Economics 15/08/2009: US rally is unlikely to last - implications for Ireland

Some are making lots of hay out of the idea that Germany, France, the US and the UK economies are improving and that this will have a positive effect on Ireland. Let me play a devil’s advocate here.

Yesterday I wrote about my view of GDP growth debate when the premise of growth is predicated on our exports (here).

One more factor is worth considering in this debate: interest rates and FOREX.

Scenario most likely: US is coming out of the recession in Q1 2010. By then, inflationary pressures are building up in the EU (we might be still below the target rate, but Monsieur Trichet is by then fully cognizant of deflation being over and money supply being out of whack by a thousand miles stretch). US inflation is already there, also below the target, but much closer than Eurozone’s. What happens next? Interest rates rise in the US and in the Eurozone. Dollar/Euro rate heads South, boosting our exports somewhat. But our CPI heads North as a combination of high taxes and rising mortgage financing costs wipes out households’ saving nests. Do you call this ‘growth’? or do you call it a disaster? Brendan Keenan and the likes of Davy seems to be happy to say it is the former. I would conjecture it is the latter.

Scenario less likely: US and EU come out of the recession jointly – around the end of Q1 2010. This means all of the above, but with Euro actually staying strong or even appreciating against the dollar. Double whammy then.

So let us cheer carefully any turnaround in the ‘partner’ economies, then…

But now, consider the whole idea of a turnaround. So far, our not too financially savvy media has been confusing stock market rally with economic fundamentals. I fear this is about to change in September/October. Here are three barometers:

Barometer 1: Personal. Last year, the crisis in our markets spelt a dramatic decline in my own income by ca 80% within a span of August-October. This year, the same process has just started anew with my sources of income falling and companies owing me cash falling further behind on their payments. And we are talking non-trivial amounts backlogged for over 90 days on invoices.

Barometer 2: Global trade. Once again, 2008 is perfectly reflected in 2009. In 2008, crisis in global trade and finance was pre-dated by the bottoming out of commodities cycles in late January 2008. In 2009, the same has happened in February 2009. As economy fell in 2008, Bear Sterns got rescued (March 15, 2008). In 2009 it was the turn for the Obama’s economic stimulus package – signed on March 6, 2009. Now, all along, global trade collapse followed smaller pre-shocks. June-August 2008: Baltic Dry Index, having peaked in May, collapsed 28%. June-August 2009, having peaked for the year in June 2009, BDI falls 25%. All seasonally adjusted, mind you. In 2008 this was followed by massive short selling in the financial markets and bottoming out of stock markets on July 15, 2008. Short-covering leads to a rally thereafter with the next two weeks yielding a 5% rise in S&P500. In 2009 the story is slightly different yet the timings are the same and the net impact is the same as well. Banned naked shortselling implies longer lags for translating expectations into price movements, so July 10 stock markets bottom coincident with the Fed injecting some $80bn into the market for the first time in a month, produce a short-covering rally of 12% (S&P500) in exactly the same period as last year.

Barometer 3: Fundamentals. In the meantime, as 2008 short-covering rally was unfolding, global trade was shrinking fast – chart below.

In case you are still wondering, the same has happened in 2009 so far (chart below):

So in both years we have BDI scissoring away from the S&P500 – right before the main wave hits the shores on Wall Street. The real economy took hold with a delay back in 2008 due to the short-covering rallies triggered by regulatory moves. Ditto this year. And trade flows fundamentals are not alone in showing no support for a sustained rally in the stock markets. Here are some other signs:

Short run dynamics in the stock markets are now firmly showing increasing volatility: VIX has declined from July 2008 through August before taking off up the cliff in September 2008. So far, the same dynamics are present in terms of decline and increasing volatility of VIX itself.

The US consumer sentiment index fell unexpectedly in early August to 63.2 from 66.0 in July - the lowest reading since March, according to the Reuters/University of Michigan index. Now, as the chart illustrates, UofM survey index also peaked in August 2008 before heading rapidly South.
Although the seasonally adjusted output of the US factories, mines and utilities increased 0.5% last month (for the first time since December 2007), reversing course after a 0.4% decline in June, annual output is still down 13.1% in the past year. But the current bounce is fictitious, as capacity utilization increase from 68.1% to 68.5% was minor and on top of the record low of June – so no restart of an investment cycle any time soon. Worse than that – all gains in industrial output in July were due to teh US car makers deciding to re-supply stocks. Motor vehicle production jumped 20.1% on a back of a planned increase following earlier severe production cutbacks as General Motors and Chrysler went through bankruptcy. So ex autos, industrial output for July was off 0.1% while manufacturing output rose just 0.2%. Output of high-tech industries rose 0.4% in July (still down 20% in the past year).

Finally, unemployment – I wrote about this ‘surprise dip’ in last month’s unemployment figures before (all based on an actual fall in the labour force participation rates, not on a slowdown of jobs destruction. But while ordinary unemployment rate is scarry, the duration of an average unemployment spell (the second chart below) is frightening. Since the Department of Labor started collecting data in the late 1940’s, there hasn’t been unemployment spell that lasted this long: July 2009 at 25.1 weeks. The previous highest peak in the average duration of unemployment: July 1983 = 21.2 weeks.


So nothing, short of something strange brewing in Wall Street’s Caffeteria, underpins the last rally. And this means a nasty September/October market is a distinct possibility.

