31/08/2011: Europe's economic, business & consumer confidence sink in August

Following a precipitous collapse of the US consumer confidence this month (see posts here and here for details), the EU has just posted a series of consumer, business and economic sentiment indicators that are showing a massive drop in overall economic activity across the board. Here are the details.

Starting with Economic Sentiment Indicator (ESI) first:

• August ESI reading for EU27 came in at 97.3 (contraction territory) down from July 102.3. 3mo MA for the index is now at 101.4 and yoy the index is down 5.7%.
• Euro area ESI is also in contraction zone at 98.3 for August, lowest since May 2010, down from 103.0 in July and off 3.8% yoy. 3mo MA of the series is now at 102.2.
• ESI for Germany is still in expansion at 107.0 in August, but down from 112.7 in July and down on 3mo MA of 111.4. The index is now down 3.1% yoy. This is the lowest reading since July 2010.
  
• ESI for Spain is showing deeper contraction in August, reaching 92.7, down from July 93.0 and registering uninterrupted contractionary performance since (oh, sh**t) September 2007. ESI, however is up in Spain yoy by 1.6%.
  
• ESI for France latest reading is at 105.9 for July, which was down from 107.4 in June.
• ESI for Italy signals recession at 94.1, down from 94.8 in July and off 4.8% yoy. 3mo MA is at 96.1 and the index has remained in contraction zone for consecutive May 2011.

Two charts to illustrate - one of complete historical series, and one of a more recent snapshot:
What the historical series show is a worrisome trend:

• Before January 2001, Euro area average ESI reading was 102.1, post-introduction of the Euro, the average reading is 98.9. This implies a swing from shallow expansionary optimism in pre-Euro period average, to a shallow pessimism in post-Euro introduction period.
• In Germany, prior to 2001, the average ESI was 103.9 and post January 2001 the average stands at 98.0
• In Spain, prior to 2001, the average ESI was 101.9 and post January 2001 the average stands at 98.7
• In France, prior to 2001, the average ESI was 99.4 and post January 2001 the average stands at 101.9 - the only major economy to buck the trend
• In Italy, prior to 2001, the average ESI was 101.5 and post January 2001 the average stands at 99.5

Next, consider the Consumer Confidence Indicator (CSI):

• CSI for the EU27 has fallen from -12 in July to -17 in August, the lowest reading since September 2009 and well below 3mo MA of -13.4. In August 2010 index stood at -11.
• CSI for Euro area is also at -17 in August, down from -11 in July.
  
• August reading is the lowest since June 2010, as Euro area consumers are generally less optimistic than the EU27 average. EU27 average historical reading is -11.1 and Euro area average historical reading is -12.0. Prior to January 2001 the historical averages were: -10.7 for EU27 and -11.3 for Euro area. post-introduction of the Euro, average historical readings are now at -11.7 for the EU 27 and -13.1 for the Euro area, suggesting that the Euro introduction was not exactly a boost to consumer confidence in either the EU27 or in the Euro area.
  
• Germany's CSI came in at +0.5 in August, down from 1.4 in July. The index is now well below 3mo MA of 1.1 but is well above -3 reading attained a year ago.
• Spain's CSI is now at -17, down from -13.4 in July and below 3mo MA of -14.1. In August 2010 the index stood at -19.8, so there has been a yoy improvement in the degree of consumer pessimism.
• France's CSI stands at -18.4 (recall that France is the only large Euro area economy with strong focus on consumer spending) in July (latest data), down from 17.60 in June and an improvement on -25.8 yoy.
• Italy's CSI is reading at -28.8 in August, down from -27.4 in July, down on -26.6 3moMA and well below August 2010 reading of -21.3.

Again, two charts to illustrate:

Some historical trends concerning the Consumer Confidence Index:

• As noted above, consumer confidence had shifted, on average, from cautious optimism in pre-Euro era to cautious pessimism since January 2001.
• In Germany, before January 2001, consumer pessimism (average) stood at -7.26. Post January 2001, the average pessimism became deeper at -10.83. In effect, then, that 'exports-led' economic growth model for Germany has meant the wholesale historical undermining of consumer interests.
• In Spain and Italy, the picture of long-term historical trends is identical to Germany, with levels of pessimism being higher than in Germany across entire history.
• In France, consumer pessimism in pre-2001 period stood, on average, at -19.36 - deeper than in other Big 4 EU economies. Post 2001, average pessimism actually declined to -16.94, still the heaviest level of pessimism (on average) across the Big 4 economies.

