still to be convinced that this is (a) real, and (b) likely to lead to sustained values increases. 

If you are keen to look at some interactive charts on the above data, go here.

And if you are keen on checking out one crazy property market... look here:

12/1/2013: Banks lending to private sector - Nov 2012

For much of the discussion about "Ireland is not [insert a euro 'peripheral' country name here]", here are comparatives in terms of banks lending to private sector in November. Predictably and as mentioned earlier on the blog, our lending is still contracting. On the 'positive' side, it is contracting less in Greece, Spain and Portugal for non-financial corporates, and less than in Greece, but more than in Spain and Portugal for households.

For the sake of my own physical and mental health, I am not going to give you a judgement of what this means. Draw your own conclusions.

Note: I just realised I forgot to link to the source on this.

11/1/2013: Greek Tax Revenues: Bad to Worse aka 2009-2012

And if scary charts from Ireland are not enough for you when it comes to Friday Horror Pics diet, here's one from Greece, via Fabrizio Goria ( @FGoria ):

So things went from poor in 2009 to bad in 2012... but, hey, the worst is over for the euro...

10/1/2013: Heritage Foundation IEF 2013: Ireland

Heritage Foundation issued their annual Index of Economic Freedom.

Here is summary of results for Ireland and you can explore data and comparatives yourself here.

And some charts for regional peer group leaders (Switzerland and Ireland):

 And overall score comparatives:

As usual, my methodological criticism of this analysis is that it relies on GDP, not GNP, which means we get artificially inflated readings on all variables involving National Income. The analysis also omits consideration of indirect taxation burden.

Much of the weakness in individual methodologies can be glimpsed by using heat maps (here) which throw some bizarre results. But do have fun and explore...

8/1/2013: Unemployment in Europe: The Ugly

Euro area unemployment figures for November are out and the ugly, truly abysmally ugly reality of the EA17 economic conditions can no longer be hidden from view:

Per chart above, seven out of EU27 states have overall unemployment rates above 14%. A year ago, there were 5. 19 states had higher unemployment in November 2012 than in November 2011, 2 had identical rate and 6 have seen unemployment levels decline.

Just under 1/4 of all young people in the labour force in EA17 are now unemployed. This doesn't include: students held over in studies beyond their optimal studies duration by the prospect of not having a job, life-long young unemployed, emigrants and 'one-year visa-holders', and in some countries, this also excludes those who are 'engaged' in state training programmes.

In Greece, the rate is at 57.5% and in Spain it is 56.5%. In five out of 27 states, more than 1/3 of all youths in the labour force are now unemployed.

In Ireland - Europe's poster-boy for 'austerity' and recovery - the rate of youth unemployment (and recall that Ireland has the youngest population in the EA17) is now running at 29.7% (down from 30.5% y/y), the 7th highest rate in EU27.

In the 'Social Welfare' haven of Europe, 24.4% of younger people are unemployed. In the US the rate is 15.6%. Virtually every economy - save Germany - has unemployment rates for younger workers in excess of where they were at Euro introduction point.

8/1/2013: Some Notes on Green Shoots

Here's a summary of my points from tonight's RTE Frontline discussion. Note: these are not exaclty written up as an article, so treat them as working notes.

As a preamble, let's recognise three things:

1. The current Government did inherit the economy effectively dead on the ground - at the bottom of a massive cliff. Since then, the economy remained largely static and structurally virtually identical to the one in 2010.
2. The current Government did inherit a policies straight-jacket, breaking out of which would have required a massive amount of courage and leadership.
3. The current stabilization can lead to an uplift in growth, to 1%-1.5% pa on GDP and under 1% pa on GNP side, but I would not call such a development 'green shoots'.

In my view, two rhetorical or allegorical analogies can be made for the Irish economy today:

One: the economy is a glass-half-full for the few (MNCs & some exporters) and empty for the many (ordinary households and SMEs).