And what does this mean for Ireland? Ok, there is an interesting analysis to be had on the spillover from the potential correction in the US to that in here. In particular, we should look at the fundamentals behind the financial sector risk exposures to any additional shocks. Remember - in 2008 the meltdown of financials was much deeper in Ireland than it was in the rest of the Euroze. And of course in the rest of the Eurozone it was much deeper than in the US.

Why? Risk exposures differentials due to leverage. Americans had a subprime crisis. True. Eurozone had an over-borrowing crisis. Prior to the onset of the financial crisis, US financial sector leveraging was around 40% of GDP, Eurozone stood at 70% of GDP, in Ireland - at well over 350% of GDP. Hmmm... smelling the rat yet?

Well, take a look at the two charts below (courtesy of R&S - Mediobanca):The first chart shows leverage as % of GDP in the financial sector, the second one - risk exposures measured as total securities relative to net tangible equity. Now, for Ireland, the comparable figures are: leverage at 425% (Q1 2009), risk exposure is simply indetrminable as our banks have been engaged in a wholesale re-shifting of liabilities and rewriting of assets, but it is hard to imagine our risk ratios to be less than 15% (given some of our banks are facing 30-39% stress on their loan books).

So if the US were to catch a cold in October, while Europe is to get another bout of flu, Ireland might come down with something so nasty, we wish we had an H1N1 'swine' flu hitting our financial markets...

What's that stock market equivalent of Tamiflu, then?

Economics 14/08/2009: Irish welfare rates - Part II

I grew tired of, honestly, of the bull surrounding the OECD stats on social welfare. So I crunched through the data, available from their database on the subject. The link to this data is here.

Tables below rank Irish welfare payments as per the percent of the Average Production Wage (average wage in manufacturing for production & maintenance workers). Rankings are given for EU and OECD as a whole, comparing these in 2001 and in 2007 - the latest year for which data is available.

First Tables:

So, of course, 1 above refers to Ireland being ranked the country with the highest level of benefits for the specific type of welfare assistance or unemployment assistance received.

That is bad enough? Oh, I also looked through the OECD methodology. And what I found confirmed exactly what I was saying before in yesterday's post:

• Only cash incomes are considered, so no in-kind benefits, e.g health cards were factored in;
• Average wage was not accounting for childcare costs despite welfare recipients having that taken care of;
• Only income taxes and own social security contributions, so no health levy was factored in;
• Housing costs, childcare costs and any other forms of “committed expenditure” are not deducted when computing net incomes. Nor are they counted on the 'income' side as benefits-in-kind for welfare recipients;
• As benefits included in the calculations exclude benefits “in-kind”, free school meals, subsidised transport, free health care, etc. are not included. Occasional, irregular or seasonal payments (e.g. for Christmas or cold weather) are not included. Also excluded are benefits strictly related to the purchase of particular goods and services (other than housing or childcare as described below), reduced price transport or purchase of domestic fuel or the purchase of medical insurance and prescriptions;
• Cash benefits excluded are: old-age cash benefits, early retirement benefits, childcare benefits for parents with children in externally provided childcare, sickness, invalidity and occupational injury benefits and benefits relating to active labour market policies;
• Subsidies for the construction of housing, purchases of owner-occupied housing, subsidies for the interest payments on owner-occupied housing, and other similar payments are not included. Similarly, the assumption of living in private rental accommodation means the benefits in kind provided by social housing, usually involving rents below the market rate, are not taken into account in the comparative tables;
• It is assumed that families live in privately rented accommodation and the level of rent for all family types regardless of income level and income source is 20% of the gross earnings of an average production worker. In Ireland today this means that OECD figures only account for maximum of €565 per month per household. Real levels of subsidy in Dublin would require a minimum of €750-800 pm for one bedroom property and over €1,000 for two-bed rental (Daft.ie figures on rental properties). Thus OECD underestimating Irish welfare recipients' housing assistance by a factor of 2.

Taking into account these omitted variables, my figures from the earlier post show that pretty much anyone working in lower grades of all sectors in Irish economy would be better off on social welfare.

I stress, again, that my assertion concerns people on social welfare. It does not cover people on unemployment assistance.

Economics 14/08/2009: Turning point, but not for you and me...

NCB's Brian Devine issued a new update on Irish economy. Clean and tight as ever, and a worthy read. It makes the case for upgrading Irish GDP growth, but unlike a host of the note stamped out by Davy's boys on a weekly basis, NCB's note is backed up by a bit more real analytical beef.

"Irish data (PMIs, Live Register, industrial production, retail sales, exports etc..) have stabilized and in some instances risen from the lows. Consequently, the NCB economic activity index which had been indicating that activity was contracting at a seasonally adjusted annualized pace of 12% in February is now signalling that the economy was contracting at an annualized pace of 6% in May. Our more timely, PMI based, growth indicator is also well off its lows and continued rising in June and July (Chart 2)."
So far just fine. There is no claim, of course, that Ireland is growing again (i.e that we've bottomed out).

"When the Irish data is combined with better than expected data from the US and the Euro area it causes us to upgrade our annual 2009 and 2010 forecasts to -7.6% (previously -8.1%) and -2.0% respectively (previously -3.1%). While we are upgrading our GDP figures we do not see the trajectory of the recovery being any different than previously – the bottom in the economy will be formed in H12010, with sustainable growth not expected until H2 2010. It is possible that we get positive GDP on a q/q basis before Q3 2010 given the volatility in Irish GDP and GNP (Chart 3) but we do not see there being sustainable growth until H2 2010 (Chart4)."
This is a little optimistic from my point of view, but not as widely off the mark as other brokers. I still do not see domestic growth posting any improvements on earlier forecasts.

