2/1/2013: The Bitter ATRA Fudge

Some say never shall one let a good crisis go to waste... US Fiscal Cliff 'deal' of December 31st is an exact illustration. Here is the list of pork carriages attached to the Disney-styled 'train' of policies the US Congress enacted.

Have a laugh: http://www.nakedcapitalism.com/2013/01/eight-corporate-subsidies-in-the-fiscal-cliff-bill-from-goldman-sachs-to-disney-to-nascar.html

And to summarise the farcical output of the Congressional effort:

• The American Taxpayers Relief Act (ATRA) has raised taxes on pretty much everyone. Taxes up means growth down. Now, recall that the US economy is not exactly in a sporting form to start with (link here).
• The payroll taxes cuts are not extended into 2013 so every American is getting whacked with some 2% reduction in the disposable income, taking out $115 billion per annum (the largest revenue raising measure in the ATRA) out of households savings, investment and consumption, or under 1% of annual personal consumption.
• The super-rich (or just filthy-rich, take your pick, but defined as those on joint incomes at or above $450K pa) will see income tax rising to 39.6% and will have to pay an additional 0.9% in Medicare tax to cover that which they will not be buying - the Obamacare. They (alongside anyone earning above $250K pa) will also pay 3.8% additional tax on 'passive' income - income from capital gains and dividends for same Obamacare.
• Dividends and CGT are raised from 15% to 20% (again for joint earners above $450K pa).

Meanwhile, the US has already breached the debt ceiling and the ATRA has done virtually nothing to address the deficit overhang. So in a summary, the 'deal' is a flightless dodo flopping in the mud of politics. There are no real cuts on the expenditure side, there are loads of tax hikes that are likely to damage demand and investment and lift up the cost of capex funding for the real economy. And there is simply more - not less - uncertainty about the future direction of policy, as the White House and the Congress are going to be at loggerheads in months to come dealing with the following list of unaddressed topics:

1. Spending cuts
2. Budget deficit
3. Further tax hikes
4. Debt
5. Reforms of the entitlements system
6. Growth-retarding effects of ATRA and Obamacare.

Obamanomics have delivered fudged recovery, fudged solutions to structural crises and real, tangible increases in taxation. The latter is the 'first' since 1993.

1/1/2013: Recovery in Asia? Well... not so fast, folks

The Year is only 1 day old (almost) and the trigger-happy Bulls' headlines are all around. Forget the 'Fiscal Cliff' non-solution in the US (it kicked the can of excessive deficits by about 1 month out, before uncertainty about the longer term outlook returns with renewed 'negotiations' and it failed completely and spectacularly in even approaching any workable solution to the US debt overhang). The chirpy sound of 'optimism at any cost' is now coming out of Asia.

Today, we saw Korean and Taiwanese PMIs released. Here are the facts:

• HSBC South Korea PMI for manufacturing sector rose from 48.2 in November (outright recessionary levels) to 50.1 in December. Now, 50.1 sounds like being above 50 (the 50 points mark identifying level of activity consistent with zero growth on previous month), statistically it is not significantly distinct from 50.0 or, for that matter, from 49.9. In other words, since May 2012, PMI registered continuous consecutive contractions in the manufacturing sector, compounded over time. In December, there was effectively zero growth from the bottom levels of November. And this some media heralded as the 'return' to growth. Worse, new export orders - the staple of Korean economy, continued to contract in December for the seventh consecutive monthly period.
• Taiwanese PMI did pretty much the same, rising from an outright contraction of 47.4 in November to 50.6 in December. Taiwanese level of activity (at 50.6) was probably statistically significantly above 50, but hardly anywhere near the levels consistent with a definitive growth trend. This was the first above-50 reading in 7 months and was underpinned (positively) by expansions in both new orders and exports orders. Importantly, input prices rose in Taiwanese manufacturing sector, while output prices shrunk - profit margins, therefore, have dropped - a trend established for at least 3 months now.

