12/11/2012: Quick reading list of late...

Some of my reading from today - worth checking out:

"Debunking Two Nate Silver Myths" from Scientopia.org lays our Bayesian foundations for Nat Silver's forecasting efforts. But in reality, the blog post deals with a deeper issue - the way we interpret predictive models.

"Mathematics, Marriage, and High explosives: Why There Is No Nobel Prize for Math" is a good short post on Shapley and Roth Nobel MP in Economics win, but the post repeats the myth (I am guilty of having told this one myself before) that is solidly debunked here.

A cool paper "The Collapse of the Soviet Union and the Productivity of American Mathematicians" - I recall the years of 1993-1997 when the UCLA maths department welcomed numerous faculty members from the former USSR and Eastern Block.

Foreign Policy superb article on the potential geo-political implications of the opening of the Arctic Passage: "Open Seas". The historical perspective absolutely brilliantly drawn.

NYTimes on "The science and art of listening" quote: "The difference between the sense of hearing and the skill of listening is attention" 

Aside from that - re-reading Vladimir Vonovich's "Moscow 2042" was a delight...

And I will be blogging on academic papers I read... so stay tuned.

11/11/2012: 4 interesting charts on investment portfolia compositions

four charts showing differences between the euro area and US portfolia compositions prior to the crisis, during the crisis and now (via Morgan Stanley):

Households:

 So for households, US portfolia are relatively balanced at near 50:50 split on risk and 'riskless' sides. equity ownership is low by historical standards, but that is probably offset by higher exposures to government bonds, corporate debt, government bonds and commodities as well as funds. Lower deposits holdings compared to euro area suggest lesser precautionary savings.

On euro area side, we have dramatic long-term decline in equities holdings and structural rise in deposits and cash. Precautionary savings motive is very pronounced.

Pension Funds:

Charts below show different pattern for equities holdings in these funds against household trends above:

Interestingly, Euro area households and pension funds are relatively similar in terms of longer trend of equities holdings, suggesting that either the objectives of both types of investors are convergent (retirement expectations and demographics weighing heavily on both) or structurally, equities markets in Europe are simply not attractive to both types of investors.

Much to speculate about here... especially behaviorally...

11/11/2012: Property prices bust 2008-2012

House prices changes peak-to-2009 then 2009-present:

Via Goldman Sachs.

With core driver - fundamentals:

Note Spain (my analysis): fundamentals-driven house prices are yet to travel down to below Irish markets drop... This, of course, is not a precise fully deterministic model (feed-back loops from unemployment to house prices are also going from house prices to unemployment), but it is clear that Spanish property is still 'overvalued' grossly relative to fundamentals.

And here's some other 'bad' news:

Taking the comparative above (again, my reading of the chart), a combination of fiscal direction and debt levels implies Irish house prices are still overvalued by up to 20% or so. Spanish ones - by about 10-15%...

Full note here.

Note: these are not my forecasts. I am only pointing out the direction that the above figures above imply in my view for the property markets.

10/11/2012: 'Special' case redux?

Just in case Angela Merkel reads EU Commission research... here's a chart summarizing the 'structural' adjustments to-date courtesy of JMP Research:

And the chart shows that 'special' Ireland:

• Delivered second largest drop in unit labour costs in the periphery (much of that, as in Greece's case and Spain due to massive spikes in unemployment)
• Produced 4th largest (or second lowest) improvement in current account dynamics and had 3rd highest increase in unemployment.

In other words, as with fiscal adjustments, our 'structural' gains are far from being 'special' or exemplary, but rather represent below average levels of achievement compared to other 'peripheral' economies.

And in case you need more, here's a bit on wages 'moderation' in Ireland:

The chart above shows pretty clearly that while Ireland claims to have achieved tremendous gains in labour costs competitiveness, in reality our gains are only spectacular if we forget the rapid inflation experienced in 2000-2009. Let's run some maths: between 2000 and 2012:

• Greek nominal labour costs relative to EU average fell 0.37%
• Irish rose 7.69%
• Portuguese fell 4.21%
• Spanish rose 6.4%
• Dutch rose 8.9%
• Italian rose 1.97%
• French rose 1% and
• German fell 16.36%

In other words, Ireland's labour costs still are up more than for any other peripheral state and, in fact, are only lower relative to the EU average against the Netherlands. Spot anything 'special' here?

10/11/2012: Dublin's Shame

This week saw perhaps the most important FT article on Ireland's crisis (link) titled Dublin's Shame, the article highlights the issue of grotesquely over-exaggerated pensions of Irish failed bankers. The point it touches upon - by itself - is not a minor one. But what is most important is the fact that FT takes a clearly only feasible ethical position on the issue and, put frankly, throws it in the face of not only the Irish banking establishment (on which the article focuses), but the Irish Government that is sheepishly incapable of any response to the issue that would have been congruent with the normal tenets of morality in any normal society.