Another: the green shoots we might be seeing in months to come are more likely the shoots from the last years' crops seeds that have failed to germinate in 2010-2011. The field of the Irish economy has not been properly seeded in years now.

Four core problems faced by Ireland going into 2013 are largely the same ones as we faced in 2008-2012 and the same ones the Coalition Government had highlighted in years of opposition:

1. Fiscal deficit and debt
2. Banks 
3. Households debt
4. Growth and structural reforms

On (1): Fiscal deficits and debt

• Fact: Debt continues to rise, and is expected to hit (December 19th, 2012 IMF report) 122.5% of our GDP this year. At the end of 2011 it was 106.5% of GDP and thus the current Government has added/adding 16% of GDP or EUR35 billion worth of new debt. Most of this is not banks-related as the bulk of banks recaps took place in 2011.
• Fact: Primary deficits have been cut significantly: from 5.9% in 2011 to 1.8% in 2013 expected. Yet in 2013 we still will have second highest overall fiscal deficit in the Euro area, possibly - highest, depending on what other countries do. We also have rapidly expanding interest rate bill - the increase in interest charges on the state in 2013 y/y will consume almost 2/3rds of the austerity 'savings' generated in Budget 2013.
• Fact: The government continued with the programme of, what I call, quick-fix or 'fake' austerity that primarily focused on cuts to capital spending and tax increases, and not on structural reforms. Let's take a look at 2012 - the year when the Government was claiming to have been focusing on growth. Net Voted Capital spending was cut 19% - an overshoot on targets by 4%. Net Voted Current spending was not cut, but actually rose 0.1% y/y or 1.6% above the target the Government set in April 2012! That's a rate of overshooting of what ca 2.4% for the full year.
• So the Government has delivered so far: higher debt and higher current spending, higher taxes, higher charges, lower capital spending and, thus, lower investment and jobs.

On (2) and (3): Banks and Household Debt

• Fact: Lending by the banks continued to contract in 2012. Loans to private sector in Ireland, within covered banking instituions have declined on aggregate by over 4.3% in 12 months through November 2012. Rate of decline in loans to Irish households in July-November 2012 never once slowed below 3.6% and since this Government came to power, household loans are down 19% in total, mortgages down 20%, consumer credit 22%. All three continued to decline m/m in November 2012.
• Fact: Deposits have stabilised and expanded by 2.6% in November 2012 y/y, but the fabled 'savings' glut the Government so much decries has not translated in real pay downs of Irish households' debts. We still have the most indebted households in the euro area. In fact, IMF has highlighted that for the Government in their recent report and yet there is little movement on dealing with this problem.
• Fact: Banks are overcapitalised and zombified and the Government has no control over their internal practices or operations. Thus, mortgages rates are going up on ARMs and unsecured credit costs are rising in massive jumps despite the claims of 'improved funding outlook' and ECB continued liquidity supports. 
• Fact: Banks were given yet another 'trump card' at the expense of the country, by the Government, the veto power in the new Personal Insolvencies Regime
• Fact: the IMF has warned very clearly in its December statement that Irish banks remain source of risk in light of mortgages crisis. 
• That mortgages crisis, may I remind the Government, is accelerating once again, even before the fig leafing of the 'Insolvencies Reforms': in Q3 2012 we had over 181,000 mortgages at risk of default of defaulted - up 6.5% q/q and 22% y/y. When this Government came to power there were 131,000 mortgages at risk of default or defaulted. This Government's 'repairing of the banks' has contributed to adding some 50,000 to these.
• The debt crisis in Irish homes is now out of control and all we hear from this Government is the promise of the Insolvencies Regime reforms that will provide no support for troubled homeowners, property tax on negative equity homes, more semi-states price hikes on homeowners and householders, plus 'My Hands are Tied' when it comes to dealing with the banks from the Ministers in charge of this economy.