Lastly, consider Business Confidence Indicator (BCI):

• EU27 BCI has fallen from +0.1 in July to -2.50 in August, hitting the lowest reading since July 2010. The index is now down compared to +0.17 3mo MA and is below -2.10 reading in August 2010.
• Euro area BCI has declined from +0.90 in July to -2.90 in August, behind +0.5 3mo MA. A year ago, BCI reading was -2.60, making current reading the lowest since July 2010.
• Germany's BCI has declined from +9.60 in July to +4.60 in August, behind +8.67 3mo MA. A year ago, BCI reading was +3.80, making current reading the lowest since September 2010.
• Spain's BCI remained unchanged in August at -13.90, behind +-12.27 3mo MA. A year ago, BCI reading was -13.0, making current and previous month readings the lowest since June 2010.
• France's BCI has declined from +5.10 in June to +0.8 in July (latest data), making the latest reading the lowest since December 2010.
• Italy's BCI has declined from -4.50 in July to -4.80 in August, behind -3.93 3mo MA. A year ago, BCI reading was -7.0.

Historically:

• Business confidence readings averaged -5.62 across the EU27 in pre-2001 period, and have since then fallen to -6.77 average reading for the period post-2001. BCI for the Euro area averaged -5.60 in pre-2001 period and -6.23 in post-2001 period. This, again, shows that the introduction of the Euro did not have a positive effect on business confidence.
• In Germany and Italy, pre-2001 BCI averages were better than post-2001 averages, while in Spain there was an improvement in the levels of business pessimism post-2001. In France, pre-2001 average BCI was -6.59 and post-2001 average BCI is -6.41 - implying statistically identical readings.
  

30/08/2011: US Consumer Sentiment collapses in August

The US Conference Board Consumer Confidence index fell in August, confirming other readings of Consumer Sentiment in the US released earlier (see chart below). The Index now stands at 44.5, down from 59.2 in July.

• The Present Situation Index decreased to 33.3 from 35.7.
  
• The Expectations Index decreased to 51.9 from 74.9 last month.
  
• US Consumer Confidence index is now at its lowest level since April 2009 (40.8).
  
• Consumers claiming business conditions are "bad" increased to 40.6 percent from 38.7 percent,
  
• Consumers' assessment of employment conditions was more pessimistic than last month. Those claiming jobs are "hard to get" increased to 49.1 percent from 44.8 percent, while those stating jobs are "plentiful" declined to 4.7 percent from 5.1 percent.
• Those expecting business conditions to improve over the next 6 months decreased to 11.8 percent from 17.9 percent,
  
• Those expecting business conditions to worsen over the next 6 months surged to 24.6 percent from 16.1 percent.
  
• Those anticipating more jobs in the medium term future decreased to 11.4 percent from 16.9 percent, while those expecting fewer jobs increased to 31.5 percent from 22.2 percent.
• The proportion of consumers anticipating an increase in their incomes declined to 14.3 percent from 15.9 percent.

Earlier-released University of Michigan Consumer Sentiment Index for August 2011 posted a decline from 63.7 in July to 54.9 - the lowest reading since May 1980 (see chart).

29/08/2011: Mortgages Arrears - 2Q 2011 data

The Central Bank of Ireland today published the latest data on mortgage arrears and repossessions for 2Q 2011. Per CBofI data (note, much of the analysis is my own):

• At the end of June 2011 there were 777,321 private residential mortgage accounts held in the Republic of Ireland to a value of €115.089 billion.
  
