12/10/2012: Irish Savings Myths

Last night at the Dublin Chamber dinner, Taoiseach Enda Kenny made a rather common, but egregious in its nature statement that Ireland has the highest savings rate in the OECD at 12% GDP. Speaking before him, the President of the Dublin Chamber, Patrick Coveney, made a similar statement, but referenced 14% savings rate. Both speakers were identifying a high savings rate as being an impediment to consumer spending and recovery.

In addition to the above, the Chambers President made another startling juxtaposition. In his speech he said that:

1. Savings are too high and we need to 'do something' to reduce these;
2. Investment is too low
3. In the future, investment (via bank lending) will remain low.

Let me deal first with the last set of claims. In the Irish economy, savings are used to pay down debts (thus supporting deleveraging of the households and companies, and preventing collapse of our banks) and invest in economic activity. Reducing the debt-repayment component of savings would require a default/restructuring of private debts. The remainder of our savings goes to finance investment (direct equity & direct lending to businesses) and deposits in the banks (which in turn normally finance lending). So which part of our savings would Patrick Coveney like to cut? The banks bit (precipitating collapse of the banks) or the investment bit (precipitating further decline in investment)?

I am not even going to ask Mr Coveney as to what he might suggest that the Government should do to cut our savings rate. Impose huge wealth taxes, or go straight to a large-scale expropriations of 'excessive' savings? Both will do wonders to Ireland's reputation abroad, let alone to the dynamics of future investment at home.

Instead, lets move on to the myths both speakers were keen on repeating - the myths of our allegedly massively high savings rates. All of the data below is taken from the IMF WEO database.

Let us rank Ireland's gross savings rate compared to all other advanced economies (higher rank means lower savings rate):

Contrary to what our Taoiseach and Mr Coveney were saying, Ireland's savings rate in 2010-2014 is estimated by the IMF to be... the 5th lowest in the sample of 33 advanced economies around the world. May be it is the highest in the Euro zone? Oh, no - it is actually the fourth lowest in the Euro zone.

So what about this year then? Oh, that would be exactly the same as for the 2010-2014 average:

But wait, you might say, surely we are saving as an economy more today than in the past? Oops...

As above shows, during the 1980-2011 period, average savings rate in Ireland stood at 18.63% of GDP. In 2012 it will be 10.82% of GDP. In 2011 it was 10.59%, in 2010 11.53% and so on. Not even close to the historical average! And not close to our peers all of whom have much higher rates of savings: Israel at 18.94%, Finland at 19.84%, Belgium at 21.38%, Austria at 25.23%, Netherlands and Hong Kong at 26.29%, Luxembourg at 26.57%, and so on.

And yes, Mr Coveney, savings and investment are linked in Ireland:

And the gap between savings and investment in Ireland - explained in part by the banks claims on our savings via loans repayments:

... well that gap is currently at the advanced economies average and it was below that average during the crisis so far. 

In other words, there is no 'excess' savings in Ireland. As this economy continues to struggle with the banks debts (ah, the Chambers dinner was sponsored by one of the Pillar Banks) our savings-investment gap is forecast to rise above the advanced economies average in 2013-2017. That is the illustration of the Taoiseach's famous dictum that he won't have 'defaulter' written on his forehead. So clean forehead for our Taoiseach means no investment for businesses. Simples...

10/10/2012: Irish Real Economic Debt - Busting Records

Last night I came across the latest data from the IMF on the overall levels of indebtedness and leverage across a number of countries. Here's the original data:

Much can be taken out of the above. For the purpose of discussion below, I define real economic debt as a sum of household, non-financial corporate and government debts, excluding financial firms' debts. This real economic debt is liability of the Irish economy: households, private enterprises and public sector providers of goods and services.

First up, total debt levels:

Ireland's total real economic debt runs at a staggering 524% of our GDP and 650% of our GNP. In fact, I use 24% GDP/GNP gap as a basis for adjustment which is significantly less than the current gap, but is consistent with 2011-2012 (to-date) average. Put into perspective:

• Our economy's overall indebtedness is 1.73 time higher than the euro area levels in GDP terms and if GNP is used as a basis it is 2.14 times higher
• Our real economic debt is 14.4% ahead of that of Japan (second most indebted country on the list) if GDP is used and is 41.9% ahead of Japanese debt if GNP is used.