On (4): Growth:

• The Government puts forward two core figures identifying its recent achievements: lower unemployment and positive growth. Both are - at best - glass half-full.
• In 2011 GDP went up 1.4%, but GNP contracted 2.5%. In 2012, we can expect GDP to increase by around 0.4% and GNP to shrink once again by ca 0.5% (IMF data). 
• Since the Government came to power, GDP in this country has grown so far by ca 1.8% cumulatively, and GNP shrunk by ca 3%. The economy is flat on the ground and showing no real signs of a robust recovery. It is not contracting outright, but given the gravity of the fall, this 'stabilisation' is a poor showing.
• Unemployment: official QNHS data for Q3 2012 shows that unemployment declined 0.2% (-3,600) on Q3 2011. But the number of people in the labour force has fallen -7,900 - more than double the rate of unemployment decline.  Live Register shows decline (December 2012 on 2011) of - 11,051 signees, yet almost half of these declines can be accounted for by people engaged in State-run Training Programmes. Based on exits from the workforce in Q3 2012, this suggests that the Live Register drop in 12months through December 2012 can be accounted for by people running out of benefits and joining State training programmes. In other words, jobs creation is not doing anything to add net new jobs in this economy. 
• Since Q2 2011, when the Government took office, numbers of people in employment declined 20,000, in full-time employment - dropped by 29,000.
• Quoting from the CSO: "The number of persons employed decreased by 0.2% (-4,300) over the year to Q3 2012. This compares with an annual decrease in employment of 1.3% in the previous quarter and a decrease of 2.1% in the year to Q3 2011. The annual rate of decrease of 0.2% in the year to Q3 2012 is the lowest since employment first decreased on an annual basis in the third quarter of 2008." Glass half-full if you kept your job, empty if you lost one or are looking for one.
• The retail sector continues to struggle. Headline figure today for November sales is a decline of 0.2% in the value of all sales, y/y and a decline of 0.5% in the volume. This at least partially controls for the uncertainty of Budget 2013, as it compares sales to the period of uncertainty about Budget 2012.
• Note: Minister Rabbitte made a reference to the m/m decline in sales of TV equipment as the core driver of declines in retail sales in November. This is simply 1% of the truth. In y/y terms, largest drops in sales were in Motor Trades (-4.5% in value & volume), Furniture and Lighting (-9.0% and -4.5% in value and volume), Books, Newspapers and Stationery (-8% and -9%) and Other Retail Sales (-8.3% and -7.1%). Seven out of 13 categories of sales posted declines in value of sales, y/y and nine in volume.

On Structural Reforms:

• We need reforms of charges and fees in professional services, as well as in semi-states' controlled costs (energy, health insurance, education, transport, etc) - none were enacted so far by this Government to-date.
• We need reforms of local authorities to reduce rates on businesses and to improve value-for-money - only minor, unambitious approach was taken so far by the Government, aside from creation of (for now) centralized 'local' property tax. Again - revenue measures were put ahead of structural reforms.
• We need reforms of the Government services - reflected not on the capital side or revenue sides of the budget but in current spending - little done so far, short of slash-and-burn through the easier cohorts of employees (part-timers, contractors) and the continued loading of costs onto the shoulders of services users (the largest component of so-called 'cuts').
• We need reforms to boost our institutional competitiveness - outside semi-states and public services, in areas such as taxation system, entrepreneurial supports (including tax policies), international trade, visa regimes, mobility of residents who are non-EU nationals (especially within professional grades, where such mobility is critical to their productivity), etc. Nothing, or even the opposite of the reforms is being done by the Government.
• We need reforms of personal insolvencies regime to help homeowners and to stop the cancer of debt spreading uncontained. Very little is being done on this front by the Government.
• We need political reforms to create an environment where policies are created not in a near-vacuum of the Ministerial Panels or Super-Groups, but in the open, with real debates, real testing by the Dail and the public, transparently and beyond the whip system constraints.