Meanwhile, unreported by the Bulls:

• Vietnam manufacturing PMI sunk to 49.3 in December from 50.5 in November, with 8 out of last 9 months posting contracting activity.
• Indonesia's manufacturing PMI remained above the 50.0 line at 50.7 in December, but growth fell from 51.5 in November.
• Earlier report from China showed December manufacturing PMI at 51.5 up from 50.5 in November, "signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011." But new export orders actually fell in December after a 'modest increase in November', which implies that China's manufacturing 'revival' is driven most likely by state spending boost, not by any 'resurgence in global economic activity'.
• And Australian manufacturing PMI was continuing to tank in December: "Manufacturing activity contracted for a 10th consecutive month in December, with the seasonally adjusted Australian Industry Group Australian Performance of Manufacturing Index recording a level of 44.3, unchanged from a slightly upwardly revised reading of 44.3 one month ago. The slump in manufacturing new orders also extended into the 10th month albeit at a slower rate, reflecting weak global demand and a softening Australian economy. The new orders sub-index rose 1.6 points to 45.7 in December."

So, pardon me, but what 'resurgence in Asia'?

1/1/2013: US Household Income: down 7.8% on January 2000

Sentier Research have published analysis new series on the US Household Income data (see report here).

Topline analysis, quoted directly from the report (emphasis mine):

• According to new data derived from the monthly Current Population Survey (CPS), real median annual household income in November 2012 was  $51,310, statistically unchanged from the October 2012 median of $51,134. 
• This is the second month in a row that real median annual household income has failed to show a statistically significant change. I
• With the exception of a 0.7 percent increase between April and May, all of the other month-to-month changes in real median annual household income since January 2012 have not been statistically significant. 

But wait, things are even worse:

• The November 2012 median annual household income of $51,310 was 4.4 percent lower than the median of $53,681 in June 2009, the end of the recent recession and beginning of the “economic recovery.” 
• The November 2012 median was 6.9 percent lower than the median of $55,093 in December 2007, the beginning month of the recession that occurred more than four years ago. 
• And the November 2012 median was 7.8 percent lower than the median of $55,650 in January 2000, the beginning of this statistical series. 
• These comparisons demonstrate how significantly real median annual household income has fallen over the past decade, and how much ground needs to be recovered to return to income levels that existed more than ten years ago.

And two charts to illustrate:

31/12/2012: Calling in the New Year

And calling in the New Year, an image via MacroMonitor:

May 2013 be somewhat different!

31/12/2012: Happy New Year!

A Very Happy 2013 to all readers of this blog!

Visit often, engage with comments, and don't forget to follow me on twitter: @GTCost

31/12/2012: Pimco Twitter-cast for 2013

Bill Gross of Pimco issued his 'twitter-cast' for 2013:

Gross: 2013 Fearless Forecasts: 

1. Stocks & bonds return less than 5% (so shallower returns for 2013 across both asset classes than in 2012, e.g. S&P500 YTD gain of 12.2%, US 10year Treasury yield index down from 1.880 to 1.7574 YTD)
2. Unemployment stays at 7.5% or higher 
3. Gold goes up (no indication by how much, but gold rose 6.3% in 2012 and is now on the longest price appreciation trend since 1920, having clocked 12th consecutive annual gain)
4. 5yr US Treasuries yield 0.70% by end of 2013 (5yr Ts started 2012 at 0.830 yield and closed off on 0.7229)
5. Dollar declines (see below)
6. Oil above USD100 at 'some point in year' (WTI is now down 8% for 2012 on foot of shale gas boom in the US, with WTI-Brent spread averaging at a discount USD17.44/barrel against a premium of USD0.95 for the 10 years period through 2010 (according to Bloomberg data). Brent was up 2.8% this year - a fourth consecutive annual gain. The significance of shale effect is hard to overestimate: US crude production is at 6/985 million barrels per day - the highest since 1993.)

And couple of precedent 'tweeter-casts':

Two charts for USD and Euro YTD changes:

Update: fresh closing data: Nasdaq Comp up almost 16% y/y, DJIA up 7.3% and S&P 500 up 13%.

23/12/2012: Q4 2012 Global Risk Analysis from BBVA - part 2

In the previous post I reproduced some interesting risk maps from BBVA Research report for Q4 2012. Here some more of the same:

And debt levels against risk thresholds (do keep an eye for Ireland's 'unique' position):

I am including the above primarily to re-enforce the fact that the issue of total economic debt I am continuing to raise in relation to Ireland and the rest of advanced economies is now becoming mainstream.