Our real economic debt can be decomposed into the following three components contributions:

In other words, the above chart clearly shows that Ireland's core debt overhang arises not from the Government finances, but from accumulation of liabilities on the side of the companies. More than that:

• Ireland's Government debt levels are 25.5% ahead of the euro area
• Ireland's Household debt levels are 64.8% above the euro area
• Ireland's corporate debt levels are at 209% of the euro area levels.

Thus, with the Government policy firmly focused on taxing households to save own balancesheet, we have a perverse situation that the economy is dealing with debt overhang in Government debt that is more benign than the debt overhangs in the sectors the Government is obliterating. Households faced with increased taxation to pay for Government debts and deficits implies lower spending on goods and services and lower ability to repay household debt. Thus higher taxes on households (direct and indirect, including aggressive extraction of income via semi-states' charges) imply growing burden of the debt overhang in the private sectors (firms and households).

Adding financial debts to the overall real economic debt in the economy forces Ireland into a truly unprecedented position vis-a-vis other countries in the sample. (Note - adjustment for IFSC is mine).

Using the bounds for debt of 90% (consistent with upper range for Checchetti, Mohanty and Zampolli (2011) and Reinhart, Reinhart & Rogoff (2012)), the levels of cumulated real economy debts that are consistent with reducing future long-term potential growth in the economy are taken to be 270% of GDP. Hence:

and

In the above, the larger the size of the bubble, the greater is the drag on future economic growth from debt. The further to the right on the chart the bubble is located, the greater is the problem associated with Government debt (as opposed to other forms of debt). What the above shows is that Ireland's debt crisis is truly unique in size, but it also shows that the most acute crisis is not in the Government debt, but in private sectors debt.

Now, at 4.5% per annum cost of funding overall debt, irish economy interest rate bill on the above levels of real economic indebtedness runs at ca 29.2% of our GNP. Do the comparative here - interest rate bill equivalent to the total annual output of the Irish Industry (that's right - all of our Industrial output in 2011 amounted to less than 29.3% of our GNP. This is deemed to be 'long-term sustainable'... right...


Note: In my presentation at a private dinner event yesterday I referenced by earlier estimate of the total economic debt in Ireland at 420% of GDP. My 2011 estimate was ca 400% GDP. These figures have been published by me in the Sunday Times and also correspond closely to the 2010 figures cited by Minister Noonan in the Dail and made public here on this blog. They also were confirmed by Peter Mathews TD. My estimates were based on publicly available data which is less complete than data available to the IMF.

7/10/2012: VTB and Sberbank relative position vis peers

Another interesting point from the Goldman note on euro area banks, relating to Russian banks - see chart below (you'll need to click to enlarge it):

Note that per my latest recent assessment of Russian equity markets, both VTB and Sberbank are relatively undervalued.

Original note is linked here.

7/10/2012: Goldman on Euro Area banks

Some very interesting stats on the Euro Area (comparatives) banking sector from the recent (October 4) research note from the Goldman Sachs (link here). Here are some bits:

In a recent (October 4) presentation to retail investors in Cork I was speaking about the mismatch in non-financial corporations funding sources between the US and Euro Area. My conclusion was that in the medium term (2013-2015) Euro Area corporates will be forced to increase issuance of corporate bonds since their preferred source of funding - banks lending - is going to stay subdued on supply side, while the equity issuance cannot absorb simultaneous deleveraging of the banking sector, and demand for increased equity from the corporate sector, especially as Governments across the EU are going into 'tax-em-to-hell' mode when it comes to potential investors.


Here are two charts from GS note on the same:

And where are banks largest, dominant players in the economy? Why, in usual suspects...

Now, what's the problem with the above chart? Oh, let's see: Swiss and UK bankers are bankers to the world, with more exposures to assets outside their countries than inside. Irish banks listed include some IFSC banks, but... adjusting for that and adjusting for GNP/GDP gap, Irish figure is as follows:

• Covered banks: 295% of GNP as of Q2 2012 (using 2011 GNP)
• Total Assets of Domestic Group of banks as of August 2012 are 447% of 2011 GNP. Of these, 318% are purely assets relating to Irish residents.

Thus, if we are to control for the international exposures of the banks, the same relative position for Ireland is most likely to be maintained as in the chart, albeit the numbers will be smaller across all banking systems. And now think of adjusting these for the quality of assets held... and weep.


And here's a note for Michael Noonan and his friends at Irish banks: this time it is NOT going to be much different:

Do note the above is in nominal Yen, which is kinda telling - Japanese banks have not grown since 1990, inflation-adjusted, through probably 2009-2010. And that with Japanese printing cash and piling up public debt like there is no tomorrow between 1990 and today. What hope is there for the return of lending and profitability in Irish banking ca 2014 that the Central Bank and the Government and the banks have been betting on throughout their disastrous disaster management practices 2008-present?