• 55,763 accounts (7.2% of total) were in arrears for more than 90 days, up from 49,609 accounts (6.3% of total) at the end of 1Q 2011. Accounts in arrears have balances of €10.838 billion as of 2Q 2011, up on €9.599 billion a quarter before. Thus percentage of outstanding amounts that represent mortgages in arrears of 90 days and over is now 9.42% against 1Q 2011 percentage of 8.28%.
• Percentages of loans in arrears more than 90 days have risen from 5.1% in 3Q 2010 to 5.70% in 4Q 2010 to 6.30% in 1Q 2011 and to 7.20% in 2Q 2011. Hence, the increases here are accelerating as of last quarter.
• Percentages of loans volumes in arrears 90 days or more have risen from 6.64% in 3Q 2010 to 7.39% in 4Q 2010 to 8.28% in 1Q 2011 and to 9.42% in 2Q 2011. Again, increases here also accelerated, with 4Q2010 on 3Q2010 rising by 0.75pp, 1Q 2011 on 4Q 2010 rising by 0.89pp and 2Q 2011 on 1Q2011 rising by 1.14pp.
  
• 69,837 residential mortgage accounts were categorised as restructured at the end of 2Q 2011, up from 62,936 restructured accounts at the end of 1Q 2011.
• Of the restructured mortgages total, 39,395 are not in arrears and are "performing as per the restructured arrangement"
  
• 30,442 of restructured mortgages "have arrears of varying categories (arrears both less than and greater than 90 days)"
  
• Therefore, 95,158 accounts are either in arrears greater than 90 days or have been restructured and are not in arrears as at the end of June 2011.
  
• Arrangements whereby at least the interest only portion of the mortgage is being met account for over half of all restructure types (52%).

Now, let me run though the figures in more aggregate detail. Take together all loans that are in arrears 90 days or more, plus repossessions and loans that are restructured, but are not in arrears. Clearly, these loans represent some indication of mortgages either at risk or defaulted. Let's call these such.

• In 2Q 2011 a total number of 95,967 mortgages were either at risk or defaulted, up on 86,963 mortgages in 1Q 2011.
• Between 1Q 2011 and 2Q 2011, the number of mortgages at risk or defaulted has risen by 9,004, which is a faster rate of increase than in the period between 4Q 2010 and 1Q 2011 when the rise was 6,665 mortgages.
• In 2Q 2011, the percentage of all mortgages that were at risk or defaulted was 12.35%, up on 11.11% in 1Q 2011 and 10.21% in 4Q 2010.
• In 2Q 2011 a total volume of mortgages at risk or defaulted was €17.493 billion, up on €15.774 billion of mortgages in 1Q 2011 and on €14.525 billion in 4Q 2010. Also, note that the rate of these mortgages increases is accelerating as well.
• In 2Q 2011, the percentage of all mortgages value that was at risk or defaulted was 15.20%, up on 13.60% in 1Q 2011 and 12.45% in 4Q 2010.

Let me sum the above up: in 2Q 2011, the value of mortgages that were either in arrears 90days and over or were restructured and not in arrears accounted for 15.2% of the entire mortgages pool in Ireland.

Here's the summary:

Note that in the above table, the rates of risk increases are outpacing the rate of households deleveraging almost 15 times to 1.

We sooooo obviously don't have a mortgages crisis on our hands, that it all looks rather sustainable, ...if you stick your head deep into the sand bank... kinda like this...

29/08/2011: Residential Property Price Index: July 2011

Residential Property Price Index for Ireland for July 2011 was released earlier today by the CSO, showing continued deterioration in property prices across the board.

Per CSO: "In the year to July, residential property prices at a national level, fell by 12.5%. This
compares with an annual rate of decline of 12.9% in June and a decline of 12% recorded in the twelve months to July 2010." Chart below illustrates:
Residential property prices fell by 0.8% in the month of July. This compares with a
decline of 2.1% recorded in June and a decline of 1.3% in July of last year. To give a bit more granularity to the data:

• RPPRI now stands at 75.1, down from 75.7 in June, and 3mo MA is 76.03, against June 3mo MA of 77.07.
  
• Relative to peak property prices have no declined 42.45% against June to-peak decline of 42%.
  