On GDP side, there is lots of volatility, as Brian's note states, and the large share of GDP volatility is strategic tax optimization decisions made by the MNCs. Thus, should Intel/Dell/Pfizer and so on decide back in their US HQ that now is the time to book more profits outside the USA, Irish GDP might rise. Otherwise, it might fall. Who knows... But really, who cares.

Our economic problems in this country are not with the MNCs-component of the economy - they are with

• the fiscal wreck left behind by the Government overspending;
• the labour markets that are absolutely out of touch with productivity - a legacy of our Trade Unions and Professions;
• deteriorating quality of our workforce, courtesy of education system that is more suitable for a Faulty Towers sketch than for a 21st Century economy; and
• uncompetitive domestic markets, supported by the Social Partnership.
  

Do any of these things have a chance of seeing an improvement should Pfizer decide to produce more Viagra here?

Will Dell shipping more PCs out of this country really change the fact that our 'flagship plcs' are like drug junkies depend on state contracts and acquisitions of competitors at the top of market valuations (preferred mode for growth as opposed to organic expansions throughout the 2000s)?

Will GSK opening a new facility for 200 scientist (of whom 100 come from outside Ireland, and GSK would love to get the other 100 to come from outside Ireland too, but, alas, it can't, for it promised the 'knowledge'-driven Ireland Inc that it will hire home-grown workers too) change the fact that our clientilist system is about to saddle the entire country with onerous debts of the few developers?

The answer to all of these is 'No'. It won't.

"The cyclical downturn is always going to end but growth does not necessarily imply an economy without problems. We are still in the camp that believes the recovery process will be long and gradual with unemployment, fiscal consolidation and the oversupply of property continuing to weigh on domestic demand. We see the main driver of the exit from the cyclical downturn being the contribution from net exports (expanding global demand combined with weak demand for imports)," says NCB note.

That is a polite way of saying that under the current policies and in the current economic development environment within the country, there is no chance Irish economy can pull itself out of this recession, especially out of its structural component.

A much better, more realistic analysis from NCB, as compared to used car sales lot than the one from the Dawson Office...

Economics 14/08/2009: Irish welfare rates and the tragedy of poverty

On last night's RTE Prime Time I referred to the OECD 2007 report that shows Ireland having the second highest welfare rates in EU27 (and the third highest in the OECD).

Here is the link to the report.

Here is a chart from the report:
Here is an excellent article on the report.

And here is my follow up analysis.

The OECD data was in the range of 2005-2006. Since then:

• Taxes on work in Ireland increased substantially
• Wages have declined in 2007-2008
• Earnings other than wages (overtime, bonuses, commissions) also have fallen
  
• CPI has dropped in July 5.9% yoy and HICP fell 2.6% yoy

So after tax returns to work have declined rather significantly in real terms - a good deal 10-15% for an average wage earner, depending on the sector.

In the mean time,

• Welfare rates have gone up (since January 2009) by 3% nominally, or between 5% and 8% in real terms;
• Indirect benefits rose in real terms, as rents fell off the cliff and not all these savings were passed on to the Exchequer - some of these savings could be easily 're-distributed' between assistance-receiving tenants and the landlords;
• Black /gray cash economy is thriving, providing additional earnings to some welfare recipients; and
• Costs of services to those of us in employment that are free to welfare recipients have gone up, implying a rise of benefit to the welfare recipients.

But let us be clinical about this. I did an balance-sheet analysis before on current (post-April 2009 Mini-Budget) after-tax earnings here.

Our replacement net of tax wage - equalizing the value of benefits obtained by the welfare recipient (in the case of my model - single parent with one kid) to make them even with the wage earner - now stands at €31,102.

The above figure is not inclusive of Income Taxes, Income Levies, PRSI and Health Levy contributions exacted by the state off those working. So let us add this to the numbers above.

For PAYE:

• Health levy adds 4% on all earnings below €75,036;
• PRSI levy adds another 4%
• Income tax and Levies (here) - €31,102 after tax is consistent with the pre-tax earnings of €39,870pa
  

Replacement wage for PAYE (inc PRSI and Health Levy): €43,059.60.

For Self-Employed person:

• Health levy adds 3.333% on all earnings below €75,036;
• PRSI levy adds another 5%.
  

Replacement wage for Self-Employed (inc PRSI and Health Levy): €43,191.17.

If we are to recognise that a self-employed person has to cover some of the costs of their work out of pocket, say 25% of the net revenue received in income (a conservative assumption if you need to operate some equipment, run a van etc), a self-employed person working in this country would have to generate around €54,000 in revenue in order to come close to breaking even with a welfare recipient!

Comparatives: Pre-tax average wages by sector (for All workers and for lower grade of P&M Workers):

• Industry: All employees = €42,078 pa (-€981pa relative to a welfare recipient), Production & Manual Workers = €34,507 (-€8,552pa);
• Mining & Quarrying: All = €40,435 pa (-€2,624pa), P&M Workers = €36,878 (-€6,181pa);
• Manufacturing: All = €41,184 pa (-€1,875pa), P&M Workers = €33,675 (-€9.384pa);
• Electricity, Gas & Water Supply, Waste: All = €55,286 pa (+€12,227 pa), P&M Workers = €46,592 pa (+€3,533pa);
• Financial & Insurance Services: All = €56,742 pa (+€13,683pa), P&M Workers = €34,445 pa (-€8,614pa).
• Minimum wage earners €17,992 pa (-€25,068pa worse off working than being on welfare).