Lastly, here are two tables neatly summarizing the epic fiasco of European (and Irish - see second table) banking:

Do note prominent positioning of Ireland's zombies, right there, with Tier Last Marfin, B of Cyprus, and Dexia...


Now for a quote... but wait a second first a preliminary set up: Irish Government claims that new regulatory regime will be a departure from the past for Irish banking. The same Government claims that too much competition in Irish banking was contributing to regulatory failures. So a duopoly of BofI + AIB zombies should foster more effective regulatory regime, right? Oh... Goldman on that (italics mine):

"At the other end of the spectrum, countries with central banks as their supervisor have generally done better, the two exceptions being the Netherlands and Ireland (where supervisors fared badly owing to the huge size of the banks that these countries had relative to their GDP – the sheer size of these made it much too difficult to supervise these, ‘too big to save’ banks in these cases)." So, tell me - if having TBTF banks = "much too difficult to supervise" banking system, how will having Duopoly banking system help supervisory effectiveness? Answer: it will hinder such effectiveness. Instead of being captive to a bunch of banks, Irish regulatory regime will be captive to two banks - incidentally, the very same ones that led capture of regulators back in 1990s-2000s.

Let's stop the reading here...


Update: In a fair criticism of the GS report, it ignores Solvency II implications, although does cover Basel III and Dodd-Frank. Solvency II omission was pointed out by the @creditplumber / David McKibbin. 

6/10/2012: Irish Industrial Production - August 2012

Per CSO:

• Production for Manufacturing Industries for August 2012 was 0.7% lower than in July 2012. On an annual basis production for August 2012 increased by 0.2% when compared with August 2011.
• The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period June 2012 to August 2012 was 1.8% higher than in the preceding three month period.
• The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed a monthly increase in production for August 2012 of 5.1% and there was a decrease of 0.9% in the “Traditional” Sector.
• The seasonally adjusted industrial turnover index for Manufacturing Industries decreased by 0.1% in August 2012 when compared with July 2012. On an annual basis turnover increased by 0.2% when compared with August 2011.

Here are some more detailed stats and dynamics:

• Volume of total Manufacturing output was down 3.43% in August compared to same month in 2007 (pre-crisis). 3mo average through August 2012 was up 1.78% on 3mo average through May 2012 and 3.75% ahead of the 3mo average through August 2011.
• August reading for Manufacturing marks the first m/m decline since February 2012.
• Volume of production in All Industries in August 2012 was down 4.68% on same period in 2007. 3mo average through August is 1.75% ahead of 3mo average through May and is 2.72% ahead of 3mo average through August 2011.
• Both Manufacturing and All Industries indicate improved 3mo averages as consistent with modest improvement in output dynamics.
• Volume of activity in Modern Sectors posted the highest reading since October 2011 and the second highest reading since the beginning of comparable series (January 2006). 3mo average through August 2012 is now 1.26% ahead of the 3mo average reading through May 2012 and is 6.59% ahead of the 3mo average through August 2011. Very strong performance in the sector.
• In Traditional Sectors, however, volume of activity fell 14.17% y/y and is now down 20.05% on August 2007 level of activity. 3mo average through August 2012 is down 1.78% on 3mo average through May and is down 4.34% on 3mo average through August 2011.

Chart to illustrate:

• As the result of the above trends, the gap between indices measuring the Volume of production in Modern and Traditional sectors has now widened to 51.5 - the highest reading since the all time record of 56.6 in October 2011.

It is worth noting that Traditional manufacturing sectors are usually associated with higher labour intensity than Modern sectors, implying the disconnection between improvements in overall Manufacturing index (volume) activity and the likelihood of jobs creation acceleration.

Turnover indices:

• Manufacturing sector turnover dipped marginally in August (-0.1% m/m) but is ahead, also marginally, on the annual basis (+0.19%). The index is down 6.9% on August 2007. 3mo average through August 2012 is 5.28% ahead of the 3mo average through May 2012 and is 3.29% ahead of the 3mo average through August 2011.

Lastly, New Orders index:

• New Orders index hit the highest reading in 2012 in August, up 3.4% y/y and 1.16% m/m, although the activity is still down 6.8% on August 2007. 3mo average through August 2012 is 5.5% ahead of 3mo average through May 2012 and 3.9% ahead of the 3mo average through August 2011.