Using 7 months of 2011 data, we can forecast expected declines in the index for 2011 as a whole:
Please note: this is a crude forecast. The result suggests that prices can decline to 75.3% of 2005 levels by the end of 2011 for all properties, with corresponding declines in House prices to 78.41%, Apartments to 57.47% and Dublin prices declining to 69.02%.

Let us make another set of important calculations. Recall that section 73 of the NAMA Act 2009 established the definition of the cut-off date for NAMA valuations. This date was later set at 30 November 2009. NAMA then applied an LTEV uplift on properties valued to that date. According to NAMA own business projections, the agency will require 10% increase in property values referenced to LTEV and November 30th 2009 cut-0ff-date to break even. In addition, NAMA claimed that its valuations are based on the consulting report they received from London Economics that timed property markets bottoming out to the latest Q1 2010.

Well, since the cut-off date, Irish residential property has now fallen a whooping 20.02% and relative to the end of Q1 2010, when NAMA expected the bottoming of the property cycle, the property values are down 16.28%. Ooops...

Back to the data:

• Index for House prices stood at 78.1 in July, down from 78.6 in June (-0.64% mom) and down 12.25% yoy
• House prices 3mo average index is now 79.03, down from 80.1 a month ago.
• House prices are down 40.83% to peak
• Apartments continued falling at precipitous rates, with Price Index for Apartments down to 57.6 in July from 59.4 in June. A decline of 3.03% mom and 15.67% yoy.
  
• Apartments prices 3mo MA is now at 59, down from 59.93 in June.
• Apartments prices are down 52.59% to the peak.
  

Having posted a bizarre increase from 70.5 in April to 70.8 in May, Dublin prices have fallen off the small cliff in June settling at the index reading of 69.1. July data shows Dublin prices flat at 69.1. This means that 3mo MA is now at 69.67, down from 70.13 in June. Relative to peak, prices in Dublin are down 48.62%. Year on year, July Dublin prices are down 11.86%, an improvement on annualized rate of decline of 12.64% in June, but worse than yoy change attained in May (-11.5%).

29/08/2011: Retail Sales and Consumer Confidence: July 2011

In the previous post, we looked at the latest data on retail sales for Ireland for July 2011 (here). Now, let's update the data for retail sales and consumer confidence.

Per ESRI latest data, consumer confidence in Ireland dropped from 56.3 in June 2011 to 55.9 in July, with 3mo moving average down to 57.2 in July from 57.9 in June.
As charts below indicate, Irish retail sales continue to underperform historical trends, but, crucially, are running well below the levels that would be consistent with the consumer confidence readings (both contemporaneous, lagged 1 period and 3mo moving averages):
The above suggests that we are still in - both, structural (consumer confidence and sales lags signals to the left range of the trend) and cyclical (below trend) - weaknesses in terms of retails sales and consumer demand.

29/08/2011: Retail Sales for July - a mixed bag swinging in the headwinds

The volume of retail sales in Ireland declined by 0.6% in July 2011 yoy and there was a monthly change of -0.5%. The value of retail sales decreased by 0.5% yoy and there was a month-on-month change of -0.4%.

• Current value of sales index reading is 88.7, down from 89.1 in June and below the 3mo running average of 88.8. The index is still ahead of the January 2011-to-date average of 88.3.
• Value of sales index is now 25.65% below its peak in February 2008.
• Value of retail sales index now reads 93.2, down from 93.7 in June. The index is now slightly below its 3mo running average of 93.3 but slightly ahead of 6mo running average of 92.8. The volume index average for January 2011-to-date is 92.3.
• Volume of retail sales is now down 19.86% on its peak attained back in October 2007.
  

If Motor Trades are excluded, the volume of core retail sales fell by 2.3% in July 2011 against July 2010, while there was a monthly increase in sales volumes of 0.5%. There was an annual decrease of 1.2% in the value of retail sales and a monthly increase of 0.8%.