23/12/2012: Q4 2012 Global Risk Analysis from BBVA - part 1

Few interesting risk mappings for December 2012 from BBVA Research:

Per BBVA, through Q4 2012:

"The Western Central Banks “Put” drives financial tensions back to normal in both US and European
Markets. But some segments still “under pressure” (banks and interest rates). Emerging Markets among the most benefited markets during the quarter. The Central Banks actions leads EM Europe below the neutral area thanks to the diminishing Euro convertibility risk. Asian and to a lesser extent Latam financial pressure enter also in the very low tension area."

My view - don't be complacent on Latin America and some Asian markets - keep an eye out for Grey Swans (see my note here).

A nice chart showing easing of pressures in the sovereign CDS markets:

Nice performance for the Peripherals, but... caveat emptor - CDS markets might be singing a song of no content (see here).

Ratings agencies moves summary:

Note that Ireland is the longest running stressed ratings sovereign other than Hungary (shallower downgrades, albeit to below junk ratings). Which puts into perspective the irish Government claims to the success of Irish programme. In reality, we've been down for longer than anyone else, so everything else held equal, we should be expected to come of it earlier too. So far, however, there have been no upgrades (that's right, despite Irish Government claims - example here):

Here's an interesting risk radar map:

And same for Spain and Italy:

 and for Greece, Portugal and Ireland:

See the next post for more from BBVA Research...

23/12/2012: Not another cent?.. Irish banks state aid 2011

In the previous post, amidst the excitement of the aggregate figures reporting, I forgot one small, but revealing chart.

Now, recall the FG/LP election campaign promise of 'not another cent' for the banks?..

23/12/2012: State Aid in EU27 & Ireland

Yesterday, the EU Commission released updated analysis of state aid expenditures, covering 2012 data. The document, titled "State aid Scoreboard 2012 Update Report on State aid granted by the EU Member States - 2012 Update" is available here.

Here are some interesting bits:


"Between 1 October 2008 and 1 October 2012, the Commission approved aid to the financial sector totalling €5,058.9 billion (40.3% of EU GDP). The bulk of the aid was authorised in 2008 when €3,394 billion (27.7% of EU GDP) was approved, mainly comprising guarantees on banks’ bonds and deposits. After 2008, the aid approved focused more on recapitalisation of banks and impaired asset relief rather than on guarantees, while more recently a new wave of guarantee measures was approved mainly by those countries experiencing an increase in their sovereign spreads, such as Spain and Italy.

Between 2008 and 2011,  the overall amount of aid used  amounted to  €1,615.9 billion (12.8% of EU GDP).  Guarantees accounted for the largest part amounting to roughly €1,084.8 billion (8.6% of EU GDP), followed by recapitalisation €322.1 billion (2.5% of EU GDP), impaired assets €119.9 (0.9% of EU GDP) and liquidity measures €89 billion (0.7% of EU GDP)."


In other words, keeping up the pretense of solvency in the legacy banking system of the EU (primarily that of the EA17) has created a cumulated risk exposure of €5.06 trillion (over 40% of the entire EU27 GDP). With such level of supports, is it any wonder there basically no new competition emerging in the sector in Europe.


"In 2011, the Commission  approved aid to the financial sector  amounting to  €274.4 billion (2% of EU GDP). The new aid approved was concentrated in a few countries and involved guarantees for €179.7 billion, liquidity measures for € 50.2 billion, recapitalisations for €38.1 billion and impaired asset relief for € 6.4 billion.

The overall volume of aid used in 2011 amounted to € 714.7 billion, or 5.7% of EU GDP. Outstanding guarantees stood at € 521.8 billion and new guarantees issues amounted to €110.9 billion. Liquidity interventions amounted to € 43.7 billion and new liquidity provided in 2011 stood at €6.5 billion. Recapitalisation amounted to € 31.7 billion. No aid was granted through the authorised impaired assets measures."

Some illustrations of historical trends.

First non-crisis aid:

Amongst the euro area 12 states, Ireland has the fourth highest level of state aid over the period 1992-2011 and this is broken into 5th highest in the period of convergence with the EA12 (1992-1999), 5th highest for the period of the monetary bubble formation (2000-2007) and the second highest for the period of the crisis (2008-2011).