The overall activity in the industrial production is clearly stabilizing at the recovery levels, but as noted above this is solely driven by the activity in Modern sectors.

6/10/2012: Correlation v Causation

An excellent, albeit very reader-friendly (yes, that's a draw back as it trades depth) discussion about the relationship between correlation and causality (link). H/T to Markus Sagebiel ( @msgbi )

6/10/2012: US Payroll Data for September 2012

So far, 2012 has been a volatile year for jobs creation in the US and the latest figures released yesterday confirm this volatility, albeit this time to the pleasant side. Expansion of NF payroll by 114,000 in September came in slightly below expectations, but alongside trend. More significant reading was accorded to the upward revisions for previous level of employment. NF payrolls for July went up from 141,000 to 181,000 and for August from 96,000 to 142,000 - a cumulated increase of 86,000 on previous estimates. However, private sector payrolls rose disappointing 104,000 some 30% below the consensus and up only slightly on 97,000 increase in August. Meanwhile hourly earnings were up 0.3% outstripping both expectations and August flat performance (+0.0%). Average weekly hours worked went up by statistically insignificant 0.1 hours to 34.5 hours.

On the optimism deflating side of things, we have Q1 average increases in NFP of 226,000, followed by Q2 increases in NFP of 67,000. Now we have Q3 at 145,700 average which is 146,200 monthly average. In other words, despite massive revisions, Q3 is not spectacular when it comes to jobs creation.

Headline unemployment figure showed most dramatic change in yesterday's report declining from 8.1% in August to 7.8% in September and bringing US unemployment to the lowest rate since January 2009. This accelerates decline of 0.2% in unemployment rate recorded in August. Good news - labour market participation rate rose from 63.5% in August to 63.6% in September. Which means more people were finding jobs. Alas, back in 2010-2011 the participation rate stood at 64.4% on average, ahead of the current level. And the number of those in employment rose by 873,000 against the drop of those unemployed by 456,000. But, again, that silver lining contains a sizable cloud over it: employment to population ratio rose to just around 58.5%, which is only slightly ahead of 58.4 in 2010-2011 and well behind 62.7% in 2003-2007 and 60.8% in 2008-2009.

However, the decline in unemployment is really an over-exaggeration of the actual labour market performance for a number of reasons:

• A number of commentators correctly pointed that household survey - the basis for calculating unemployment rate - has been returning very volatile readings.
• Ending of the emergency unemployment benefits during the summer also most likely contributed to pushing people into employment (something that would be consistent with increases in employment being predominantly in lower wages and part-time jobs - see below). It is worth remembering that emergency extensions to benefits were cut fully back in May. As the result, unemployment benefits extensions dropped by some 865,000 since May.
• Part-time involuntary employment accounts for 3/4 of the total gains in employment over June-September 2012 with numbers of part-time workers who would like to have a full-time job, but can't find one rising 582,000. Overall, U6 unemployment rate (those unemployed and underemployed) remained at 14.7% in September, showing that virtually all gains in the labour market in the US are low quality. And further confirming this, the percentage of long-term unemployed (in excess of 6 months) in total unemployment rose to 40.1% in September from 40.0% a month before.

See the chart (via Citi Research):

So to the Obama Camp optimists out there - the trend in jobs improvements is exceptionally weak, and at a risk of being derailed completely once electioneering-induced pause in fiscal adjustments is over comes January 2013. And to Mitt Romney Camp contrarians out there - the trend in jobs improvements is still present, if only in a sense of absent deterioration. 

Glass half-full and half-empty...


Update:  and here is an excellent post from the Sober Look blog on the sub-trends in US consumer credit 'growth'...

6/10/2012: Euro area bonds supply calendar for October 2012

Morgan Stanley October bonds supply calendar for euro zone sovereign bonds:

 

And summary of volumes for redemptions, coupons and new issuance:

Ireland's volumes above refer to coupon payments only.

6/10/2012: Art, Mathematics and Science

And to finish off the night of charts galore, here's something charts-graphs related of a softer variety: on art and maths . Enjoy!

5/10/2012: Remember when US was 'decoupling'?

Really cool stuff: Euro area and US default probabilities divergence (via Citi Research):

And on related note of Euro area divergence, US is posting some nice figures today on NFPs, implying this.

Now, remember the days when European 'leaders' were bragging about the US decoupling from the rest of the world?.. Well, it looks like the US, along with the rest of the world, is decoupling from Europe.

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...