• Value of core retail sales now stands at 95.7, up from 94.9 a month ago and ahead of 3mo running average of 95.3, but still below 6mo running average of 95.9. In comparison, 2010 average was 97.6 and 2011 running average to-date is 96.2.
• Core retail sales in value are now 19.3% below their December 2007 peak.
• Volume of core retail sales is now reading 99.1, up from 98.6 a month ago, and against 98.8 average for the 3mo and 6mo running average of 99.3. 2010 annual average is 102.3, while January 2011-to-date average is 99.5.
  
• Volume of retail sales is now 15.3% below its November 2007 peak.
  

In July, Motor Trades (+7.1%) and Non-Specialised Stores (+0.4%) were the only two
categories that showed year-on-year increases in the volume of retail sales. Largest yoy drops were posted by Books, Newspapers and Stationery (-9.5%), Other Retail Sales (-6.9%) and
Pharmaceuticals Medical & Cosmetic Articles (-6.8%) in the volume of retail sales.

A follow up post will update on the data for consumer confidence and links to retail sales data.

28/08/2011: Eurocoin August 2011 - signalling sharp contraction

Euro area leading economic indicator, eurocoin posted a sharp contraction in August, confirming rapid slowdown in the economic activity.

• Eurocoin fell from 0.45 in July 2011 to 0.22 in August, a drop of 51.1% - the sharpest since August 2008. This marks third consecutive month of declines.
• Eurocoin 3-mo running average is now at 0.40 and 6-mo average at 0.50. Year on year, the indicator is down 40.5%.
• The leading indicator is now reading within the band of 1/2 standard deviation from zero, making current growth reading virtually indistinguishable from stagnation.
• The indicator is now at the lowest level since September 2009.
  

• Annualized rate of growth is now running at 0.88%.
• Inflation - per ECB latest data, is running around 2.5%.

Updated charts relating Eurocoin to the ECB policy rates show lower expected fundamentals-determined repo rate at 2.5-3.5% based on Eurocoin and 2.75-3.25% based on HICP - both well ahead of the current rate of 1.5%.
The core drivers for Eurocoin decline in August were:

• H1 2011 growth rates (see earlier post here)
• H1 2011 slowdown in industrial production - impacting Germany and Italy and contraction in industrial production in France and Spain
• PMI Composite indicator through July 2011 showing contracting activity in the Euro area and in particular - Italy and Spain, plus significant deterioration in German business confidence (see detailed post here) and close-to-contraction reading in France
• Consumer confidence remaining in contractionary territory for the Euro area and, specifically, for France, Italy and Spain
• Sharp sell-offs in the stock markets across all 4 major economies, and
• Zero growth in exporting activity in the Euro area, with sharply falling exporting activity in Germany, zero exports growth in France, near zero growth in Italy and contracting exports in Spain
  

In short, all components of growth forecast are showing substantial deterioration, with 3 out of 5 main headline readings in contraction and 2 main readings in zero growth ranges.

25/08/2011: BIS publishes a wish-list for global regulation of OTC derivativatives markets

The Committee on Payment and Settlement Systems and the Technical Committee of IOSCO released a report on over-the-counter (OTC) derivatives data that should be collected, stored and disseminated by trade repositories (TRs). The market for these instruments is current estimated at over $600 trillion. Details and report are available here.

Per BIS statement: "The committees support the view that TRs, by collecting such data centrally, would provide the authorities and the public with better and timely information. This would make markets more transparent, help to prevent market abuse, and promote financial stability."

I happen to agree with the above, subject to one core caveat: collecting data is not enough. It is imperative that data collected is organically integrated into analytical frameworks that actually have a meaningful connection to supervision. This, however, is hardly an easy (and low cost) measure to achieve.

The report implies:

• minimum data reporting requirements and standardised formats
• the methodology and mechanism for data aggregation on a global basis
• these requirements and data formats will apply to both market participants reporting to TRs and to TRs reporting to the public and to regulators
• new information currently not supported by TRs is also identified as being helpful in assessing systemic risk and financial stability, including: current exposure, netting and collateralisation details on bilateral portfolios of OTC transactions; current market values of individual open OTC derivatives transactions; information on collateral assets that are applied to OTC derivatives portfolios, including the valuation and disposition of these assets
  

Back in 2009, the G20 called for OTC derivatives to be centrally cleared and transactions reported to repositories by the end of 2012. In a number of cases, national markets regulators are already setting up such facilities, for example the Trade Information Warehouse for credit default swaps and the Equity Derivatives Reporting Repository, under the US DTCC.