So here we have it - our incentives to work or choose welfare.

Now, there are many studies out there doing international comparisons of pensions and other benefits across the EU.

Majority of them count a particular benefit alone and disregard in-kind payments and other assistance, such as housing allowances, rent supports, bills assistance, lack of apartment maintenance fees, etc. Majority of them disregard the fact that a working family has to pay its own healthcare costs in this country on top of paying taxes to cover our public health services. Or that we pay for child care, while our welfare recipients do not. Or that we pay to commute to work, that we also pay more for our food, because we do not have the luxury of eating all our meals at home. This makes these comparisons extremely stylized.

Another example is Eurostat adjustments of welfare supports for PPP differentials. This is suspect practice because PPP refers to HICP inflation adjustments and exchange rates differentials. However this presents several problems in comparing welfare benefits baskets in Ireland with the rest of EU:

1. We have many more non-rates benefits (housing assistance, healthcare cards, etc) not reflected in HICP;
2. We have larger relative share of imports in welfare consumer basket of goods than larger countries of the EU, so stronger Euro here buys more for our welfare recipients than it does in the rest of the EU, even after we adjust for nominal exchange rates;
3. In most of the EU there are caps and declining scales of benefits. Not in Ireland, where a life-long benefit is available at a flat rate irrespective of the person's ability to work, health status and duration on benefit; and so on.
   

Methodology is important.

The real tragedy of Irish welfare system is that we tend to lump together people on unemployment benefits with:

• long-term welfare recipients (often generational ones) who are able-bodied working age adults; and
• long-term disability aid recipients.

This is simply immoral and wrong economically. They are not the same. Unemployed seek employment. Welfare recipients do not. Elderly and disabled have a real claim to make on the society for help - they deserve it and they should not be stigmatised for this assistance. Those who can work, but choose not to have no such claim to make.

Our unemployment assistance rate is below our long term welfare rates. This is farcical. It is an incentive for some to move off unemployment roster and out of the labour force. But it also fails to recognise that people who find themselves in unemployment have some consumption commitments that are reasonably based on their prior income (so these commitments are not some extravagant spending of the past) and have to be met. The long-term social welfare recipients have a steady income instead.

From my point of view, the real problem is that we are paying a number (no one can tell us how big it is) of people who made it their career to milk the taxpayers. I have no problem with helping those in real need of help - the elderly and those with severe disabilities. And I have no problem with providing a safety net for those who pay for it through taxes.

But I have significant issue with seeing perfectly healthy individuals not working, while many people with real disabilities are leading productive lives, ordinary families taking their hard earned cash and sending it the way of those who never intend to contribute to the society.

High cost of social welfare is economic (lost jobs and lost investment due to high tax burden, discouraged younger workers and so on), but first and foremost it is social. The latter manifests itself in a culture of entitlement developed in the mindset of our long term welfare recipients and their advocates.

How many times do we hear that welfare recipients are

• poor (see figures above to show that they are not);
• never gained from the Celtic Tiger (welfare provisions increased between 97% and 110% since 2000 alone);
• neglected by the society (welfare costs have risen from 8% of our GNP in 2000 to over 13% in 2009 and this does not include massive indirect transfers from the private sector through schools allocations, sports grounds, community facilities etc); and
  
• ignored by private sector growth (there is a deeper question to be asked here in return: Why should someone who never worked in their life be entitled to benefit from the wealth and income created by the sweat and labour of others?)
  

Welfare spending now accounts for over 70% of the annual Exchequer tax intake. It is more than 37% of our current expenditure bill. This is not sustainable.

An argument that NAMA funds can be better spent on social welfare supports is a fallacy, for there are no NAMA funds. We will have to borrow to finance both. If we are to borrow to retain current welfare spending, some €5bn per annum in fresh debt will have to be added to our own and our children's obligations.

A simple math - through 2013, doing nothing on Irish social welfare spending will cost us additional €23bn in debt we will have to pay down in the future. Scared? If unemployment remains at the levels we are seeing today through 2015-2018, this bill will rise to €44-61bn, once interest payments on the requisite bonds are factored in.

That is a disaster on the same scale as NAMA.

Instead of strengthening the fabric of our society through providing a real safety net and real help to those who cannot contribute to this society through work due to age or health reasons, by having this lavish welfare system with a maze of benefits supplied on the unlimited life-long basis, we are actually destroying the moral state of Ireland. That is the real cost of our welfare-as-entitlement industry that is still thriving in this recession.

What should be done?

We need serious reforms of the welfare system in the long run. I will write about this at some point in the future. In the immediate term, we need:

• a cut in welfare rates of 12% for all able-bodied long term welfare recipients, bringing the rates below the unemployment assistance rate;
• a system of two-tier old-age pension: one basic rate for all, set at 1/2 of the current rate, and a second, top-up rate for those who pass means testing (the second rate to be set at 1/2 of the current rate) - on the net, poor pensioners will be guaranteed current level of benefits with no change, while wealthy pensioners will see a cut in their rate of 50%;
• ensuring that no public worker retired on full public pension benefits is in receipt of the old-age pension allowance - at either rate stated above. There should be no double pension allowance;
  
• a 3% reduction in unemployment benefit to reflect the fall in HICP;
• enforcement of the rent support scheme to extract savings, generated in the private sector on falling rents;
• introduction of co-pay on hospital visits for welfare recipients to reduce use of emergency rooms as their primary care physician access.
  

