5/10/2012: Did Economic Fundamentals trump QE

Two effects of QEs and LTROs - the drivers of temporary inflation - were to boost returns on commodities and reallocate funds into Emerging Markets early on, followed by the fundamentals taking over once again, bidding down commodities and re-diverting EM inflows to developed markets...

Put differently, you can't fight fundamentals with money when the real transmission mechanism is broken. So far, we had this theme powerfully reverting returns back to the 2010 norm. It remains to be seen if the recent firming up of the US growth is going to be sustained.

5/10/2012: China's "This Time..." Moment?

T'is the night for charts folks... another pretty one:

This time it's different pic comes via Citi Research and illustrates Chinese property price indices...

5/10/2012: How you spell easy money?

Nice chart from Citi Research:

Easy Money - US Treasuries & German Bund 10year yields:

Pretty much times equities too...

5/10/2012: Couple interesting points on gold

Some very interesting research on gold from BNP Paribas (link) and some snippets from it:

Take a look at this chart:

Gold showing lower downside volatility compared to all comparatives and gold showing the upside premium too. Why wouldn't it if inflationary expectations are 'anchored' up?

"We expect central bank accommodative actions, and their impact on inflation expectations and currencies, to be supportive of gold for most of 2013. The US 5yr/5yr breakeven rate, an indicator of inflation expectations, rose on the announcement of QE3 to above 3% from 2.6%. It has since  retreated to 2.9% (Chart 3).

Part of the rationale behind further monetary easing by the Fed is precisely to support inflation expectations and avoid a deflationary environment. Another key objective of QE is to boost risky assets by increasing liquidity and reducing Treasury yields."

"The upcoming round of quantitative easing should also put downward pressure on the US dollar. The currency may lose ground against currencies such as the Yen or the Sterling until mid-2013. Euro appreciation will likely be capped by ongoing uncertainty linked to the sovereign debt crisis. While depreciation in the US dollar tends to be positive for gold, it is difficult to read much into this. The correlation between gold and the EURUSD is variable
and unstable. It currently stands around 65% on a 30-day basis (Chart 4)."

And in case you've been thinking that all the talk about gold as the 'barbaric relic' and the power of the central banks worldwide to right the crisis and protect us from catastrophic risks is true, ask yourself then why this:

In other words, why are Central Banks and Treasuries suddenly buying gold when they keep telling us all that everything is fine in the world of fiat money? Answer is - in part, being prudent, they are insuring against catastrophic risks. Which is a good practice. The bad practice, of course, is to simultaneously lie to their people that 'barbaric relic' is irrelevant in the age of fiat they so well control.

5/10/2012: Eurasian Economic Commission

A very interesting and, in my view, on-the-money discussion of the Eurasian Economic Commission - the build-up on customs union between Russia, Belarus and Kazakhstan from the Carnegie Endowment for International Peace: here.

Disclaimer: I would be a long-time supporter of the idea of the customs union within the CIS and the expansion of this union to include other neighboring states, with the Eurasian Economic Commission gaining capacity to negotiate functional trade and capital and people mobility agreements with the EU.

5/10/2012: Endaffo - a Magic Celtic Dragon

So this... link ... is the latest twist of spin PR tumble & dry news cycle with the Time Magazine ca 2012. And it has triggered somewhat of a surfing waves weather in the websphere. On the one hand, the FGers and Green Jerseyists are cheering the coup that has led to the declaration on the magazine cover of the return of the Celtic something. Obviously in green. On the other hand it is triggering memories of the not-so-distant past: link and link.

Oh, putting aside the fact that Time Magazine clearly doesn't bother reading actual data (otherwise what comeback?), all I can say about the 'good news' is that while Enda 2012 now does Biffo 2010, Time Magazine 2012 does Newsweek 2010.

And here's a priceless, poignantly telling lunacy of the Times 'interview' (italics are mine):

"And why do you think a gulf exists between the Irish and international perceptions of Kenny?
Politicians are often more popular abroad than they are in their own countries. That’s partly because familiarity breeds contempt. You could say it’s because the Irish know him better. But it’s also because the Irish focus on the smaller picture, and sometimes you really can see things better from a distance. It’s exactly the same if you think about what goes on in Washington or Westminster."
http://world.time.com/2012/10/05/behind-the-story-times-catherine-mayer-discusses-irish-prime-minister-enda-kenny/#ixzz28Q4VfaCJ 

Yes, Irish voters, residents, taxpayers, people - you are small-minded. Better listen to the Big Picture folks in the Times magazine who can't even check IMF WEO database to see, just what a marvelous Celtic Comeback Enda Kenny has triggered in the country his Government runs. Oh, sorry... but that would be 'focusing on the smaller picture', right?

