07/11/2011: US Mint sales for October

In recent weeks there was some long-expected noises coming out of the gold 'bears' quick to pounce on the allegedly 'collapsing' sales of gold coins by the US mint. I resisted the temptation to make premature conclusions until the full monthly sales data for October is in. At last, we now can make some analytical observations.

The thesis advanced by the 'bears' is that October sales declines (for US Mint sales of new coins) are:

1. Profoundly deep
2. Consistent with 'gold bubble is bursting at last' environment and
3. Significantly out of line with previous trends, and
4. Changes are reflective of buyers exiting the market on the back of high gold prices

Let's take a look at the data:

First - sales. 

In absolute terms, number of coins sold by the US Mint in October has fallen to 65,000 from 115,500 in September. Mom, thus, volume of sales, measured in the number of coins is down 43.7% and yoy change is -45.6%. Significant declines. Latest sales are running below the historical trend and 6mo MA has hit the long term historical trendline. 

This suggests reversion to historical mean, as predicted by my previous note on this matter and is, in my view, a welcome sign of some 'froth' reduction in the speculative component of the market. The trend remains on the upside, and 6mo MA is still running ahead of pre-crisis averages. Historical average is at 98,329 coins with a massive standard deviation of 112,309. Crisis period average is 128,967 and smaller (but still substantial) standard deviation of 110,323. Now, for 10 months of 2011 so far, the average is 130,400 coins sold, but the standard deviation (imprecise estimate, of course) of 41,934 or roughly 1/3 of the volatility over entire history.

Thus, if anything, monthly movements along the elevated average trend for crisis period are now looking less volatile than in pre-crisis period, which suggests that gold is acting as a hedge during the crisis against prolonged risks in other asset classes and that this property is so far being reinforced by reduced volatility as well.

Chart above shows that when it comes to gold coinage sales in volume (oz) of gold content, October sales (50,000 oz) are well below September sales (91,000 oz) and are 46.8% behind October 2010 sales. Worried 'bears' are onto something here? Well, not exactly. As with coinage, volatility of the series historically runs at 52,985 against historical average sales of 55,768 oz. Crisis-period volatility is at 44,726 against crisis-period average sales of 95,859 oz. 10mo through october 2011 volatility is at 26,514 (1/2 of historical volatility) and average sales are 89,350 oz - below crisis period average. Again, there seems to be more stability in sales in terms of oz volume than before, which, surely, should be a good thing for a hedge instrument. The 6mo MA trend is on decline here since March-May 2011 and, again, this is not a bad thing, as it signals continued reversion to 'normal' trading conditions - i.e. potential reduction in speculative buying.

Next little thingy, volume of gold per coin sold on average now stands at 0.769 oz/coin in October, virtually bang on with September 0.788 oz/coin. Which too is a good thing. Average historical volume of gold per coin sold is 0.587 oz/coin (stdev of 0.2) and crisis-period average is 0.816 oz/coin (stdev of 0.191). Latest 10 months period average is 0.703 oz/coin (note - we are still well ahead of that in October) and stdev for the period is 0.126 - well below historical volatility. 

So no drama - in fact, much less drama - in October data. Upward trends remain, reversion to trend is ongoing nicely, volatility falling. I never make predictions about bubbles timing, but as far as 'bursting' explosions and profound changes - I don't really see them. At least not yet.

What about the fourth 'argument' listed above? Are buyers fleeing gold coins markets because prices are too high? Well, I don't know what buyers think, but correlation between price of gold and volume of gold sold via coins by the US Mint is evolving as follows:

Thus, in October, 12mo dynamic correlation has fallen to -0.24 from -0.06 in September. This looks dramatic, until we consider historical trends. Average historical correlation is at -0.09 with stdev of 0.397. Crisis period correlation averages at -0.151 with a standard deviation of 0.377. For the period of January 2011-October 2011, average correlation is at -0.205 and stdev at 0.151.

The above implies that while current negative correlation is not dramatic, the trend in 2011 is so far distinctly for deeper negative correlations between gold price and coins sales and for more stability along this trend line.