This really is a basic starting point for restoring sustainability to our public finances. No matter how you turn the arguments about welfare system around, it has to be done!

Economics 12/08/2009: An afront to our democracy

So Mr Carroll's case has been now refused the examinership by the Supreme Court. Welcome news - at least there is a remnant of sanity left in this country and it is the Judiciary. But the telling reaction to the highest court in the land verdict came from the Department of Finance. In a blatant disregard of the Supreme Court powers, a mere civil servant-run lowly department (that is but a fraction of one of the three pillars of the state) has in effect told the Supreme Court (the highest body of another pillar of this state) to pack off.

In a response penned, most likely well in advance of the Supreme Court decision, the DofF stated that (quoting the Irish Times report - here): "The Department of Finance rejected any suggestion that the Government’s plans for Nama were affected by the court ruling. “It makes no difference – Nama will proceed as planned,” said a spokesman for the Minister for Finance. “We’ve always made clear that Nama will operate in line with EU Commission guidelines, which set out the use of the long-term economic value measurement.”

So Supreme Court telling the nation that, in agreement with the Commercial Court, its assessment of Mr Carroll's assets is that these assets are not worth even 15-20% of loans advanced to the company, 'makes no difference' to the NAMA. We will still pay Euro60bn for the same assets.

Now, do the math, Mr Carroll owes the banks over Euro2bn. He has trouble paying on Euro136mln. His companies are generating around Euro27-30mln per annum - and that according to his company records, that Commercial Court, in the context of his the survival plan, identified as “lacking reality” and bordering, if not trespassing, on the “fanciful”. So here we are, the valuations of Mr Carroll's loans quality is in (this time confirmed by the highest authority in the land):

• According to the courts, Mr Carroll's loans are not worth 21.3% of their face value (in other words, a discount of 78.7% on their value will not bring the price down to the current market valuation) (Euro265mln out of Euro1.26bn = 21.3% value of assets);
• The balance sheet below illustrates clearly that even assuming 7% annual cash flow growth, plus 5% asset growth per annum for 2008-2020, a very benign interest rate environment (note we assume max cycle interest rate of 10% on Mr Carroll's borrowings in Scenario 2) and disposal of all his properties in the end of the term, the net market value of Mr Carroll's companies in 2020 will be a negative Euro5.7-7.5bn.

Now, it is the only attempt of estimate Mr Carroll's loans net worth at this stage known to me, so do take your time to read through it. The really, really scary part, that if NAMA were to buy his loans at a 50% discount, NAMA will be making a cumulative loss of between Euro2.41-2.56bn by 2020. If the discount were to 70%, NAMA resulting losses will be Euro1.19-1.34bn. At a 70% discount, folks!

And DofF still thinks we shall all p***s off: NAMA is here and there is nothing we can do about it!

This is bad news for:

• the responsible and accountable Government and governance, for our DofF in effect is stating the position of the State as 'NAMA - no matter what'; and
• the Irish democracy, for DofF has expressed absolute and public disdain for the highest court of this land.

And thus we have (courtesy of http://farm3.static.flickr.com/2452/3813875003_7e58e1ddc3_o.jpg):

Economics 10/08/2009: Industrial production blues and fun-NAMA

Brian Lucey has an open petition on NAMA on his site (here):
http://brianmlucey.googlepages.com/namapetitionandoireachtasemails
which is, in my view, spot on in terms of what each member of Oireachtas should read before the NAMA debate takes place.


Before we begin with CSO's data on industrial production - few NAMA posters are posted below, so do make sure you get to the end of this post...


CSO data on industrial production was published earlier today. Trumpets are blowing that things are turning around for Ireland Inc. But hold your horses...

On an annual basis production for Manufacturing Industries for June 2009 was 4.3% higher than in June 2008. So turnaround is here, then? Well, no... The most significant changes were in:

• Basic pharmaceutical products and preparations (+35.1%),
  
• Other manufacturing (+25.9%) and
  
• Computer, electronic and optical products (-17.7%).

What does the above mean? Pharma guys are chugging along in transfer pricing / tax optimization, but computers and electronics - hammered by exits and layoffs and the collapse in private investment worldwide - can't even master a tax optimization scheme. I mean, Table 3 in CSO release clearly shows this sector having suffered the greatest layoffs of all other sectors in proportional terms, and of all other Modern sectors in absolute and proportional terms.

The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period April to June 2009 was 2.0% lower than in the preceding three month period. This is volatile stuff, so 3-mo aggregates are a bit more telling.

The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed an annual increase in production for June 2009 of 16.0% - the same transfer pricing argument holds. But there was a decrease of 16.6% in the “Traditional” Sector.

The seasonally adjusted industrial turnover index for Manufacturing Industries was 1.9% lower in the three month period April to June 2009 when compared with the preceding three month period. Now, outside the current crisis, turnover is actually less volatile than production volumes, and yet now it tracks almost 1:1 the more volatile series. What's going on? I am not sure, but one potential explanation is that we have gone into a severe enough jobs/production capacity cutting mode earlier this year to allow for some stabilization during May-August period. Of course, this means September-October turnover will make or break our stabilization. If turnover falls, new layoffs will be coming. If it rises, well, if it rises by a hell of a lot, then hiring might commence.

On an annual basis turnover was 0.6% lower when compared with June 2008.

Now, few interesting charts:
Taking a closer look above, compare the changes over the last four months reported relative to sector activity in 2005 (the 100 line):

• In March 2009, 8 sectors performed above their 2005 levels in volumes. In June, the number was 6.
• But in April 2009, this number was 5, while in May it was 3...