"Public shaming may be the only recourse available to the government. Some argue that the pension funds should stop paying these executives, daring them to sue. Alternatively, Dublin could raise a levy on the richest pensions. But, however justified the resentment, either step would be wrong. Governments should not tear up contracts or tweak laws just to target a few. If the directors are to be penalised for their acts, this should happen in the civil courts."

Alas, public shaming is something our Government refuses to engage in, judging by the statement made this week on the issue by the AIB owner - Minister Noonan. And, sadly, in Ireland, there is not a chance the civil courts will see the face of the vast majority of the reckless, incompetent and entitlement-driven elites.

10/11/2012: GS on Fiscal Cliff

Earlier this week I posted few assorted analytical thoughts from various source on the US Fiscal Cliff and earlier today I posted on Goldman Sachs summary of 3 core global risks.

Here are four snapshots from Goldman Sachs on US key risks:

Fiscal cliff:

Tax hikes:

Debt ceiling:

Updated: Merrill Lynch note on US elections outcome is a superb read: here.

And Citi detailed forecasts out to 2020 from the 'cliff': here.

10/11/2012: Shorter-term divergence for Europe?

For what it is worth:

Shorter-term divergence again disfavors Europe... and even worse... UK:

10/11/2012: Age of Great Rotation?

Merrill Lynch calling the turn from the Age of Deleveraging to the Age of Great Rotation: "History shows that the beginning of every great bull market in equities (1920s, 1950s, and 1980s) has coincided with a major inflection point in the trend of long-term bond yields (see Chart 3)."

"If in 2013 jobs and credit validate Bernanke’s success in his “War against Deflation,” an era of rotation out of fixed income and into equities could begin."

That's a load of 'ifs' and 'cans'. In reality, there will be such a shift at some point in time. Only question is the following one: will the Age of Deleveraging (not called 'Great Deleveraging' by the ML, note) going to be so short-lived that by the end of 2013 Ben's cash printing will be sufficient to drive down real economic debt in the US down significantly enough to generate a new upswing in consumer credit (after all, there will be no US growth absent credit growth).

ML are pretty darn optimistic on this:
"The strong performance of US real estate, bank stocks, and distressed European assets this year suggests to us that a stealth rotation has actually begun. The fiscal cliff may temporarily derail the journey, but in our view the destination remains a favorable one for financial assets. Our core asset allocation is bullish equities and credit, bearish bonds and neutral commodities."

ML own view is a bit dented by the evidence in the chart above on the 1920s-1930s markets transitions relative to Treasury yields... Of course, as today, the 1920s-1930s period is precisely characterized by a long-term Great Deleveraging dynamics. Denying that the current state of the economy is characterized by potentially the same forces is a bit reminiscent of the Greenspan's 'over-exuberance' view.

Link to the ML research note: here.

10/11/2012: Three core risks: via Goldman Sachs

Neat summary from Goldman Sachs on 3 core risks:

10/11/2012: Euro area households feeling the pain?

Couple interesting charts from the Goldman Sachs research note on French consumption woes - link):

Euro area household disposable income is now under water in the Euro area steadily since 2008, which marks 5 years of sustained contraction. More interestingly, the chart shows abysmal performance of the RDI in Germany since roughly 2004.

The next chart maps gross savings rates for households - which are falling in the Euro area, just as disposable income is falling. Given the double dip recession, this suggests that tax hikes and cuts to income are now severe enough to knock households out of precautionary savings motive. And the latter would imply that households consumption is unlikely to rise even when income growth returns.

10/11/2012: Euro Area bonds supply - November 2012

Five weeks forward bonds supply calendar from Morgan Stanley:

And aggregates:

10/11/2012: Big Data made visible by UBank

Another interesting article: here. UBank in Australia has put some billion transactions records into public domain, allowing customers to run comparatives on spending patterns etc. (H/T to @moneyscience ).

"Users may input their gender, age range, income range, living situation, post code and whether they rent or own their home. The site uses that data to serve up average spending habits of people in that demographic, including detailed information on restaurants, housing costs and travel destinations. Users may also choose to input more detailed data to perform a “financial health check”, comparing their monthly shopping, utilities, housing and communication costs with “people like you” and the average Australian."

The idea is to make Big Data work for both clients and the bank - reducing the overall costs of risk pricing and in the long run helping the customers to lower their risk profiles and cash flow management. This has to be good for the bank and  for its clients. 

Next step would be for the bank to capture actual interactions within the database and correlate these to changes in spending patterns of customers (within the sample of those who engage with the system and outside the sample) to see what changes are generated.

This type of 'actioning' big data has been discussed at a recent round table on disruptive innovation in finance that I chaired in Dublin (here).