Economics 28/9/10: Live Register v QNHS measures of unemployment

As promised last night - here are comparatives on Live Register and QNHS measures of unemployment.

First raw data:
Pretty close?
Actually 98.8% close. But recall, QNHS is quarterly, LR is monthly, so what about average quarterly numbers for LR and QNHS?

So 99.2% close.

Economics 28/9/10: Anglo's bondholders must go

Reuters say Ireland should abandon the Anglo seniors

(emphasis mine)

"The Irish government will reveal the full horror of the cost of rescuing Anglo Irish on Sept. 30. It has already signaled bad news for the 2.5 billion euros of subordinated debt, but it is desperately trying to draw the line and support the 14.1 billion euros of senior debt.

"It's cosseting the bondholders because it fears further damage to its own creditworthiness if it walks away. But if the Anglo bill is as big as outsiders fear, its support will have the opposite effect. Even as the Irish prime minister talked on Sept. 28 of a "manageable plan," the spread on Irish sovereign debt widened to a record 475 basis points.

"The last official estimate of the rescue bill, 25 billion euros, looks hopelessly optimistic. Ratings agency S&P estimates it at 35 billion euros, while BarCap says 48 billion for the sector, or over a quarter of Ireland's 163 billion euro GDP. [My own estimate of 38.6bn on the upper side is now patently below external consensus, despite being branded 'outrageous' and 'outlandish' by several insiders in the past]

"The Sept. 30 statement is expected to contain a best estimate and a worst case. If the best estimate is near S&P's figure, further downgrades of Ireland's sovereign debt are likely. However, if the government were to abandon the senior bondholders, the saving -- equivalent to a tenth of Ireland's GDP -- would give the state the chance to work its way out of its economic hole."

Here we have: S&P, RBS, Barclays, Reuters, WSJ, FT, Sunday Times (Irish edition - hat tip to F.F.) and all genuinely independent analysts are now saying - shave the seniors, burn the subordinates. Government still resisting. For how long can it afford demolishing our own economy to prolong the inevitable?

Economics 27/9/10: Some evidence on entrepreneurship from the US

An interesting study of proprietorship and entrepreneurship from the US used 19 years worth of data (1989-2007) from the Survey of Consumer Finances in the US, to addresses three questions:

1. Are business owners generally more or less financially conservative than their non-business-owning counterparts?
2. Do business owners accumulate more wealth?
3. Do business owners hold a smaller share of their financial assets in risky stock holdings?

The study: BUSINESS OWNERS, FINANCIAL RISK, AND WEALTH by Tami Gurley-Calvez Bureau of Business and Economic Research Department of Economics College of Business and Economics West Virginia University (July 2010 (link) Ewing Marion Kauffman Foundation)

The motivation for these questions is straightforward: “If households that own businesses are investing more heavily in relatively safe assets, then policies that reduce financial risk (such as the availability of high-yield certificate of deposit accounts) might spur business ownership among high ability households with lower risk tolerances. Alternatively, business owners may not view their ventures as risky due to asymmetric information or perceptions of their projects. In this case, policies that facilitate the ability to assess the profitability of business ownership, such as a transparent patent process and systems of regulation and taxation, would be better suited for promoting growth in business ownership.”

Results indicate that business owners are

• financially conservative based on borrowing and savings questions
• but are more likely to be willing to assume above-average risk for financial gain,
• consistent with other studies findings that entrepreneurs save more, business owners accumulate more wealth over time;
• however, business owners and non-business owners invest similar shares of their financial portfolios in safe assets.
  

So business owners are more risk averse in their own business ventures, but are about as risk averse in terms of their investment portfolios allocations as the rest of us.

“Taken together, the results suggest that policies aimed at increasing business ownership should focus on helping households identify high-value business opportunities through transparent tax, legal, and regulatory systems. Efforts to reduce risk should focus on the business venture, such as full loss offsets, rather than focusing on reductions in other financial risks.” (emphasis is mine).