The CPSS and the IOSCO latest call comes as the global authorities are trying to set international minimum standards to apply to derivatives markets from the end of 2012, when a global system of Legal Entity Identifiers (LEI tags) for individual transactions should come in place.

In addition, the authorities also want to develop a standardized international product classification system to provide better sorting of transactions and underlying data, with potential links to higher level risk analytics.

IOSCO previously published a discussion paper on the role of securities regulators with regard to systemic risk which:

• Identifies transparency and disclosure as an important tool for dealing with systemic risk, including product transparency and financial sector stress tests. To meet these requirements, the authorities "would need aggregate data on, inter alia, (i) each entity's current gross exposure and exposure net of collateral (in order to assess both the absolute size of its exposures and its relative importance for the markets under consideration); (ii) each entity's current gross exposures and exposure net of collateral to each of its major counterparties (in order to quantify interconnectedness); and (iii) aggregate exposures of all counterparties in terms of specific asset classes, products, currencies, reference entities and underlying sectors." This data can help evaluate potential "knock-on effects of financial distress at any one institution and identify concentrations of risk among groups of closely related institutions".
• Measuring counterparty exposure will require data regarding bilateral positions, market values of open positions, netting arrangements, collateralisation and disposition and valuation of collateral
• Determining bilateral positions will require "data on the full set of open trades between a pair of counterparties and their economic characteristics, including all terms that are required to calculate and assign a value to a trade such as effective and termination dates, notional amounts, underlier reference data, counterparty information, coupon amounts and schedules, and other salient economic terms specific to individual types of transactions (e.g., restructuring clauses for credit default swap ("CDS") contracts and reference interest rates for interest rate swaps)"
• Determining the effect of netting arrangements will require "data on the set or sets of positions whose gains and losses can be netted against one another in determining amounts owed to any counterparty".

It is, perhaps, revealing to read in the paper candid assessment of the two panels that current reporting infrastructure simply cannot cope with the data required for risk analysis (including higher level systemic risk analysis) in relation to the overall derivatives markets.

"Existing TRs, ...do not track and report market values of open positions with regular frequency. ...existing major TRs are organised along asset-class lines while counterparty risk is managed at the bilateral portfolio level. For example, in computing current exposure, gains in a counterparty's position in one derivative product may be netted against losses in another derivative product. ...TRs as currently implemented would be unable to provide a complete set of information for determining current exposures, and ...some data gaps would still remain. For example, gathering information about collateral and reliable market value for non-cleared OTC derivatives is a challenge. Similarly, it is challenging to create an effective system for capturing information on bilateral netting arrangements."

So on the net - the consultative process launched by today's announcement should be a very interesting one and I will be covering it here. In addition, myself and industry research co-author are working on a paper for the QJ of Central Banking which will touch on some of the issues relating to the above.

25/08/2011: Irish Exports - long term composition

In light of the recent stellar performance of our exports (see my note on the latest figures here), it's worth taking a look at the overall exports and trade balance composition by broadly-defined sectors. Here are some historical facts.

First for some interesting long-term trends:

• Back in 1973, 5 broad sectors: Total food and live animals (0), Beverages and tobacco (1), Crude materials, inedible, except fuels (2), Mineral fuels, lubricants and related materials (3) and Animal and vegetable oils, fats and waxes (4) accounted for 26.8% of our exports by value. By 2002 that number shrunk to 8.6%. The overall importance of these sectors rose to a local peak in 2007 at 12.75% and in 2010 the sectors contributed 12.1% of our exports. Using the data for the first 5 months of 2011, the current running contribution of these sectors to our overall exports stands at 11.2%, despite continued CAP supports and strong agri-food prices.
• Annual contribution of the two sub-sectors related to ICT manufacturing: Office machines and automatic data processing equipment (75) and Electrical machinery, appliances etc., n.e.s. (77) to our exports stood at 13.05%. This share rose to an absolute peak of 34.03% in 2001 and had since fallen to 8.6% in 2010. Based on 5 months data for 2011, current contribution of the two sub-sectors to exports is running at 7.15%.
• Annual contribution of the two sub-sectors related to pharma and medical products and preparation industry: Organic chemicals (51) and Medicinal and pharmaceutical products (54) started with a barely noticeable 4.35% back in 1973, rising to just 7.8% in 1987 before taking off to reach 48.9% in 2010. The two sub-sectors contributed 51.5% of our total value of exports in the first 5 months of 2011.
  