Is this a good thing? Nope. The opposite is true in my opinion. More negative correlation implies stronger reduction in speculative buying, leaving gold coins demand more dependent on long term hedging objectives and as the tool for preservation of wealth. In other words, less speculation, more long term demand. This is not what we should see in a bubble 'bursting' stages.

Once again, caution is due - I am not arguing if there is a bubble in gold markets overall. This is just analysis of the coins sales. I am simply suggesting that we are seeing a well-predicted reversion to the mean along upward trend in demand. We are also seeing, in my opinion, gold coins doing exactly what gold in general is expected to do - providing long term hedge instrument against risks associated with other asset classes.

Disclosure: I serve as non-executive member of the Investment Committee of GoldCore and I am long gold with stable unchanged allocation over the last 3 years. All of the above views are solely my own. 

07/11/2011: Economic Sentiment in EU27, Euro area and the Big 4

In previous two posts I covered Consumer Confidence and Business Confidence indices for EU27, Euro area and the Big 4 economies. Here's the latests composite indicator for Economic Sentiment.

Overall EU27-wide economic sentiment continued to point South in October with a reading of 93.8 (below 100) coming on foot of 93.9 in September. 3mo MA for the indicator is now at 95.0 against 6mo MA of 98.4, signaling downward trend. The index is now below 100 for three months in a row.

Historical average for the series is at 101.1 against pre-Euro introduction period average of 102.1. Since introduction of the Euro, the index averaged 99.5, well below pre-Euro era average reading.

Euro area own economic sentiment also deteriorated in October to 94.8 against 95.0 in September. The index is now below 100 for three months in a row. 3mo MA at 96.1 below 6mo MA of 99.3 showing downward trend.

Historical average for the index is at 100.8 with the reading of 102.1 for the period prior to Euro introduction and 98.8 for the period since Euro introduction.

Per charts above:

• Economic Sentiment declined in Germany from 104.9 in September to 104.1 in October, with 3mo MA at 105.3 running behind 108.6 reading for 6mo MA. Before Euro introduction, German Economic Sentiment averaged 103.9 and since Euro introduction the average is at 98.1.
• Economic Sentiment fell (slightly) in Spain from 90.9 in September to 90.8 in October, remaining below 100 for every month since August 2007. 3mo MA is at 91.5 against 6mo MA of 92.6, so contraction in the sentiment continues to accelerate. Pre-euro period average for Spain is at 101.9 and since introduction of the Euro the index averaged only 98.6.
• Economic Sentiment bounced back to slower rate of decline in France rising from 96.0 in September to 97.2 in October. The index remains below 100 for 3 consecutive months. 3mo MA is now at 97.6 against 6mo MA of 101.2. France is the only country which saw improvement in the Economic Sentiment since introduction of the Euro. Pre-euro period average is at 99.4 against Euro period average of 101.8.
• Italian economic Sentiment has bounced slightly from 89.0 in September to 89.3 in October showing a slowdown in the overall rate of decline. 3m MA is at 90.8 and 6mo MA is at 93.3, with 6 consecutive months of sub-100 readings. Prior to introduction of the Euro, the index averaged 101.5 and since introduction of the Euro, the average is 99.3.

As shown in the chart below, shallow positive trend in the Economic Sentiment index during the years prior to Euro introduction has been replaced by a negative trend since introduction of the common currency.

Furthermore, the rate of decline in the averages between pre-Euro and post-Euro introduction periods is steeper in the Euro area than in the overall EU27, suggesting that the Euro was not conducive to improvements in overall Economic Sentiment.

07/11/2011: Producer Confidence in EU27, Euro area and Euro area Big 4

In the previous post we looked at the historical (and latest) data for Consumer Confidence in EU27 and the Euro area. This post updates data for Producer Confidence (Industrial Producers segment).

Business Confidence indicator fell from -5.7 in September 2011 to -6.8 in October for EU27. The decline marks continued downward trend with index below zero for the third month in a row. 3mo MA is now at -5.0 against 6mo MA of -2.4. Historical average is at -6.1 against pre-Euro period average of -5.6 and Euro period average of -6.8.

The indicator slipped to -6.6 in October, down from -5.9 in September for Euro area sub-sample. This too was the third consecutive month of index reading below zero. 3mo MA is at -5.1 against 6mo MA of -2.2. Pre-euro period average is -5.6 against post-euro introduction average of -6.2.