In effect, the whole manufacturing sector is sick and the disease is not new to this crisis. Read through this chart above - it is really, really telling. The same chart with monthly changes May-June (preliminary results, of course for June) - 11 sectors show no improvement, 9 show improvement.

Now step back for a bit of a broader view:
Self-explanatory, but few notes worth making:

• Capital goods are slightly up +4.66% mom in June, but that is after being slightly down -2.83% in May, so change on March 3.75%, but on April only 1.7%. Not exactly a robust start of a new cycle here, but not a disaster.
• Intermediate goods down - MNCs might be scaling back for summer.
• Consumer goods up, but no durables - weather effect?

Unfortunately, CSO can't get their act together on surveying new orders for all sectors, so we have a snapshot of what's happening in the very limited number of areas. But what the chart below really shows us is our dependence on MNCs - yeah, those American (and other countries') companies who are still trading, if only because of our tax arbitrage opportunity...

Credit for the following due to:
http://img7.imageshack.us/img7/5391/namahaughey.jpg
http://i38.photobucket.com/albums/e146/vgupload/sofew02.png

Economics 09/08/2009: Banks

A new post - the one promised a while ago - on Euro Area Banking Survey by ECB (July 2009 results), part 1 is now available on my Long Rune Economics blog here. Enjoy - most of this data has not seen the daylight in any media outlet and some of it has serious consequences for Irish banks, consumers etc... in other words - this is the bigger fish worth frying...

Economics 09/08/2009: Calling a turning point?

Forward looking update: I am working on detailed analysis of the latest ECB data on banks activity survey across the Eurozone, plus Ireland's own Earnings and Labour Costs data for Q4 2008... posts will be coming on these two, so stay tuned.

Now, I am skeptical about the 'Green Shoots' theory primarily for two reasons:

1. Relative to current fundamentals, the markets (equities) are overbought and bonds are at extremely low yields. Two possible scenarios can unfold from here on: Scenario 1 = we get growth in the US in Q3 2009, through Q4 2009 and inflation in Q1 2010. This means preciously little for Europe and Japan. Scenario 2 = we get growth in the US in Q3, then a contraction in Q4, and then out of a recession in Q1-Q2 2010 - a 'correction in the middle' scenario. Inflation will rise in Q2 2010 then. Again, Europe lagging and Japan is stagnating. Either way - I believe inflation is coming and it will be very hard hitting - 5%+ in 2010 as a peak, then up to double digits in 2011. Someone will have to pay for all this cash sloshing around courtesy of the Fed.
2. Real fundamentals - unemployment, personal disposable income, investment and so forth - bar the Government spending and printing presses - are still in a fall.

Now, I am much more comfortable with 6-months scenario of seeing the return to growth - albeit to moderate growth at the very best (especially when it comes to Europe). Here, we have Composite Leading Indicators from the OECD that do a decent job tracking trend (but not inflections necessarily) pointing to some interesting things. That said, I would be not as upbeat as OECD in interpreting these results...

• June 2009 data points to stronger signs of improvement in the economic outlook of OECD economies compared with June.
  
• Strongest recovery signals in Italy and France and clearer signals of troughs in Canada, Germany, the United Kingdom and the United States.
  
• In Japan tentative signs of improvement have also emerged.
  
• Troughs can also be observed in China and India, with tentative trough signals now appearing in Brazil and Russia.

TOk, let's take a look:

• CLI for the OECD area increased by 1.2 point in June 2009 but was 5.0 points lower than in June 2008. Now, note that in the previous recession, the CLI signal as about 1.5 years ahead of actual growth...
• The CLI for the United States increased by 1.3 point in June but was 7.2 points lower than a year ago. The same accuracy for CLI here as in the case of OECD (above) and Euroarea (below) when it comes to timing growth return... Now, note that the US has much better data available than the rest of the world, and here, things are really all over the place. Unemployment is down to 9.4%, but on the back of massive exits from the labour force. Structural unemployment has actually worsened: the number of people out of work longer than six months soared by a record 584,000 to 5 million, accounting for more than a third of all unemployment for the first time on record (chart below). While unemployment fell by 267,000 to 14.5 million, employment fell by 155,000. The labor force declined by 422,000, which means per Marketwatch, "the jobless rate declined because people dropped out of the work force, not because they got jobs". The participation rate fell from 65.7% to 65.5%. Unemployment chart below:There are some signs of improvement on jobs front, however. The average work week rose to 33.1 hours after falling to a record-low 33 hours in June. The average work week in manufacturing (a key leading indicator) rose from 39.5 hours to 39.8 hours. Total hours worked in the private-sector were unchanged. Good news, but one has to put this into perspective - a rise of 0.1 hour on a record low? Average hourly earnings rose by 3 cents, or 0.2%, to $18.56. Even better news, but again - state and local taxes are rising... Disposable income is singing the blues still. Higher working hours might see increased industrial production in Q3. Of 271 industries, 30.1% were hiring on net in July, up from 28.6% in June. In manufacturing, 22.3% of industries were hiring, the highest percentage since September.
  
  
• The Euro area’s CLI increased by 1.5 point in June but stood 1.6 points lower than a year ago. Now, that sounds misleading - as in - we are closer to trend than the US or OECD... true, but the problem, of course is that our trend is soo low, it would be considered a majour downturn for the US economy to run at our long term growth rates...
  

• Oh and take a look at Japan - the sickest economy in the universe. Now, note that those years above 100 - that was actually pure stagnation. Yet, CLI still gunned for growth there.
  