Some interesting factoids that the study throws:

• A massive 12.26% of US households own businesses.
• Business owners are underrepresented in the lower income categories, making up about 3% and 5% of the lowest and second-lowest income quintiles, respectively.
• At the upper end of the income distribution, business owners account for 18% of households in the 80th-90th percentile range and 37% of households in the 90th-100th percentile range.
• Business owners comprise 2% of the lowest quarter of the wealth distribution and 43% of households in the 90th to 100th wealth percentile range.
  

But things are not changing much over time. Per authors: “These results are consistent with Gentry and Hubbard (2004) who report that entrepreneurs account for 11.5 percent of the population in 1989 using the same definition

This, however, is a function to some extent of the fact that business owners earn higher incomes and accumulate more wealth, meaning they are unlikely to stay in lower incomes/wealth percentiles even if they start from there.

“Business owners have higher mean and median income levels. The median income for business owners is $87,000, whereas the median for households not owning businesses is $42,000. Likewise, business owners have more assets and net worth overall and by income category. Business owners have a median net worth of $497,000, and non-business owners have a median net worth of $94,000. The difference is large but the ratio of median net worth for business owners to median net worth for non-business owners of 5.29 is lower than the 8.03 ratio calculated from Gentry and Hubbard (2004) using 1989 SCF data.”

So the last figure suggests that over time, the wealth gap with non-business owners is shrinking. Undoubtedly, a housing bubble helped here.

Economics 25/9/10: Accounting for our exports

Quarterly national Accounts offer a rich set of data. Listening to all the talk about turnarounds and Government policies, I wondered -

• We know that Irish Government has little to do with our exports, which are largely determined by demand outside Ireland over which our leaders have no control;
• Exports have been performing strongly over the recession
• Exports, net of imports enter both GDP and GNP figures

So a natural question from my point of view was: "Absent net exports, how badly was our economy hit by the Great Recession?"

Here are the charts, taking our GDP and GNP (seasonally adjusted, expressed in current market prices) and subtracting net exports (exports less imports).
And same in terms of year on year growth rates:
Now, let's put together our growth rates for GDP and GNP ex-net Exports and standard GDP and GNP growth rates (gross of net exports, expressed as before in current market prices, with seasonal adjustments):
To me, this paints a pretty clear picture. Given that the Government has provided virtually no supports for our exporters, the gap between each solid line and each dashed line shows the true extent of net exports contribution to growth in GDP and GNP. And this gap also shows that the economy more directly controlled by the Government has been tanking at a much steeper rate than the economy which includes our exporting firms.

Let's put a cumulative figure to this same picture:
So in those parts of Irish economy where our Leaders had a say (red) we have suffered a decline in domestic income of cumulative 34.35% since 2007. In economy which includes the part which our Leaders have very little control over, the decline was 23.7%. One wonders if there is any truth whatsoever to the leadership claims on economic policy front we've been hearing in recent days?..

Economics 24/9/10: EU-wide slowdown confirmed

Eurocoin for August 2010 has confirmed that composite leading indicators for the Euro area growth are pointing to continued deterioration in growth in Q3 2010. Eurocoin has declined to 0.37 i n August from 0.4 in July, marking a 5th consecutive monthly drop.

Here's the chart:
My forecast for next Eurocoin to reach 0.34 in September and Q3 2010 growth to slide to 0.2-0.25%. My previous forecast for Eurocoin for August-September (issued in June and confirmed in July) was 0.34.

Economics 24/9/10: Still deep in denial?

Updated

In the real of bizarre, we have two fresh statements from Irish officials.

First, NTMA issued a statement claiming that Irish authorities - aka Irish taxpayers - will make up any shortfall on the banks capital side. One wonders if the NTMA has acquired new powers from the State - this time around, to determine our budgetary policy. You see, per European authorities, capital support for the banks is a matter of national deficits. National deficits are a matter of fiscal policy. Fiscal policy is firmly a matter for the Exchequer (i.e the Government). NTMA is neither the Exchequer, nor the Government. What business does it have in making promisory statements to the markets concerning the matters of fiscal policy?