Other sectors evolution is plotted below:
However, it is worth remembering that various exporting sectors are also importers - both of inputs into exports production and goods for consumption and capital investment. So consider the composition of our trade balance by each broad sector contribution:
The chart above hardly needs much commenting. Ireland's trade balance is pretty much now made up of pharmaceuticals and medical products. back in the 1970s, on average, we were net importers of Organic chemicals (51) & Medicinal & pharma products (54) with the two sub-sectors contributing 3.74% deficit to our trade balance. By 2010, the two sub-sectors own trade surplus stood at 86.1% of Ireland's overall trade surplus and in the first 5 months of 2011 the same proportion stood at 97.3%. Let's, say, our potency is Viagra, folks.

Which, of course, brings us to the point of recalling that scary moment which awaits us in 2012, when Viagra starts going off patent... and the overall patent cliff that the industry is facing globally.

In the mean time, our flagship domestic exporting sectors: Total food and live animals (0), Beverages and tobacco (1), Crude materials, inedible, except fuels (2), Mineral fuels, lubricants and related materials (3) and Animal and vegetable oils, fats and waxes (4) continue to contribute negatively to our overall trade balance. These sectors yielded 2.62% negative contribution to trade surplus in 2010 and in the first 5 months of this year they own trade deficits are running at 4.85% of our total trade surplus. By the way, if you think this is a new development, the same was true in the 2000-2009 (-0.23%).

2011 so far is also the first year when we are registering negative contribution to the trade balance from Office machines and automatic data processing equipment (75) and Electrical machinery, appliances etc., n.e.s. (77). Back in the 1970s these flagships of manufacturing were contributing 25.86% of our overall trade balance. In the 1980s 26.5%, in the 1990s 35.6% and in the 2000s +20.5%. In 2010 they accounted for 6.28% of the trade balance, but in the first 5 months of 2011 their contribution turned to negative 2.1%.

Some interesting stats to keep in mind when we talk about successes of our exporting sectors.

25/08/2011: National forecasts and systemic upward biases

New research, published today by NBER shows that national growth and budget forecasts in the Euro area tend to overestimate growth and revenue stability than in other advanced economies and are prone to provide more biased estimates in the period of economic expansion.

The paper, titled Over-optimism in Forecasts by Official Budget Agencies and Its Implications, and authored by Jeffrey A. Frankel of the Kennedy School of Government, Harvard University and published as NBER Working paper 17239 (link here):
"... studies forecasts of real growth rates and budget balances made by official government
agencies among 33 countries.

In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons.

This over-optimism in official forecasts can help explain excessive budget deficits, especially the
failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary."

In contradiction to the Franco-German recent mantra on fixed and centralized budgetary systems, the author states that: "Many believe that better fiscal policy can be obtained by means
of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland’s Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP."

In contrast, own budgetary discipline and honesty in forecasts pays off: "One country, Chile, has managed to overcome governments’ tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile’s official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession."

25/08/2011: German Index of Business Climate post another sharp contraction in August

Germany's Ifo index of business climate posted another large-scale contraction in August according to the latest reports.

• Index of Business Climate now stands at 108.7 (still in the expansionary territory), down from 112.9 in July. 2Q 2011 average for the index is 114.3 and 3Q 2011 (to-date) average is now at 110.8. Year on year, Business Climate index is down 2.4 points. This is the second consecutive monthly contraction.
  
• Business Situation index also registered a contraction to 118.1 in August from 121.4 in July - a second monthly contraction in a row.
  