• The CLI for the United Kingdom increased by 1.1 point in June 2009 but was 0.9 point lower than a year ago. The UK is much closer to a recovery, unless, of course we have a double dip as in 2000-2003...
  
• The CLI for Germany increased by 1.7 point in June but was 6.6 points lower than a year ago. To be honest, there is no way the CLI for Germany can stay off the rising path from now on - the sheer collapse of exporting activity there was so deep earlier this year, you would have to put those Germans through another world war to get any worse destruction of productive capacity than we saw. So is CLI really meaningful here at all? And then, spot that double dip in previous episode.
  
• The CLIs for France and Italy, after having increased by 1.4 and 2.2 points respectively in June, are now above the level reached a year ago, by 2.7 points in the case of France and 4.8 points in the case of Italy. Well, France is appearing to do just fine here - national consumption-driven economy (as opposed to the German exporting model) is underpinning more stability in the downside part of the cycle. There is also massive spending by the French government on everything under the sun. But the question is - are we in a double-dip here? Once stimulus runs out, and assuming the Germans are not going to stand by and watch the French issuing more debt in their name, something will have to give. It won't be a devaluation of the Euro, and it won't be unionised wages. And it certainly won't be Sarko cutting his populist spending sprees... Now, Italy is to Europe what Japan is to the world, so frankly, after 30 years of disastrous growth, who cares that Italy is in a 'recovery'? Can they themselves even notice that they are? Without Berlusconi trumpeting around Rome about his super-human manly and stately powers? I'll check in 10 days and will report from there...
  

So here we are.

• In my view, we can call a global recession turning point somewhere around now;
• But the meaning of this statement is hollow unless there is a return to real growth - not the corrective 3-4% for half-a-year and then 1% for the rest of our lives, but 3-5% trend - and this is unlikely, especially given the necessary therapy we will have to undergo to cure inflationary hangover of Obama-nomics, Brownist Monetarism and Trichetisation of the Euro;
• Individually, the US is probably past the turning point now and is accelerating rapidly (though the risk of a double dip, in y view is somewhere around 30% now);
• UK is also past the turning point and probability of a double dip is also around 30%;
• Euroarea is not going to see real growth for years to come and probability of a double dip is around 40%.

The CLI for China increased 1.4 point in June 2009 but was 3.7 points lower than a year ago. The CLI for India increased by 1.2 point in June 2009 but was 3.4 points lower than in June 2008. The CLI for Russia increased by 1.2 point in June but was 17.7 points lower than a year ago. In June 2009 the CLI for Brazil increased by 0.4 point but was 11.4 points lower than a year ago. So BRICs are for now decoupling from each other and there is possibility that a new bubble is forming in equity markets in Brazil and Russia...

Happy hunting.

SCAMA - a joke that's touching reality

From http://img218.imageshack.us/img218/9136/scama.gif

Economics 07/08/2009: Live Register - unemployment's deeper roots

Before we begin on Live Register - I would recommend an excellent post by Myles on Irish automotive sales - read it here.

So Live Register is in, prompting some cheerful commentary as per slowdown in the rate of increases in unemployment. Ahem... not that I noticed.

To be honest - there are some signs of a slowdown in the rate things deteriorate, true, but these are:

1. Hardly well-underpinned and can be easily reversed (see Female trends below); and
2. Are pure mathematical (non-fundamentals-driven) in nature, as things must be asymptotically converging to some longer-term equilibrium at some point in time.

So here are the details:

First CSO statement: "The seasonally adjusted Live Register total increased from 412,900 in June to 423,400 in July, an increase of 10,500. In the year to July 2009, there was an unadjusted increase of 197,495 (+82.9%). This compares with an unadjusted increase of 197,781 (+89.6%) in the year to June 2009. [So so far we are still in worse dynamics than in 2008 - pretty bad, wouldn't you agree?]

• The monthly increase in the seasonally adjusted series consisted of an increase of 5,100 males and an increase of 5,500 females. [Females now outnumber males - a sign that more dual unemployed families are being hatched under the nurturing light of our Government policies, and that better quality jobs are now being destroyed at a faster rate];
• The average net weekly increase in the seasonally adjusted series in July was 2,100, which compares with a figure of 3,000 in the previous month. [Sounds better, until you recognise that last months basis was 4 week, this month's basis is 5 weeks];
• The standardised unemployment rate in July was 12.2%. This compares with 10.2% in the first quarter of 2009, the latest seasonally adjusted unemployment rate from the Quarterly National Household Survey. [But it also shows that the rate of increase - by 0.3 percentage points per month - has been steady since May];
• In the month, the estimated number of casual and part-time workers on the Live Register was 37,415 males and 32,138 females [Which means nothing - nada - because many, if not a majority, of these workers are now facing hidden forms of unemployment, aka working, but not being paid on time!]
  