I am going to be brief on the outlook for 2013-2015. If we do the above, and do it well, we shall see a robust, sustainable recovery, starting with mid- or late-2013 and gaining momentum into 2015, with potential rates of growth at around 2.5% in 2014 rising to 3.5+% in 2015. If we have also positive global recovery environment to aid us, there is no reason why growth of 5%+ in 2015 should be off-limit. 

7/1/2013: Falling speculative investment interest in gold

In two recent posts I covered US Mint sales data (annual and monthly) for gold coins. The core theme of both was the return to fundamentals in demand as signaled by sales volumes. Such a return, of course, is the flip-side of the retrenchment by speculative investors. Here's a chart from BCA from November 2012 showing just that process working through:

Note: Disclosure in the first link above.

7/1/2013: A scary chart from Spain

If you want a frightening figure for the start of the week, here's one, courtesy of the WSJ:

Per WSJ: "At least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt, according to official figures, and the government has begun withdrawing cash for emergency payments."

"In November, the government withdrew €4 billion from the reserve fund to pay pensions, the second time in history it had withdrawn cash. The first time was in September, when it took €3 billion to cover unspecified treasury needs." Such withdrawals can lead to sales of bonds, which in turn can lead to higher yields - classic scenario of a ponzi scheme unwinding.

The point is not valuations, but risk.

"Spain will have trouble finding buyers for the estimated €207 billion in debt it plans to issue in 2013, up from €186 billion in 2012, to cover central-government operations, debt maturities of 17 regional administrations, and overdue energy bills," according to WSJ. 

But there is, of course, more. "Spain's commercial banks already have increased their Spanish government-bond portfolio by a factor of six since the start of the crisis in 2008, and now own one-third of government bonds in circulation." In other words, there is a closed loop between Spanish State, State pensions fund and the banks. A liquidity crunch or solvency problems for banks will cascade all across the debt markets, potentially triggering defaults on pensions.

Note: per Eurointelligence report earlier today, "This is old news as already back in June there was a report that Spanish debt holdings by the Reserve Fund had gone from 55% in 2007 to 90%, and it was government policy to reach 100% by replacing maturing foreign debt holdings with new Spanish debt. It is also a bit of a noisy red herring, as a stock of €65bn is about 2/3 of the government's annual pension bill, it is clear that the Social Security Reserve Fund accumulated over the past decade can never be a substantial contributor to future pensions. However, the Euro's prohibition of central bank financing of state budgets may require the creation of such buffer stocks"

6/1/2013: 'Stone Age' of journalism?..

A quick note on something that has been bothering me in recent days.

"Much internet journalism at level equivalent to Stone Age" was a headline in a recent Irish Times opinion piece (no link, per Irish Times confusing attitudes to links).

One wonders - does that include internet writings / blogs /online-journals contributions by scores of scientists, economists, political scientists, sociologists, artists, philosophers, historians, institutional researchers, political leaders, etc?..

Much of what is written on a daily basis in newspapers is authored by professional journalists (occasionally - original research, but more often - re-communication of others work; professional in quality, but still - secondary in nature). A lot of what is written on the web is authored by original creators / discoverers of ideas, it is often discussed on the web by people who shape these ideas in debates not feasible in print media nor on print media web platforms, and it is often unique to the 'Internet' platforms, especially to pure web-based platforms.

So 'Stone Age' Internet journalism? or 'Tone Deaf' print opinionism? 

6/1/2013: Houston, we've got a (US) problem?..

2013 biggest Grey Swan might be not China's slowdown or Euro area's continued debt crisis (although both are pretty much still on the books, although the former is less likely than the latter). It might not even be the Japanese economic implosion (albeit Japan is sick beyond any repair)... oh, no... the real Grey Swan of 2013 might be the markets starting to take a closer look at the US.

This might sound bizarre during the weekend following Friday, when the VIX index collapsed 39.1% - more than in any other trading day in its history, and when the US markets have ended the first week of the year with total gains almost equivalent to what some are projecting for the entire 2013... and yet... as some would say: "Houston, we've got a problem!"