Second, per Reuters report: "An Irish official told The Daily Telegraph that Dublin will "explore the appropriate burden-sharing arrangements" over coming weeks as it fleshes out its plan to break up the nationalised bank. Anglo Irish may ultimately cost Irish taxpayers as much as €25bn". So let's quickly summarize the statement:

1. After the economy posted a double dip (GDP side), having lost some €13,000 per every working person in income since the beginning of this Great Recession,
2. After all independent analysis has pointed, for some 21 months now to the need to cut loose the subordinated (and senior) debt holders in Anglo, plus subordinated debt holders in other state-supported banks,
3. After the above calls by independents was echoed in recent weeks in the international analysts opinions (e.g. RBS),
   
4. After independent analysts have correctly estimated Ireland's exposure to Anglo to be in the region of €33-39 billion, the estimate once again echoed in international analysts estimates (S&P),
5. After international bond markets have shown total disapproval for the Government handling of the recession, bidding both bond yields and CDS spreads to historic highs
   

our officials remain in a deep denial about both the extent of the problems and the required course of action.

Economics 24/9/10: Double Dip is now official

With a slight delay - here are the latest figures from the Quarterly National Accounts released yesterday.

The headline number is GDP double dip - Q2 2010 posted a decline in real GDP of 1.2%, deeper than the decline in GNP (-0.3%), signaling weakening side of the external economy.
In constant market prices and seasonally adjusted, Q2 GDP stood at €41,130mln down 1.81% on Q2 2009 and -1.21% on Q12010. Cumulative H1 2010 GDP was 1.28% below H1 2009. Despite shallower contraction in GNP, domestic income has suffered a much deeper contraction in the year to date. Quarter on quarter contraction in GNP between Q1 2010 and Q2 2010 was 0.278%, year on year GNP fell 4.05% in Q2 2010. H1 2010 GNP was 4.42% below H1 2009.

Let's put this into a perspective. Over the course of H1 2010, Irish economy lost €3,087mln in income. Per latest QNHS, there were 1,859,100 people in employment in the country, which means that our economic loss in H1 2010 amounted to €1,660 per working person. Since H1 2007, our economic losses total €13,078mln or €7,035 per working person. Annualized losses in national income now run at roughly €14,000 per working person since the Great Recession began.

The gap between GDP and GNP has narrowed as a result of horrific performance of GDP:
The slight recovery in GDP/GNP gap is, of course of little comfort.

Core components by sectors:

Spending and investment remain depressed:

Economics 21/9/10: This Little PIIGSy Went to the Market

So here we go again: NTMA went to the market, ECB came along, the results are suspiciously identical (save for obviously increased costs of borrowing) to those achieved in August.

We sold €500 million of 4 year debt due in 2014 at an average yield of 4.767%, compared with 3.627 percent at the previous auction on August 17. Cover on 4 year paper was We also sold €1 billion wort of 8 year paper due in 2018 a yield of 6.023%, up from 5.088% in a June sale.

Short term stuff first:
Cover support is clearly running well above average/trend, indicating potential engagement by the ECB. Price spread is down, suggesting that the yields achieved are reflective in the perceptions compression on behalf of bidders, which in turn might mean that the markets are getting more comfortable with higher risk pricing of Irish bonds.

Next up: yields and prices achieved:
The dynamics are crystal clear - we are heading for a new territory in terms of elevated yields and lower prices. Actually, setting historical record in both, despite likely ECB interventions.

Weighted average accepted price:
Boom! The curve is getting curvier.

On to longer term stuff:
Yield spread down as well - same reason - higher yields are now a 'normal' for the markets as average accepted yield shot up.
Cover slightly up, perhaps being pushed by the bidders flowing from the shorter term paper - crowded out by Jean Claude Trichet's boys. Price spread is down (see yield spread discussion above).