Now, few charts:
Note slight acceleration in females (more on this in a sec) and basically imperceptible changes in the slopes? So much for the 'green shoots'.The real disgrace is in the unemployment rate - back to April 1995 now. Less than 14 months of economic destruction and 12 years of new jobs creation erased. Surely, Bertie would say that the doomers-and-gloomers should now hang themselves.Weekly changes in the LR plotted above. Again, one note of caution - the averaging was done on 4 weeks basis in June and 5 weeks basis in July. If it was done on 4-weeks basis, the weekly average in July would be 4,286, still below 5,530 in June. Then again, July is a much slower month in general for any sort of business strategy change, let alone for mass layoffs. Let's wait till October/November... Again, note females - the average weekly change also declined, but at a much shallower rate, pointing to the pressures on female employment rising relative to males.Now, to monthly rate of growth (chart above). The rate at which females are signing is up in monthly terms. This is the evidence of really bad news to come. Recall that layoffs happen sectorally and sequentially (meaning last in = first out). Females' job tenure is shorter than males' over economy, so if new sectors come on-line for mass layoffs, and these sectors are not dominated by males (like construction in the past), we should see an uptick in female unemployment rising faster first, followed by males in the same sectors. While there is no certainty as to whether this is what's happening, that blue line trending up in the chart above is a reason for concern and suspicion that a new wave of unemployment increases might be gaining mass.
Last chart is showing monthly figures deviations from the 3-mo Moving Average in total LR. This was converging toward the long run trend between January 2009 and May 2009 (the blue graph heading toward zero), but it now diverged again in June and July. Last time we crossed the long run trend line was in September 2008, which marked a smaller peaking cycle of April-August 2008. Duration of the last cycle was just 4 months. The current cycle is into 10th month and now apparently diverging further once again.

Other cycles were equally short-lived (2 months in 2007, 4 months in early 2008).

All of this makes me very conservative to call and 'improvement' - the series, in my view, are suggesting:

• At least 60% chance of serious deterioration in September-November 2009; and
• A very significant sign of long-term unemployment rising through the roof.
  

Economics 06/08/2009: Travel Figures, Budget, ECB

Travel figures are in - abysmal showing for tourism and leisure industry here. As predicted, the fall off in foreign visitors to Ireland continues, while the number of Irish people traveling abroad is showing signs of stabilizing.

Per CSO:

• Overseas visits to Ireland fell 15.1% to 636,600 in June 2009 compared to the June 2008.
• Visits by residents of the two main visitor markets declined substantially, Great Britain was down 19.8% to 260,700 and Other Europe fell by 12% to 219,600.
• Irish residents made 709,900 overseas trips in June 2009, 7.6% fewer than in June 2008.
• In the first six months of 2009, overseas trips by Irish residents totaled 3,439,300 or 9.8% less than in the same period in 2008.
  
• Six months total visits to Ireland from abroad fell by 10.7% to 3,304,100.

So here we go - jobs are being lost, hotels are shutting down, airlines are cutting services (and revenue), while DAA is raising charges, the Government is raising taxes and our venerable retired bureaucrats (the ones with IMF appointments on their CVs) are penning idiotic missives about how the crisis is the fault of the ordinary folks (SBPost) and how tariff protection of internationally trading sector is a great way to build Irish economy.

Sadly, Michael O'Leary is on vacation or I would have brought to you his explicative in the address of the Leinster House on the latest CSO release. Instead - a picture:

Market to watch: RWR-Reit index and US financials.


How long the circus of our Exchequer meltdowns can continue, one of you asked.

In May this year I wrote in a related note (here): "Cowen also stated that "we have a way out that is working". Remember the brilliant German movie Downfall about the last days of the Third Reich? (See a reminder/spoof here). Say no more... our unbeloved leader is in a state of delusion that is equivalent to awaiting the arrival of a miracle weapon (which does not exist) as the real enemy tanks are crushing your city."

That was then. Now, we pretty much know that the Government has deployed all its imaginary weapons and divisions against the enemy. The latest signs from the Cabinet pronouncements (and this includes their advisers) suggest that the Government has assumed the enemy away.

They have borrowed up some €25bn on the estimated liability of of over €35bn (counting recapitalization demands) that in their view will get them (alongside NPRF cash and left-overs from 2008) through this year. The Government is so short-termist that they have no clue / plan/ idea as to what happens after.

From this vantage point - anything is possible. Note the latest ECB statement today:

ECB stated that there are “increasing signs that the global recession is bottoming out”. Eurozone economy's pace of contraction is “clearly slowing”. Compared to July when it was noted that the activity “should decline less strongly” than in Q1 2009 - the latest statement suggests the ECB is already pacing potential interest rates increases in months to come.

And then in Q&A, Trichet did leave open a possibility that growth outlook for the Eurozone might be revised upward in the forthcoming ECB Staff Macroeconomic Projections before September meeting. The forecast update might move growth from current -0.3% expected for 2010 to 0% or even the consensus level of 0.4%. Another issue is timing - the ECB used to forecast return to growth for Q2 2010. This time around, no mentioning of Q2 anywhere, suggesting they are moving for growth to resume in Q1. And then there was Trichet's view that deflation is temporary and that by the end of this year we shall see inflation.

All of this points to a rising interest rates environment sometime in 2010, possibly as early as the end of Q1 2010 if inflation firms up and growth resumes in Q1. Remember, all that quantitative easing will have to go somewhere - i.e into price increases. When that happens, Mr Cowen will be sweating profusely in his air conditioned Merc, because the la-la land of endless borrowing will be over in a second.

Before then, he will pile cash reserves through aggressive borrowings from the ECB to make sure he can pay public sector wages and keep unions from completely imploding. The ICTU/SIPTU have already sensed the weakened leadership and are ganging on Mr Cowen's positions left, right and center. The problem is that comes Q1 2010, the QE will be over, as will be the Lisbon vote, so Mr Cowen will face the real problem of having no cash left by, approximately Q2 2010 or possibly the end of Q2 2010 - depending on how his borrowing will go down in the next few months.

What bothers me most, however, is why on earth no one in the markets realising this?