So with Washington & Westminster in mind, I give you a new Tiger of Global Politics: Endaffo combining "endearing and ...slightly childlike quality to his enthusiasm" features of Times-cover Enda and "razor-sharp intelligence" of Newsweek-ranked "The Fiscal Taskmaster" Biffo.

Update: In the latest of the series of powerful endorsements from international media, our Taoiseach was credited - via selective quotations from the Time article - by the Irish Times (here) as follows: ""He didn’t do anything that one would think of as particularly foolish..." 
Ms Mayer said..."

It never occurs, in the duration of her interviews, for Ms Mayer to ask the obvious: 'Given the gravity of the crisis that Ireland is going through, is talking to a man who sets for his Government lowest possible targets and then fails to achieve them worth the paper and ink?'

"Ms Mayer said it was her belief politicians in Ireland are less insulated from reality than in other countries."

Distance from reality, of course, is a matter of perspective. Given the degree of detachment from that concept that Ms Mayer seems to exhibit, she might be onto something there.

4/10/2012: Kicking, Picking... Dependency

Quite an interesting chart plotting the substitution of the Eurosystem Open Market Operations dependency for two groups of banks. Massive inversion of relative dependency there:

Source: Citi Research. 

4/10/2012: Investor's Daily: We've been telling you porkies

In the previous post I tried to make some sense out of the headline numbers from the Exchequer returns through Q3 2012. This time around, let's take a look at the overall Exchequer balance.

Headline number being bandied around is that overall exchequer deficit stood at €11,134 mln in January-September 2012, down €9,526 mln on same period in 2011 (an impressive drop of 46.1%). Alas, that is a pure hog wash. Here's why.

In 2011, Irish state assumed banks recapitalizations and insurance shortfalls funding spending of €10,653 mln, this time around, the Government allocated only €1,775 mln to same.

Adjusting for banks recaps, therefore, Exchequer deficit stood at €10,007 mln in January-September 2011 and it was €9,359 mln in the same period this year, implying deficit reduction of €647.5 mln y/y - a drop of 6.47%.

But wait, in both 2011 and 2012 the state collected extraordinary receipts from banks recapitalization and guarantee schemes - the receipts which, as the EU Commission warned us earlier this year are likely to vanish over time. These amounted to €1.64bn in 2011 and €2.06bn in 2012 (January-September figures).

Subtracting these from the balance we have: exchequer deficit ex-banks recaps and receipts in 2011 was €11,650mln and in 2012 it was €11,417mln. In other words, the State like-for-like sustainable deficit reductions in the 9 months through September 2012 compared to the same period in 2011 were… err… massive €233.7 million (2%).

Let's do a comparative here: Budget 2012 took out of the economy €3.8 billion (with €2.2 billion in expenditure measures and €1.6 billion in taxation measures). On the net, the end result so far has been €233.7 million reduction of like-for-like deficit on 2011. How on earth can the Troika believe this to be a 'best-in-class' performance?

Or alternatively, there's €9.36 billion worth of deficit left out there to cut before we have a balanced budget. At the current rate of net savings, folks, that'd take 40 years if we were to rely on actually permanent revenues sources or 14 years if we keep faking the banking system revenues as not being a backdoor tax. Either way… that idea of 'under 3% of GDP' deficit by 2015 is… oh… how do they say it in Paris? Jonque?

And just so I don't have to produce a separate post on this, the Net Cumulated Voted Spending breakdown is also worth a line or two. You see, the heroic efforts of the Irish Government to support our economy have so far produced a reduction of €474 million on capital investment budget side y/y. But, alas, similarly heroic efforts at avoiding real cuts to the current spending side also bore their fruit, with current voted expenditure up year on year by €369 million in 9 months through September 2012.

So the bottom line is - savage austerity, tears dropping from the cheeks of our Socialist err… Labour TDs and Ministers… has yielded Total Net Voted Spending reduction cumulated over January-September 2011 of a whooping €105 million… And that is year on year. extrapolating this to the rest of the year implies that in 2012 we can expect roughly to cut our Net Voted Expenditure by a terrifyingly insignificant pittance amount of €140 million.

Yep… Jonque!

4/10/2012: Spanish Banks Stress Tests

My article for The Globe & Mail on Spanish banks stress tests (link).

3/10/2012: AIB hikes mortgages rates. Government plays banjo.