The problem is best illustrated in the following three sets of chart, all comparing US fiscal performance to the peers.

Structural Deficits:

As two charts above highlight, the US Government structural deficits are massive. Since 2011, these are shallower than those of Japan (and Japan's figures in charts above are likely to become even worse following the latest Government appointment and their commitment to debase/in-debt the Japanese economy out of existence) but they are the worse in the entire G7 group save for Japan. More ominously:

• The IMF is predicting the structural deficit to worsen once again starting in 2015
• The above projections by the IMF do not reflect the disastrous consequences of the 'Fiscal Cliff' deal struck on December 31, 2012 (see here).
• In 2013, US structural deficit is projected to be around 5.49% of GDP against the G7 average of 3.04%
• In 2010-2017, according to the IMF projections, the US cumulated structural deficits will add up to 44.84% of GDP - against Japan's 58.53% and the G7 average of 24.97%. For 2013-2017, the same figures are: US 21.43%, Japan 33.31% and G7 average 10.48%. In other words, things are going to get worse in the US compared to G7 average in 2013-2017 than they were in 2010-2012. They will be worse still in Japan, but everyone expects Japan to remain the sickest member of G7, so there is little surprise or repricing that can be expected before the US risks are repriced.

Primary Deficits:

Ugly picture for the US vis G7 counterparts continues with primary deficits as well. Per above:

• The US is the second weakest link in G7 in terms of primary deficits
• In 2010-2017 period, the US is expected to generate cumulated primary deficits amounting to 37.65% of GDP and this is against Japan's 52.42%, but G7 average of 15.99%. In the period from 2013 though 2017, the US cumulated primary deficits are expected to come in at 14.21% of GDP against the G7 average of 3.54% of GDP and Japan's 25.73% of GDP. Once again, relative to G7 average, the US performance is expected to worsen in 2013-2017 compared to 2010-2012.

A table to summarise the above two sets of charts on a longer time horizon scale:

Government Debt:

The US is positioned as the third weakest G7 economy in terms of levels of Government debt it carries - after Japan and Italy. However, this analysis neglects the fact that according to the IMF projections, the US debt situation is expected to continue worsening through 2016 (when US debt is expected to peak at 114.19% of GDP), while Italian situation is expected to improve from 2013 peak of 127.85% of GDP into 2017. Similarly, compared to G7 average, the US debt dynamics post-2013 are unpleasantly convergent to the higher G7 average (driven by Japan's debt levels).

Stripping out Japan from debt analysis:

• In 2001, US debt to GDP ratio stood at 11.83 ppt below G7 (ex-Japan) average. By 2012 this number has reversed into US debt overshoot of G7 average by 10.06 ppt. By 2017 the same overshoot is expected to rise to 19.57 ppt.

Table below summarises the long-range view of the charts above:

To summarise the above evidence, the US debt levels are not sustainable in the long run, even though current growth (above debt financing costs) and funding costs (exceptionally low yields on Government bonds and the printing press effect on these yields) are delivering short-term sustainability. However, as shown above, the US primary deficit ius huge and not abating fast enough. This implies debt to GDP ratio will be rising into 2016, if not after. Which, in turn, implies rising susceptibility of the US to risk-repricing in the markets.

It is worth contrasting the US case with that of Italy and Japan. In Italy's case, there is significant surplus on the primary balance and overall deficit due to high cost of funding even higher debt, compounded by economic growth well below the cost of funding the state debt pile. In Japan - there are severe problems across all parameters: high primary deficits, growth well below the cost of debt funding, and debt pile so large that structural deficits are alarming.

All of which means that all three economies can be severely tested by the markets. As long as global economic environment remains that of subdued economic activity, so that risk aversion remains high and monetary policies remain extremely accommodative, the US is out of the investors' crosshairs and Italy is in. Should these environments change, all bets are off for the US - at least in the medium- to longer-term.