The index deteriorated mom in Germany (+1.4 in September to -0.7 in October), and Italy (-9.8 to -10.3) and on both countries 3mo MA is now below 6mo MA. France (-8.3 to -7.6) and Spain (-16.0 to -13.8) saw a slowdown in the rate of decrease in confidence. Both countries also show deeper contractions over 3mo MA than over 6mo MA.

As chart below shows, as with Consumer Confidence, Business Confidence has moved from up-trend over time in the period before the introduction of the Euro to a negative trend since the introduction of the Euro. This effect, however, can be explained by the changes in the economic environments across the entire EU, not just within the Euro area. 

Comparatives for historical averages show that pre-euro period averages were above those attained post-euro introduction in Germany and Italy, virtually unchanged in France and lower in Spain. This is consistent with the long term effects of the construction sector bubble in Spain.

06/11/2011: Consumer Confidence - Euro area and Big 4

Ignored in the hula-balloo of the euro crisis, the real side of the euro area economy is clearly not firing on all cylinders. In particular, the confidence indicators continue to signal underlying structural weaknesses both on the producer and consumer sides.

Here are the latest indices for consumer and producer confidence across the EU and euro area. The present post deals with Consumer Confidence, with subsequent two posts discussing October data for Producer Sentiment and Economic Sentiment.

Overall Consumer Confidence for EU27 has declined from -19.1 in September to -20.2 in October. 3mo MA is now running at -18.7 which is significantly below the 6mo MA of -15.9. Year ago, the index stood at -11.5 against the historical average of -11.1, pre-Euro average of -10.7 and Euro-era average of -11.8.

Euro area Consumer Confidence index stood at -19.9 in October, down from -19.1 in September. 3mo MA in October was -18.5 against 6mo MA of -15.3, so the underlying trend in recent months is down. Historical average ins -12.2 and pre-Euro era average is -11.3 against Euro era average of -13.2.

It is worth noting that the declines between pre-Euro era and Euro era averages in deeper for Euro area countries, strongly suggesting that the introduction of the Euro overall has been associated with an average decline in the consumer sentiment in the Euro area members states that cannot be explained by the variation in consumer sentiment within the overall EU.

Further, per charts above, German Consumer Confidence has fallen from -1.9 in September to -3.3 in October, remaining below zero for the second month in a row. German Consumer Confidence 3mo MA was -1.7 in October against 6 mo MA of +2.6. Historical average is -8.1. Pre-euro era average for Germany is -7.6 against the average of -8.8 for the period following the introduction of the euro. Once again, the swing downward from pre-euro period to post-euro period is larger for Germany than for EU27.

Spanish Consumer Confidence has fallen from -17.0 in September to -19.6 in October, with 3mo MA of -17.9 against the 6mo MA of -15.8. As with Germany, pre-euro period average index reading was -10.9 and post-euro introduction the average is -16.0, showing clearly that introduction of the euro in Spain was not associated with an improvement in consumer sentiment.

France’s Consumer Confidence index continued to signal contraction in demand, albeit at slower pace. October reading came in at -24.3 against -28.4 in September. 3mo MA stands at -26.3 against the 6mo MA of -23.0. France was the only country of the large euro area economies that saw an improvement in consumer sentiment since introduction of the euro: pre-euro period average reading for France was -19.4 against post-euro introduction the average index reading is -17.1.

Italy’s Consumer Confidence had posted a decline from already abysmal -31.1 in September to -33.9 in October. 3mo MA is now at -31.3 against the 6mo MA of -29.0. Just as Spain and Germany, Italy shows signs of decline in consumer confidence since introduction of the euro. Pre-euro period average index reading is -12.9 against a statistically significantly lower post-euro introduction average of -17.1. Of the Euro Big-4 economies, Italian consumers showed the greatest adverse impact of the euro introduction.

Oh, and the thing is… on average, across the Euro area itself, the same problem remains:

As shown above, the trend in consumer confidence over time was up pre-euro introduction. With euro introduction, the trend has been down.