Predictably, longer-term accepted average price is testing historical lows:
Boom, redux!

And the maturity profile of debt is getting steeper for the folks who'll take over the Government in the next round, and our teenagers (that'll teach'em a lesson, for those, of course who'll stay on these shores):

Economics 19/9/10: Irish banks - Government intervention still has no effect

Returning to my old theme - let's take a fresh look at the Government and its policy cheerleaders success rate with repairing our banking sector. Here is a quick snapshot of history and numbers as told through the lens of Irish Financials index.
So clearly, we have some really powerful analysts out there and keen commentariat (actually one and the same in this case) on the future prognosis for our banks.

But what about recent moves in the index itself?
Take a look at the chart above, which maps the Financials Index for two subperiods:
Period 1: from Guarantee to March announcement of the 'final' recapitalization of our banks,
Period 2: from Guarantee to today.
Now notice the difference between two equations. That's right, things are not getting any better, they are getting worse.

Next, let's put some historical markers on the map:
Surely, our financials are getting better, the Government will say, by... err... not getting much, much worse. The reality, of course is, any index has a natural lower bound of zero. In the case of Irish Financials Index, this bound is above zero, as the index contains companies that are not banks. As far as the banks go, there is a natural lower limit for their share values of zero. Our IFIN index is now at 80% loss relative not to its peak, but to its value on the day of Guarantee!

Having pledged banks supports to the tune of 1/3 of our GDP already, the Government policy still has not achieved any appreciable improvement in the index.

Forget longer term stuff - even relative to Q4 2009, Government policies cannot correct the strategic switchback away from Irish banks shares that took hold:
A picture, is worth a 1000 words. Unless you belong to the upbeat cheerleaders group of the very same analysts who missed the largest market collapse in history, that is.

Economics 19/9/10: What's human capital got to do with our policies?

Having spent last week giving three presentations in Ireland on our IBV paper (link here) concerning the role of human capital in urban and regional development, and having spent a week before given another five presentations/briefings on the same topic in Russia, I should probably take a break from the topic.

So here is a quick note: I finally came about to read an interesting study from McKinsey & Co on the importance of talent as a driver of competition between firms, published back in February 2008. It is a very insightful piece.

Here's an interesting quote, referring to two McKinsey Quarterly global surveys (emphasis is mine). "The first, in 2006, indicated that the respondents regarded finding talented people as likely to be the single most important managerial preoccupation for the rest of this decade. The second, conducted in November 2007, revealed that nearly half of the respondents expect intensifying competition for talent—and the increasingly global nature of that competition—to have a major effect on their companies over the next five years. No other global trend was considered nearly as significant."

Furthermore, "Three external factors—demographic change, globalization, and the rise of the knowledge worker—are forcing organizations to take talent more seriously."

Amazingly, there is little evidence to-date that policymakers have any idea the process of global competition for talent is underway in their economies. With exception of the US and Switzerland, every OECD economy puts the heaviest burden of taxation onto shoulders of the very same talent for which companies in these countries compete.

Ireland is the case study here. After a decade and a half of aggressively incentivising foreign investment into the country (not a bad thing in my books), Irish leadership has left human capital - and especially internationally mobile human capital - bearing more than 3/4 of the total tax burden in the country. Now, this proportion is rapidly increasing (see chart), having risen from 75.31% in Q2 2007 to 80.42% in Q2 2010.
This process is accelerating per table below:
Unbeknown to our policymakers (it appears), labour, especially skilled labour in the sectors the Government promotes as the future of Ireland Inc (e.g. the 'knowledge' economy) is the largest cost input for firms. Yet, through the crisis, the Government has elected a two-path approach to resolving our fiscal difficulties:

• massive cuts in capital investment, and
• disturbingly high increases in income tax burden and other tax burden on disposable income by households.

Anyone to spot a contradiction here?

Economics 18/9/10: It's not just IMF

As argued in my earlier post (here), based on the IMF analysis, our sovereign bonds yields are still some distance away from those justified by fundamentals.