• Index of Business Expectations fell precipitously, reaching 100.1 in August, down from 105.0 in July, marking the 6th consecutive month of declines. Index average for 2Q 2011 is 107.1 and 3Q 2011 (to-date) average is 102.6. Business Expectations are now down 8.9 points on August 2010.

All-in the latest reading continues to signal rapid slowdown in business activity, although the levels of the index remain in expansion territory.

24/08/2011: Few thoughts on today's Gold price correction

Following a dramatic rise over the recent weeks, gold registered a correction today. At this moment in time, gold for December 2011 delivery is down 5.76% on the day and is priced at USD 1,754.00 / oz. Here's a snapshot:
Of course, one day movement can be many things:

• A sustained correction (with market settling at lower levels and running along a flat trend)
• A short-term correction (with a return to, perhaps more sustainable, upward trend)
• A bear trap (with relatively prolonged period of downward corrections followed by a return to positive trend) and so on

While it is extremely hazardous to profess any explanations for specific daily (and generally high frequency) changes, here are some of the reasons that are being advanced by various analysts as to the possible drivers of today's correction:

1. The margins theory (see zerohedge comment here): CME raised margins on gold for the second time in the month, having hiked them first 22% and now raising them 27% again (new account margins are now at USD9,450 and maintenance accounts at USD5,500). This second rise follows 26% hike on margins by the Shanghai Gold Exchange (+26%) on Monday to 12%. In theory, margins increases should symmetrically rise costs for short and long positions on gold futures. Which can lead to closing of some positions. In practice, however, two things occur. Firstly, short positions face lower margin exposures than long positions - the difference being small, alas. Secondly, margins increases themselves might be dramatic, but on absolute terms they are still small, unless you are opening highly levered new accounts. The margins theory, in my view, helps explain the physical move in prices, but not the behavioral drivers for investors' reaction. More likely, in my view, is the possibility that two consecutive, short-spread margin hikes signal to the investors that CME is actively trying to prevent gold going parabolic, to contain speculative momentum. If so, current correction is welcome, as it triggers retrenchment of speculative leveraged investors.
2. The talk about Euro area demands for the collateral on Greek (and Portuguese and Irish... and may be Italian and Sapnish...) loans from EFSF/ESM/alphabet soup. FtAlphaville speculates on this (here). There can be indeed a push for such a move, though I doubt it will result in actual sales of gold reserves. Even if the sales were to take place, European peripheral gold will most likely be placed 'discretely' to other central banks and treasuries, plus the IMF in fear of destabilizing official reserves elsewhere. The last thing Europe will want to do is to dent its own (German, French & UK) wealth and anger a bunch of governments in Asia, plus the US & IMF - all of which are deeply into gold holdings.

Incidentally, couple of days ago I commented on twitter that CME margins increases are long-term positive for gold, if they are successful in cooling off speculative leveraged investors.

My guess - and I stress that this is a guess - is that the current correction can turn out to be relatively deep, but it will not alter long term (9-12 months) upward trend for gold. The reason is simple: US, UK, Japan and Europe are poised to print money. In part, this is already factored into previous highs for gold. In part, the uncertainty about the quantities of QE to be deployed, are offering both the upside and the downside scenarios for the gold price relative to peak.

If, however, the global QE does not materialize, stock markets and corporate debt markets will likely to slip into serious bear sentiment. Which will push gold back onto near-parabolic trend up.

As far as today's short-term correction goes, my view is that it was 'helped' by the shifts of liquidity into equities with markets posting another day of strong upsides.

For a longer-term lesson to be learned: today's correction shows clearly the perils (for ordinary investors) of rushing into an asset with a single large-scale purchase. Instead, gold should be treated as a long-term allocation aimed at real wealth preservation and hedging. Such allocation should be built over time, with sustained - volatility-reducing - strategic long positions. Not with attempts to 'time' the market or based on impulsive buy-ins based on expected capital gains.

And, of course, the volatility shown by today's gold price movement, as well as an even more dramatic volatility in equities and fixed income shown over recent months, highlight the need for conservative, long-term investment strategy based on proper risk management and diversification.