05/11/2011: Jobs destruction in Ireland 2008-2010

So we had the Celtic Tiger, now we are having a Celtic Bust. Our extreme (for a young, small open economy with high levels of tertiary education - in numbers, if not quality - etc). But how do we stack up against other advanced economies in this area?

Here's some data from the OECD covering the period of the crisis (2008-2010, no annual data for 2011 yet) on jobs destruction in Ireland, compared to same in other advanced economies.

For a small economy, even in absolute terms, the number of jobs lost in Ireland in 2008-2010 period was 261,000 or 8th largest loss in the sample of 24 advanced economies. Net of new jobs created (+11,000), Irish economy lost 251,000 (note rounding differences) jobs in the period covered. The net loss we sustained in terms of jobs destruction in absolute terms was the 5th largest in the advanced economies sample.

Chart below puts the above numbers in relative context. As a percentage of total employment, Irish net jobs destruction was 12.2% - second highest after Estonia.

In terms of sectors most severely impacted by losses, Construction leads with 87.8% share of all jobs changes during the crisis. Surprisingly - being the source of so much destruction via Irish domestic banking collapse - Financial Services jobs category posted the shallowest jobs declines at 15.1%. This is most likely due to the lack of layoffs in the state-controlled banking sector, plus the resilience of the IFSC. The only sector that saw increases in jobs numbers is the sector of Community, social and personal services.

05/11/2011: Patents and 'sticky' ROI on academic investment

In the previous post I covered some interesting data on hotspot universities (high impact academic institutions) around the world based on OECD data for 2009. Here is the data on high impact patents (EPO top 1 percent) through 2005 against data for the same through 2000.

About the only interesting trend in the above data, other than the one that reinforces the trends highlighted in the previous post is that there is tremendous 'stickiness' or resilience or historical dependence in the data. In other words, there is a 0.994% positive correlation between past performance in terms of highly cited patents and the later performance.

The above trend is of interest because it suggests that overall, league tables changes are difficult to achieve over the shorter period of time and also that ROI in academic research is itself relatively 'sticky', stretched over time.

The good news is that for the two periods, Irish patents applications have increased from 5 in 1996-2000 to 14 in 2001-2005 - a rise of 180%. The bad news, the average for 36 most advanced economies is 226% improvement over the same period of time.

05/11/2011: Universities & Research: Europe v ROW

OECD recently released an interesting database on research and universities impact for 24 countries. Here are some insights.

First from the top, the US retained its absolutely dominant position in terms of high impact universities. The EU comes in as the second. The relationship between two in terms of specific categories of high impact instituions ('hot-spots') is plotted below:

Aggregating Medicine, Human Sciences and Sciences and plotting them against Social Sciences clearly shows that world-wide (within sample) and even excluding the US, there is a very strong positive correlation between the quality of Science-focused high impact academic centres and Social Sciences centres.

In fact, correlation between Sciences and Social Sciences hot spots numbers is 0.97 for full sample and 0.91 for sub-sample excluding the US. However, excluding UK and US, the correlation drops to 0.59. In my opinion, this strongly suggests that our policies, aiming at focusing in terms of building capacity in 'hard sciences' alone - the EU-wide and certainly Ireland-own agendas for research and development frameworks - is a misguided approach that ignores the important inter-links between two fields.

EU overall results in the charts above are significantly driven by the UK academic performance. Excluding UK from the EU numbers dramatically alters EU standing relative to the US:

Thus, overall, ex-UK, EU falls to the third place in global rankings in terms of hotspots, were it to be ranked as a singular country.

Here are some more detailed plots of sub-indices by more granular division of research areas:

05/11/2011: Profit margins in Ireland: October 2011

Derived profit margins have continued to deteriorate in both manufacturing and services based on my analysis of the PMI data for October.

Per chart below:

• Profit margin conditions in Services sector posted slower rate of deterioration with differential between output and input prices moving to -15.38 in October from -18.52 in September. The differential averaged -17.2 in 12 months through October and -16.2 in 3 months through October. In 3 months through July 2011, the average differential was -17.4 and 2010 average for 3mos through october was -8.1 against 2009 same period reading of -5.6.
• Profit margins in Manufacturing have accelerated downward in October, reaching -10.87 differential against September -9.67. 12mo average through October was -19.6 and 3mo average through October was -13.4 against 3mo average through July of -19.7. 2010 average for 3mos though August was -16.4 and 2009 same period average was -11.5.