It turns out the IMF paper cited in the earlier post is not alone in the gloomy assessment of our realities. Another August 2010 study from German CESIfo (CESIfo Working Paper 3155), titled "Long-run Determinants of Sovereign Yields" and authored by António Afonso Christophe Rault throws some interesting light on the same topic, while using distinct econometric methodology and data from that deployed in IMF paper.

Here are some insights from the paper (available for free at SSRN-id1660368). "For the period 1973-2008 [the study] consider the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Sweden, Spain, UK, Canada, Japan, and U.S."

Take a look at table 2 of results from the paper estimation across listed countries. The model is based on 3 variables here - Inflation (P), Current Account (CA) and Debt Ratio (DR). All have predictable effect on the variable being explained. Per study authors: "Results in Table 2 show that real sovereign yields are statistically and positively affected by changes in the debt ratio in 12 countries. Inflation has a statistically significant negative effect on real long-term interest rates in ten cases. Since improvements in the external balance reduce real sovereign yields in ten countries, the deterioration of current account balances may signal a widening gap between savings and investment, pushing long-term interest rates upwards."

Ok, here are those results:
Ireland clearly shows relatively weak sensitivity in interest rates to debt.

But take a look on our sensitivity to deficits. Per study: "Moreover, when the budget balance ratio is used (Table 3) a better fiscal balance reduces the real sovereign yields in almost all countries"
Clearly, Ireland shows 3rd highest sensitivity of interest rates to Government deficits. We are in the PIIGS group, folks, based on 1973-2008 data!

Now, this firmly falls alongside the IMF results - further confirming my guesstimate in the post earlier.

Economics 18/9/10: IMF data on bond yields

With all the debate, recently fueled by the Governor of our Central Bank and Minister for Finance, concerning the level of Irish bond yields, it is always insightful to look at the historic evidence as the source of better understanding of the underlying bond markets realities.

Fortunately, courtesy of the IMF, there is some new evidence on this issue available. IMF working paper, WP/10/184, titled "Fiscal Deficits, Public Debt, and Sovereign Bond Yields" by Emanuele Baldacci and Manmohan S. Kumar (August 2010) does superb analysis "of the impact of fiscal deficits and public debt on long-term interest rates during 1980–2008, taking into account a wide range of country-specific factors, for a panel of 31 advanced and emerging market economies."

In a summary, the paper "finds that higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term."

But the detailed reading is required to see the following: "the impact of fiscal balances on real yields provided results that were quite similar to the baseline, although the size of the estimated coefficients was larger: an increase in the fiscal deficit of 1 percent of GDP was seen to raise real yields by about 30–34 basis points." (Emphasis is mine). Table below provides estimates:
By the above numbers, Irish bonds currently should be yielding over 7.54%. Not 6.5% we've seen so far, but 7.54%. This puts into perspective the statements about 'ridiculously high' yields being observed today.

If we toss into this relationship the effect of change in our public debt position, plus a risk premium over Germany (note that the estimates refer to the average for countries that include not just Ireland, but 29 other developed economies, including US, Germany, Japan and so on), the expected historically-justified yield on our 10 year bonds will rise to

• deficit-induced 7.54% +
  
• country risk premium driven by deterioration in economic growth adjusting for ECB rates) of 1.46%+
• change from initial public debt position 0.30%

So the total, fundamentals-justified Irish 10 year bond yield should be around 9.30%.

Don't believe me? Well here's a historic plot that reflects not a wishful thinking of our policymakers, but the reality of what has transpired in the markets over almost 30 years.
Ooops... looks like our ex-banks deficits warrant the yields well above 10% and on average closer to 15%, nominal (remember the above yields computed based on model results are real). Alternatively, for our bond yields to be justified at 6.5% we need to cut our deficit back to around 5.2% mark and hold our debt to GDP ratio steady.

Someone, quick, show this stuff to our bonds 'gurus' in the Government.