Relative to EU27, Irish state aid was above EU27 average in 1992-1994, 1998-2002, 2007-2011. In other words, Ireland's state aid was in excess of EU27 for 13 out of 20 years. And that despite the fact that our income convergence to the EU standards was completed somewhere around 1998-1999.

In terms of financial sector supports during the crisis, we are in a unique position:

The overall level of supports for financial sector in Ireland is so out of line with reality that our state aid to insolvent financial institutions stood at 365% of our GDP in 2011 or roughly 460% of our GNP. In other words, relative to the size of our economy, the moral hazard created by the Government (and Central Bank / FR) handling of the financial crisis in Ireland is now in excess of measures deployed by the second and third worst-off countries in EU27 (Denmark and Belgium) combined.

The chart above shows that Guarantees amounted to 246.7% of GDP in Ireland, almost identical to 245.7% of GDP in Denmark. Which means that our Guarantees were basically equivalent to those of seven worst-off Euro area countries combined.

However, stripping out the Guarantees, the picture becomes even less palatable for Ireland:

Ex-Guarantees, Irish State supports for the financial sector were more than 10 times the scale of EU27 supports and at 118.4% of GDP amounted to almost the combined supports extended by all EA12 states (123.2% of GDP).

21/12/2012: Slight upgrade for Ireland

Nice small present for the Day After (yep, that 'End of the World' thingy passed peacefully): Euromoney Credit Risk survey gave Ireland a small, but welcome upgrade:

Note that Ireland is just one of 3 countries receiving an upgrade.

Not a hugely significant development, but a nice step - 1 place up in the global rankings, now to 45th highest risk country (meaning there are 44 countries that rank less risky than Ireland). Do note, however, that our systemic risk scores in Structural Assessment has slipped, while Credit Ratings and Debt Indicators remained static.

20/12/2012: Pensions, health costs & education fees for 2014-2015

Staying with the IMF report on Ireland, and with the theme of 2014-2015 adjustments, here's again what the IMF had to say on what we should expect from the Government:

"The authorities should outline the remaining consolidation measures for 2014–15 around the time of Budget 2013 (MEFP ¶8). The program envisages additional consolidation of 3 percent of GDP over 2014–15. Taking into account the measures already specified for these years (such as on capital spending), and carryover savings from earlier measures, new measures of about 1½ to 2 percent of GDP remain to be identified for 2014-15."

I wrote about the above here. But there's more:

"To maximize the credibility of fiscal consolidation, and to reduce household and business uncertainties, the authorities should set out directions for some of the deeper reforms that will deliver this effort. These could include, for instance, on the revenue side, reforming tax reliefs on private pension contributions; and on the expenditure side, greater use of generic drugs and primary and community healthcare, and an affordable loan scheme for tertiary education to enable rising demand to be met at reasonable cost."

Further, per box-out on Health costs overrun: "there is scope for increased cost recovery in respect of private patients‘ use of public hospitals"

Hence, per IMF, the Government should hit even harder privately provided pensions (on top of the wealth tax already imposed), thus undermining even more private pensions pools and increasing dependency on state pensions. For those of us with kids, IMF - concerned with already unsustainably high personal debt levels - has in store more debt. This time to pay for our kids education. And for those of us with health insurance, there is more to pay too.

The above combination of measures is idiocy of the highest order. Per IMF, Irish economy is suffering from private debt overhang which leads to more deleveraging, less consumption and less investment. And these lead to lower growth. I agree. But what IMF is proposing is going to:

• Increase private debts and reduce the speed of deleveraging, and
• Raise the demand for already stretched public services.

This is the Willie Sutton moment for Ireland: the state (with the IMF blessing) is simply plundering through any source of money left in the country is a hope of finding a quick fix for Government insolvency. Now, with low hanging fruit already bagged, this process is starting to directly impact our ability to sustain private debts. But no one gives a damn! As Sutton, allegedly claimed, it makes sense to rob banks, because that is where the money are. Alas, with banks out of money, the Government, prompted by the IMF 'advice' is going to continue robbing us.

So a message to our Pensions industry, which hoped that going along with expropriation of customers' funds via pensions levy would allow the industry to avoid changes to tax incentives on pensions (the blood of the sector demand). Prepare for tax reliefs savaging. Once you fail to stand up to the bullies and protect the interests of your customers, you deserve what you are going to get. Every bit of it.