04/11/2011: October PMIs - risk of recession rising

Continuing with the analysis of the latest PMI figures for October 2011 for Ireland, this post is looking into the relationship between employment, PMIs and exports-led recovery both over historical horizon and the latest performance. The previous two posts dealt with detailed data on Manufacturing (here) and Services (here).

Manufacturing PMI posted a rise from 47.3 to 50.1 between September 2011 and October 2011, moving above 50 reading for the first time in 5 months. However, as explained in previous post this increase does not signal expansion, as 50.1 is statistically insignificant relative to 50. At the same time, employment sub-index for Manufacturing PMI remains in contraction at 47.1 (statistically significantly below 50) for the second month in a row.

Services PMI posted a slight improvement in the rate of growth at 51.5 in October, up from 51.3 in September, but once again, given the volatility in the series, these readings are not statistically different from 50 (no growth) mark. Meanwhile, Employment sub-index of Services PMI remains below water at 46 - same reading for both October and September.

Charts below show two core trends:

The trends are:

• Both manufacturing and Services PMIs are flatlining around 50 mark, signaling stagnation
• Both in Manufacturing and Services, there are no signs of easing in jobs destruction

Consistent with these trends, overall Services sector has moved from the position of relative jobless recovery signalled at the beginning of 2011 to border-line recession and jobs destruction in October. Manufacturing sector has moved from the optimal growth area (jobs creation and recovery) in the beginning of 2011 to a recession in October 2011.

In addition to weaknesses in employment and overall PMIs, October figures show deterioration in exports growth, with Manufacturing New Export Orders sub-index at 49.8 and below 50 for the second month in a row (note that 49.8 is statistically not significant compared to 50) and Services New Export Business sub-index at 50.1 (down from 53.1 in September). Both sub-indices show stagnant exports performance in the sectors. Chart below shows that we are now in a recession (albeit border-line) - vis-a-vis exports-led recovery in Manufacturing and are getting close to a recession in Services.

04/11/2011: PMI for Services: October

NCB Services sector PMI data is out today and as in the case of Manufacturing earlier last week (see details here), we have an effectively flatline economic activity in the sector. Here are the details.

Overall business activity index reading improved marginally from 51.3 in September to 51.5 in October. 3mo average through october is now at 51.3 against the 3mo average through July 2011 of 51.5. Year-to-date 2011 reading is 51.9 and same period 2010 reading was 51.0 with same period 2009 reading of 39.7. In other words, all data falls within the range of statistically indistinguishable from 50. Chart below illustrates.

The snapshot chart below shows the shorter-range PMI for Services plus the core driving constituent of activity - New Business sub-index. Worryingly, the latter remained in contraction territory at 49.7 in October, for the 6th month in a row. Year-to-date average is at 49.5, again signaling contraction, and 3mo through october average is 48.4 against 3mo through July average of 48.9. So things are getting worse, not less worse on a smoothed trend. Year-to-date period in 2010 saw average New Business sub-index at 50.2.

Profit margins (chart below) are moving in the wrong direction as well. Output prices sub-index remains at extremely rapidly falling 44 in October, same rate of contraction as in September. 3mo average is at 43.8 and year-to-date is 44.2. Last time output prices were expanding was in July 2008. Meanwhile, Input prices sub-index continues to signal inflation in intermediate and raw materials inputs at 52 in october on the back of 54 in September. Year-to-date average is 53.8 and 3mo through October average at 52.2 virtually identical to 52.4 average for 3 months through July. More on profit margins in a follow up post which will cover profits conditions in both manufacturing and services.

 Profitability sub-index (as per above discussion), illustrated in chart below remains under water. However, Business Confidence Index posted another 'we don't want to face reality' expectation reading, showing robust expectations of economic expansion from services providers. The sub-index rose to a massively expansionary 63.4 in October from 59.5 in September and the longer term trends are consistent with this reading. Of course, I have shown previously that Business Confidence component of the PMI has virtually nothing to do with the real performance metrics as measured by PMIs - the new orders and employment sub-index. This conclusion was based on econometric analysis performed on the entire time series for the data and tested for lags and directional causality.

Worryingly, New Exports Orders sub-index moved from expansionary 53.1 reading in September to virtually stand-still at 50.1 in October. This compares unfavorably against the 53.0 average for year-to-date and even against 3mo average of 51.2 through October. The above, alongside with 3mo average of 52.4 in 3 months through July suggests downward trend in overall growth in exports-related services.

 Lastly, employment in the sub-sector continued to contract. October reading of 46 was identical to September reading and signals significant contraction. The story is virtually identical to Manufacturing and will be subject of mored detailed discussion in the following post.

So on the net, there as flat-line performance across the sector in October, with majority of trends in sub-indices pointing to contraction in months ahead. Not good news, I am afraid, despite the 51.5 reading on overall PMI Services Business Activity index.

03/11/2011: ECB rate cut

ECB decision to reduce rates by 25bps today has led to a dramatic reduction of the ECB overall rate premium over the basket of advanced economies rates as shown below. With today's decision, the ECB premium declines from 16.73% in October to 1.21% in November (barring any change in the BofE rate later).

This move, however, directly contradicts ECB mandate for price stability with inflation for October anchored at 3.0%:

03/11/2011: Another shallow rise in unemployment

The Live Register figures are out for October with standardized (LR-implied) rate of unemployment inching up to 14.4%. Here are the details.

Live Register-implied Standardized Unemployment Rate (SUR) rose from 14.3% in September to 14.4% in October, matching the levels in July and August. 14.4% is the highest level SUR reached in 10 months through October 2011 and the third highest since the crisis began (note that 14.4% SUR was recorded in 4 months since the crisis began). October 2011 SUR is now identical to that recored in October 2010Chart below illustrates.

Overall, seasonally-adjusted LR rose to 447,100 in October 2011, up 2,700 on September 2011. year on year, LR fell 300 (-0.07%). In September 2011, LR declined 4,300 mom and fell 5,400 yoy (-1.2% yoy). 3mo average through October 2011 is down 0.31% yoy. As shown below, we have a virtually flat trend.

Seasonally-adjusted LR numbers for those 25 years of age and older rose 2,100, from 364,000 in September to 366,100 in October. Year on year the number of 25 years and older workers on LR is up 2,600 (+0.72%) and 3mo average through October is 1.4% above the same period yoy. The numbers of under 25-yo workers on LR increased 500 (+0.62%) from 80,400 in September to 80,900 in October 2011. However, year on year, the number of young workers on LR fell 5,700 (-6.6%) - a shallower fall than in September 2011, but a significant decline. Overall, this suggests that younger workers exits into education, emigration and general falling out of the benefits net can be a significant source for moderating trends in LR figures overall in recent months.

Casual and part-time workers counts on LR rose 1,012 (+1.2%) from 84,017 in September to 85,029 in October 2011. 3mo average through October is now 9.1% above the same period in 2010 and year on year October reading is 7,105 (+9.1%) ahead of October 2010 level. Chart below illustrates.

Numbers of non-nationals on LR fell 384 in October to 75,037 - a decline of 0.51% and are up year on year by 402 (+0.54%). Numbers of Irish nationals on LR declined 6,625 mom (-1.83%) and are up 477 yoy (+0.13%). For both series there were small (less than 0.22%) declines in 3mo average through october, yoy. Please remember - these are not seasonally adjusted.

Per CSO release, "in October 58.2% (250,659) of all claimants on the Live Register were short term claimants. The comparable figure for October 2010 was 65.6% (281,945)." The annual fall of 31,286 (-11.1%) was recorded in the number of short term claimants. "The number of long term claimants on the Live Register in October 2011 was 179,773", up  32,165 (+21.8%) yoy. "This rate of increase in long term claimants has been slowing through the year with an annual increase of 57,597 (55.9%) having been recorded in January 2011."

The rate of increase, however, can be slowing due to several factors not mentioned by the CSO, such as draw down in LR numbers due to training programmes participation, emigration and dropping out of unemployed second earners from the labour force and LR benefits.