The logic of Irish Government's policy on the banking crisis:

Fallacy 1:
Government Position: Irish Government claims that it is protecting and shoring up Irish banks so they can start lending into the economy.
Irish Banks Position: jack up variable mortgages rates, thus taking money out of the economy.

Fallacy 2:
Government Position: Irish 'savings rate is irrationally high' so we must reduce the rate of savings to incentivise demand.
Irish Banks Response: jack up variable mortgages rates, thus reducing domestic demand.

Fallacy 3:
Government Position: Mortgages crisis must be dealt with while protecting family homes, where feasible.
Irish Banks Response: jack up variable mortgages rates, thus making homeownership less sustainable for many financially stressed homeowners.

Fallacy 4:
Government Position: Strategic defaults must be avoided.
Irish Banks Response: jack up variable mortgages rates, thus incentivising more strategic defaults.

Fallacy 5:
Government Position: Property markets must be returned to healthy functional state (aka: price increases are good, price drops are bad).
Irish Banks Response: jack up variable mortgages rates, thus pushing more properties into distress sales and removing more borrowers out of the pool of potential home buyers.

Which part of this 'market' is rational?

2/10/2012: Irish Exchequer Receipts Q3 2012

Headline figure on Tax Receipts is €26,118mln collected in Q3 2012 against profile of €25,733mln a surplus over the profile of 1.5%. However, in January-August  2012 the same surplus was 1.7% and January-June 2012 it was running at 3.1% surplus on target. In other words, target is being met, but performance is deteriorating and the Department is correct to sound cautiously here, constantly reiterating the importance of Q4 in terms of receipts delivery. The cushion as it stands at the end of September was €385 million on profile.

Year on year headline figure shows improvement in 9 months through September (up 8.4% on unadjusted basis, and up 6.2% on adjusted basis) compared to 8 months through August (7.7% on unadjusted basis and 5.2% on adjusted basis). This is the good news for the Exchequer.

On adjusted basis, tax revenues are up €1,491 mln in Q3 2012, having been up €1,063 mln in 8 months through August. This suggests that September monthly performance was pretty robust even once we adjust for the various reclassifications of tax revenues.

Now, let's try to see what is going on behind the headlines.

Adjustments - covering reclassifications of USC and delayed accounting for corporate tax receipts (carryover from 2011) - were running at €511 million in 8 months through August 2012. In Q1-Q3 2012 these were booked at €529 million - a suspiciously low differential for the whole month. I noted the same suspicion back in August. 

In addition, the Department seemingly does not account for reclassification of the Corporate Tax receipts from 2011 to 2012 in full. Instead, the Department does subtract the revenues booked in 2012 due to carry over from 2011 from 2012 figures, but it does not add these carry over amounts back into 2011 comparative Corporation Tax figure.

On non-tax revenues side, banking-related receipts are running at €2.057bn in 9 months through September 2012 against €1.643bn in the same period 2011.Semi-states dividends (another indirect tax on the economy) are at €88mln against €31mln in 2011. Pensions levies are at €11mln against €8.6mln in 2011. Adjusting for banks receipts alone (see my August note as to why such adjustments are warranted), total current receipts (tax and non-tax) are at €26,471mln in January-September 2012 against €24,455 in the same period 2011 (+8.25% y/y). 

Now, adding to these adjustments on tax revenues (explained above), total adjusted current receipts are up 6.1% y/y, not the 9.3% headlined in the exchequer figures.

Excluding the Sinking Fund transfers (deficit neutral), Capital Receipts are down at €813 mln in 9 months through September 2012 compared to €1,038mln in the same period 2011.

Let's combine all receipts ex-Sinking Fund receipts:

• Official numbers are: Total tax and Non-Tax Current and Capital Receipts amounted to €29.342bn in January-September 2012, up 8.13% on the same period 2011 (€27.136bn).
• Adjusting for Banks-related receipts and adjusting for tax revenues reclassifications, total receipts amounted to €26.755bn in 2012 and €25.655bn in 2011 (January-September periods), a rise of 4.29% y/y or €1.1bn.
• The above is still an impressive performance, given stagnant economy, but it is a far cry from what is needed to close the funding gap for the Exchequer.
• Critically, while tax performance cushion on target is getting thinner, it is still positive and is likely to stay non-negative through Q4 2012. In other words, it appears that we will deliver on targets on tax revenue side. This represents the reversal to some threats emerging in July-August.

1/10/2012: ECB in two charts

ECB in 2 charts: