8/1/2013: Some Notes on Green Shoots

Here's a summary of my points from tonight's RTE Frontline discussion. Note: these are not exaclty written up as an article, so treat them as working notes.

As a preamble, let's recognise three things:

1. The current Government did inherit the economy effectively dead on the ground - at the bottom of a massive cliff. Since then, the economy remained largely static and structurally virtually identical to the one in 2010.
2. The current Government did inherit a policies straight-jacket, breaking out of which would have required a massive amount of courage and leadership.
3. The current stabilization can lead to an uplift in growth, to 1%-1.5% pa on GDP and under 1% pa on GNP side, but I would not call such a development 'green shoots'.

In my view, two rhetorical or allegorical analogies can be made for the Irish economy today:

One: the economy is a glass-half-full for the few (MNCs & some exporters) and empty for the many (ordinary households and SMEs).

Another: the green shoots we might be seeing in months to come are more likely the shoots from the last years' crops seeds that have failed to germinate in 2010-2011. The field of the Irish economy has not been properly seeded in years now.

Four core problems faced by Ireland going into 2013 are largely the same ones as we faced in 2008-2012 and the same ones the Coalition Government had highlighted in years of opposition:

1. Fiscal deficit and debt
2. Banks 
3. Households debt
4. Growth and structural reforms

On (1): Fiscal deficits and debt

• Fact: Debt continues to rise, and is expected to hit (December 19th, 2012 IMF report) 122.5% of our GDP this year. At the end of 2011 it was 106.5% of GDP and thus the current Government has added/adding 16% of GDP or EUR35 billion worth of new debt. Most of this is not banks-related as the bulk of banks recaps took place in 2011.
• Fact: Primary deficits have been cut significantly: from 5.9% in 2011 to 1.8% in 2013 expected. Yet in 2013 we still will have second highest overall fiscal deficit in the Euro area, possibly - highest, depending on what other countries do. We also have rapidly expanding interest rate bill - the increase in interest charges on the state in 2013 y/y will consume almost 2/3rds of the austerity 'savings' generated in Budget 2013.
• Fact: The government continued with the programme of, what I call, quick-fix or 'fake' austerity that primarily focused on cuts to capital spending and tax increases, and not on structural reforms. Let's take a look at 2012 - the year when the Government was claiming to have been focusing on growth. Net Voted Capital spending was cut 19% - an overshoot on targets by 4%. Net Voted Current spending was not cut, but actually rose 0.1% y/y or 1.6% above the target the Government set in April 2012! That's a rate of overshooting of what ca 2.4% for the full year.
• So the Government has delivered so far: higher debt and higher current spending, higher taxes, higher charges, lower capital spending and, thus, lower investment and jobs.

On (2) and (3): Banks and Household Debt

• Fact: Lending by the banks continued to contract in 2012. Loans to private sector in Ireland, within covered banking instituions have declined on aggregate by over 4.3% in 12 months through November 2012. Rate of decline in loans to Irish households in July-November 2012 never once slowed below 3.6% and since this Government came to power, household loans are down 19% in total, mortgages down 20%, consumer credit 22%. All three continued to decline m/m in November 2012.
• Fact: Deposits have stabilised and expanded by 2.6% in November 2012 y/y, but the fabled 'savings' glut the Government so much decries has not translated in real pay downs of Irish households' debts. We still have the most indebted households in the euro area. In fact, IMF has highlighted that for the Government in their recent report and yet there is little movement on dealing with this problem.
• Fact: Banks are overcapitalised and zombified and the Government has no control over their internal practices or operations. Thus, mortgages rates are going up on ARMs and unsecured credit costs are rising in massive jumps despite the claims of 'improved funding outlook' and ECB continued liquidity supports. 
• Fact: Banks were given yet another 'trump card' at the expense of the country, by the Government, the veto power in the new Personal Insolvencies Regime
• Fact: the IMF has warned very clearly in its December statement that Irish banks remain source of risk in light of mortgages crisis. 
• That mortgages crisis, may I remind the Government, is accelerating once again, even before the fig leafing of the 'Insolvencies Reforms': in Q3 2012 we had over 181,000 mortgages at risk of default of defaulted - up 6.5% q/q and 22% y/y. When this Government came to power there were 131,000 mortgages at risk of default or defaulted. This Government's 'repairing of the banks' has contributed to adding some 50,000 to these.
• The debt crisis in Irish homes is now out of control and all we hear from this Government is the promise of the Insolvencies Regime reforms that will provide no support for troubled homeowners, property tax on negative equity homes, more semi-states price hikes on homeowners and householders, plus 'My Hands are Tied' when it comes to dealing with the banks from the Ministers in charge of this economy.

On (4): Growth:

• The Government puts forward two core figures identifying its recent achievements: lower unemployment and positive growth. Both are - at best - glass half-full.
• In 2011 GDP went up 1.4%, but GNP contracted 2.5%. In 2012, we can expect GDP to increase by around 0.4% and GNP to shrink once again by ca 0.5% (IMF data). 
• Since the Government came to power, GDP in this country has grown so far by ca 1.8% cumulatively, and GNP shrunk by ca 3%. The economy is flat on the ground and showing no real signs of a robust recovery. It is not contracting outright, but given the gravity of the fall, this 'stabilisation' is a poor showing.
• Unemployment: official QNHS data for Q3 2012 shows that unemployment declined 0.2% (-3,600) on Q3 2011. But the number of people in the labour force has fallen -7,900 - more than double the rate of unemployment decline.  Live Register shows decline (December 2012 on 2011) of - 11,051 signees, yet almost half of these declines can be accounted for by people engaged in State-run Training Programmes. Based on exits from the workforce in Q3 2012, this suggests that the Live Register drop in 12months through December 2012 can be accounted for by people running out of benefits and joining State training programmes. In other words, jobs creation is not doing anything to add net new jobs in this economy. 
• Since Q2 2011, when the Government took office, numbers of people in employment declined 20,000, in full-time employment - dropped by 29,000.
• Quoting from the CSO: "The number of persons employed decreased by 0.2% (-4,300) over the year to Q3 2012. This compares with an annual decrease in employment of 1.3% in the previous quarter and a decrease of 2.1% in the year to Q3 2011. The annual rate of decrease of 0.2% in the year to Q3 2012 is the lowest since employment first decreased on an annual basis in the third quarter of 2008." Glass half-full if you kept your job, empty if you lost one or are looking for one.
• The retail sector continues to struggle. Headline figure today for November sales is a decline of 0.2% in the value of all sales, y/y and a decline of 0.5% in the volume. This at least partially controls for the uncertainty of Budget 2013, as it compares sales to the period of uncertainty about Budget 2012.
• Note: Minister Rabbitte made a reference to the m/m decline in sales of TV equipment as the core driver of declines in retail sales in November. This is simply 1% of the truth. In y/y terms, largest drops in sales were in Motor Trades (-4.5% in value & volume), Furniture and Lighting (-9.0% and -4.5% in value and volume), Books, Newspapers and Stationery (-8% and -9%) and Other Retail Sales (-8.3% and -7.1%). Seven out of 13 categories of sales posted declines in value of sales, y/y and nine in volume.

On Structural Reforms:

• We need reforms of charges and fees in professional services, as well as in semi-states' controlled costs (energy, health insurance, education, transport, etc) - none were enacted so far by this Government to-date.
• We need reforms of local authorities to reduce rates on businesses and to improve value-for-money - only minor, unambitious approach was taken so far by the Government, aside from creation of (for now) centralized 'local' property tax. Again - revenue measures were put ahead of structural reforms.
• We need reforms of the Government services - reflected not on the capital side or revenue sides of the budget but in current spending - little done so far, short of slash-and-burn through the easier cohorts of employees (part-timers, contractors) and the continued loading of costs onto the shoulders of services users (the largest component of so-called 'cuts').
• We need reforms to boost our institutional competitiveness - outside semi-states and public services, in areas such as taxation system, entrepreneurial supports (including tax policies), international trade, visa regimes, mobility of residents who are non-EU nationals (especially within professional grades, where such mobility is critical to their productivity), etc. Nothing, or even the opposite of the reforms is being done by the Government.
• We need reforms of personal insolvencies regime to help homeowners and to stop the cancer of debt spreading uncontained. Very little is being done on this front by the Government.
• We need political reforms to create an environment where policies are created not in a near-vacuum of the Ministerial Panels or Super-Groups, but in the open, with real debates, real testing by the Dail and the public, transparently and beyond the whip system constraints.

I am going to be brief on the outlook for 2013-2015. If we do the above, and do it well, we shall see a robust, sustainable recovery, starting with mid- or late-2013 and gaining momentum into 2015, with potential rates of growth at around 2.5% in 2014 rising to 3.5+% in 2015. If we have also positive global recovery environment to aid us, there is no reason why growth of 5%+ in 2015 should be off-limit. 

7/1/2013: Falling speculative investment interest in gold

In two recent posts I covered US Mint sales data (annual and monthly) for gold coins. The core theme of both was the return to fundamentals in demand as signaled by sales volumes. Such a return, of course, is the flip-side of the retrenchment by speculative investors. Here's a chart from BCA from November 2012 showing just that process working through:

Note: Disclosure in the first link above.

7/1/2013: A scary chart from Spain

If you want a frightening figure for the start of the week, here's one, courtesy of the WSJ:

Per WSJ: "At least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt, according to official figures, and the government has begun withdrawing cash for emergency payments."

"In November, the government withdrew €4 billion from the reserve fund to pay pensions, the second time in history it had withdrawn cash. The first time was in September, when it took €3 billion to cover unspecified treasury needs." Such withdrawals can lead to sales of bonds, which in turn can lead to higher yields - classic scenario of a ponzi scheme unwinding.

The point is not valuations, but risk.

"Spain will have trouble finding buyers for the estimated €207 billion in debt it plans to issue in 2013, up from €186 billion in 2012, to cover central-government operations, debt maturities of 17 regional administrations, and overdue energy bills," according to WSJ. 

But there is, of course, more. "Spain's commercial banks already have increased their Spanish government-bond portfolio by a factor of six since the start of the crisis in 2008, and now own one-third of government bonds in circulation." In other words, there is a closed loop between Spanish State, State pensions fund and the banks. A liquidity crunch or solvency problems for banks will cascade all across the debt markets, potentially triggering defaults on pensions.

Note: per Eurointelligence report earlier today, "This is old news as already back in June there was a report that Spanish debt holdings by the Reserve Fund had gone from 55% in 2007 to 90%, and it was government policy to reach 100% by replacing maturing foreign debt holdings with new Spanish debt. It is also a bit of a noisy red herring, as a stock of €65bn is about 2/3 of the government's annual pension bill, it is clear that the Social Security Reserve Fund accumulated over the past decade can never be a substantial contributor to future pensions. However, the Euro's prohibition of central bank financing of state budgets may require the creation of such buffer stocks"

6/1/2013: 'Stone Age' of journalism?..

A quick note on something that has been bothering me in recent days.

"Much internet journalism at level equivalent to Stone Age" was a headline in a recent Irish Times opinion piece (no link, per Irish Times confusing attitudes to links).

One wonders - does that include internet writings / blogs /online-journals contributions by scores of scientists, economists, political scientists, sociologists, artists, philosophers, historians, institutional researchers, political leaders, etc?..

Much of what is written on a daily basis in newspapers is authored by professional journalists (occasionally - original research, but more often - re-communication of others work; professional in quality, but still - secondary in nature). A lot of what is written on the web is authored by original creators / discoverers of ideas, it is often discussed on the web by people who shape these ideas in debates not feasible in print media nor on print media web platforms, and it is often unique to the 'Internet' platforms, especially to pure web-based platforms.

So 'Stone Age' Internet journalism? or 'Tone Deaf' print opinionism? 

6/1/2013: Houston, we've got a (US) problem?..

2013 biggest Grey Swan might be not China's slowdown or Euro area's continued debt crisis (although both are pretty much still on the books, although the former is less likely than the latter). It might not even be the Japanese economic implosion (albeit Japan is sick beyond any repair)... oh, no... the real Grey Swan of 2013 might be the markets starting to take a closer look at the US.

This might sound bizarre during the weekend following Friday, when the VIX index collapsed 39.1% - more than in any other trading day in its history, and when the US markets have ended the first week of the year with total gains almost equivalent to what some are projecting for the entire 2013... and yet... as some would say: "Houston, we've got a problem!"

The problem is best illustrated in the following three sets of chart, all comparing US fiscal performance to the peers.

Structural Deficits:

As two charts above highlight, the US Government structural deficits are massive. Since 2011, these are shallower than those of Japan (and Japan's figures in charts above are likely to become even worse following the latest Government appointment and their commitment to debase/in-debt the Japanese economy out of existence) but they are the worse in the entire G7 group save for Japan. More ominously:

• The IMF is predicting the structural deficit to worsen once again starting in 2015
• The above projections by the IMF do not reflect the disastrous consequences of the 'Fiscal Cliff' deal struck on December 31, 2012 (see here).
• In 2013, US structural deficit is projected to be around 5.49% of GDP against the G7 average of 3.04%
• In 2010-2017, according to the IMF projections, the US cumulated structural deficits will add up to 44.84% of GDP - against Japan's 58.53% and the G7 average of 24.97%. For 2013-2017, the same figures are: US 21.43%, Japan 33.31% and G7 average 10.48%. In other words, things are going to get worse in the US compared to G7 average in 2013-2017 than they were in 2010-2012. They will be worse still in Japan, but everyone expects Japan to remain the sickest member of G7, so there is little surprise or repricing that can be expected before the US risks are repriced.

Primary Deficits:

Ugly picture for the US vis G7 counterparts continues with primary deficits as well. Per above:

• The US is the second weakest link in G7 in terms of primary deficits
• In 2010-2017 period, the US is expected to generate cumulated primary deficits amounting to 37.65% of GDP and this is against Japan's 52.42%, but G7 average of 15.99%. In the period from 2013 though 2017, the US cumulated primary deficits are expected to come in at 14.21% of GDP against the G7 average of 3.54% of GDP and Japan's 25.73% of GDP. Once again, relative to G7 average, the US performance is expected to worsen in 2013-2017 compared to 2010-2012.

A table to summarise the above two sets of charts on a longer time horizon scale:

Government Debt:

The US is positioned as the third weakest G7 economy in terms of levels of Government debt it carries - after Japan and Italy. However, this analysis neglects the fact that according to the IMF projections, the US debt situation is expected to continue worsening through 2016 (when US debt is expected to peak at 114.19% of GDP), while Italian situation is expected to improve from 2013 peak of 127.85% of GDP into 2017. Similarly, compared to G7 average, the US debt dynamics post-2013 are unpleasantly convergent to the higher G7 average (driven by Japan's debt levels).

Stripping out Japan from debt analysis:

• In 2001, US debt to GDP ratio stood at 11.83 ppt below G7 (ex-Japan) average. By 2012 this number has reversed into US debt overshoot of G7 average by 10.06 ppt. By 2017 the same overshoot is expected to rise to 19.57 ppt.

Table below summarises the long-range view of the charts above:

To summarise the above evidence, the US debt levels are not sustainable in the long run, even though current growth (above debt financing costs) and funding costs (exceptionally low yields on Government bonds and the printing press effect on these yields) are delivering short-term sustainability. However, as shown above, the US primary deficit ius huge and not abating fast enough. This implies debt to GDP ratio will be rising into 2016, if not after. Which, in turn, implies rising susceptibility of the US to risk-repricing in the markets.

It is worth contrasting the US case with that of Italy and Japan. In Italy's case, there is significant surplus on the primary balance and overall deficit due to high cost of funding even higher debt, compounded by economic growth well below the cost of funding the state debt pile. In Japan - there are severe problems across all parameters: high primary deficits, growth well below the cost of debt funding, and debt pile so large that structural deficits are alarming.

All of which means that all three economies can be severely tested by the markets. As long as global economic environment remains that of subdued economic activity, so that risk aversion remains high and monetary policies remain extremely accommodative, the US is out of the investors' crosshairs and Italy is in. Should these environments change, all bets are off for the US - at least in the medium- to longer-term.

6/1/2013: Italy's Growth, Reforms & Austerity Conundrum

I've written before about the Italian Dilemma and the debt trap on a number of occasions (see this article for example) and my basic view remains the same - Italian economy needs structural reforms to escape the debt overhang trap and increase productivity in non-exporting firms. That gap, in productivity, between the exporters and non-exporters in the Italian case is vast.

Now, it is great to see BCA Research wading in with the similar concern about Italy's productivity problem and the issue of structural reforms: link here.

A chart from BCA:

Alas, the problem is that Italian economy is saddled with rapidly ageing population and the fact that the extent of it has been somewhat masked by the artificial inflow of lower-skilled migrants during the 2000-2007 years (link here) and underemployment of Italian younger workers.

Italian workplace structures (from hiring to firing) and firm ownership (especially smaller family firms, but also unionised larger or legacy employers) actively obstruct promotion of non-Italians to management and higher professional grades. Non-EU citizens with higher skills and their residency in Italy have been regulated by antiquated laws until August 2012 (see here). These are non-meritocratic (see here and here for examples) systems that cannot be sustained in younger societies, let alone in Italy, where emigration and ageing are forcing the workforce to become older and less productive (see an early study here on effects of migration on Italian labor force comparative to other EU countries).

On underemployment of Italian younger workers, here's a chart from 2012 OECD study:

None of this is new, as this study from James Heckman dating back to 2001 illustrates. And none of it is being addressed in Italy so far through the crisis. Monti Government has tinkered along the edges (see here and here), but failed to tackle the real causes of the long-term (decades long in fact) crisis so far - lack of merit in Italian promotion, hiring and firing structures. Monti has tried, but so far failed to push through more ambitious reforms (link here) and Italy remains trapped in the high debt - low growth scenario.

The issue, of course, is whether austerity (cuts and taxes) is in itself structurally reformist. 

In and by itself - it is not, especially if the balance of taxes v cuts is shaded toward the former rather than the latter. 'Shaded' here depends not so much on some set rule (as the Irish Government, for example, likes to pretend) of 40% v 60% or 50% v 50%, but on the starting point for the reforms and the nature of the reforms, as well as other conditions. 

Italian economy is already weighted heavily by huge taxes and indirect charges. For example, Italy has the sixth highest income tax wedge for single average wage earners with no children, per OECD. It is also suffering from a massive demographic problem that exacerbates taxation policy inefficiencies (younger workers are saddled with higher long term tax bills, while older workers are looking forward to a cushioned retirement). Between 2012 and 2016, the IMF expects Italian Government spending to run above 50% of the country GDP, and there was not a single year since 1988 when the Italian Government spending dropped below 47% of the country income. These figures are 1-2 ppts above the Euro area average, but full 15% above the average for advanced economies ex-G7 and Euro area - in other words, the economies with which Italy competes for global markets in skills and exports.

Thus, IMF assessment of the Italian reforms in July 2012 stated: "The government’s near-term fiscal plans are ambitious and critical for sustainability, but more can be done over the medium term to strengthen the fiscal outlook. To support growth, the composition of adjustment should be rebalanced more towards expenditure cuts and lower taxes". 

In other words, austerity is needed (if only to deflate the burden of debt servicing for the Government debt and provide some breathing room for structural reforms that will require much longer-term approach than currently envisioned). But not austerity-for-the-sake-of-austerity alone. Deficit targets are meaningless, in the case of Italy. Reduction in expenditure targets are necessary, and alongside these, reforms of the labour markets.

5/1/2013: Irish Market M&A and ECM activities in 2012

Per Experian release (from yesterday) covering the latest M&A (mergers and acquisitions) and ECM (flotations, rights issues and placements) data for the Republic of Ireland, 2012:

• During 2012, there were 294 transactions announced in Ireland, down on 2011 total of 307 deals (-4.2% y/y). However, the value of transactions rose 1% from €28.343bn in 2011 to €28.596bn in 2012.
• The most active sector for M&A in 2012 were: Materials & Equipment Wholesale (just over 20% of all transactions), Professional & Business Activities (15.5%) and Computer Activities (15.2%). The largest value deals were in Banking, Credit & Leasing (€10.5bn), and Electrical Manufacturing (€10.2bn).
• Ireland represented ca 3% of the total volume of all European transactions and 3.9% of their total value.
• There were 29 large deals announced in 2012 in the over-€120mln category, "up by 20.8% from the 24 transactions recorded for 2011". "…The aggregate value of large deals was up by 1.38%, from €25.25bn in 2011 to €25.597bn in 2012. The largest deal completed in the Republic of Ireland in the year was the acquisition by US industrial engineering group Eaton Corp of Dublin-based Cooper Industries Plc, for €8.971bn."
• Deal volume in the mid-market (€12-€120mn) segment in 2012 "stayed level on 64 deals. Values declined to €2.237bn in 2012 – representing a fall of 3.8% over deals worth €2.325bn 2011. The largest completed deal in the mid-market saw real estate investor Kennedy Wilson acquire the Irish Headquarters of State Street Corp for €106.9mln in November; this was the US firm’s second large acquisition of the year in the Irish property sector, it having acquired the Alliance Building, a 210-unit residential property in Dublin, for €40mln in June."
• "Deal flow in the small market (under €12m) value segment fell from 47 transactions in 2011 to 44 transactions for 2012, a decline of 6.4%. However the aggregate value of deals saw a 9.2% increase; there were €232mln worth of small transactions in 2012, up from €212mln in 2011. The largest completed deal in 2012 saw diversified building materials group CRH Plc acquire Anchor Bay Construction Products Ltd, an English company that provides reinforcement, formwork and waterproofing products to the construction industry, for €11.97mln. This was one of fourteen acquisitions made by the acquisitive Irish company in 2012".

5/1/2013: US Mint December 2012 sales

In the previous post (here), I looked at the annual data for US Mint gold coins sales. Here, let's take a quick look at the shorter-term, monthly trends and dynamics for December 2012.

Following a robust monthly rise in sales of coins by oz (weight) totals to 136,500 oz in November, December sales moderated to 76,000 oz (down 44.32% m/m), still posting a healthy 16.92% increase y/y. Compared to historical average of 56,346 oz the sales are still up, although December 2012 is below 87,717 oz average sales for the crisis period (since January 2008). However, while difference to historical (1987-2012) average is significant statistically, it is not significant relative to crisis period average. Furthermore, 6mo MA is at 68,250 which is well below the December sales levels.

For those thinking of a 'big fall-off in sales', December 2012 marked the highest volume (by weight) of sales since December 2009 and the fourth highest volume since January 2000.

In terms of number of coins sold, December 2012 came in at 82,000, or 52.74% down on November robust sales of 173,500, but monthly sales were up 26.15% y/y. Compared to historical averages, December 2012 sales are statistically indifferent from historical average sales of 98,758 coins per month, and from crisis-period average of 119,642. 6mo MA sales are at 93,500, ahead of December sales, while H1 2012 average sales were at 93,750, also well ahead of December 2012 volumes.

The relative moderation in the number of coins sold compared to the trends in the volume of coinage gold sold (oz) can be explained by the increased oz content of average coin sold. In terms of oz/coin sold, December 2012 sales stood at 0.927, well ahead of 0.787 in November, posting the highest gold content reading for any month since December 2011. Historical average content is at 0.590 oz/coin and crisis period at 0.790 oz/coin, both statistically significantly lower than December 2012 figure.

Charts and dynamics:

As above clearly shows, the historical trend is upward sloping and the current reading is comfortably at the trend levels both in terms of 6mo MA and actual level reading for December 2012.

The chart above shows contemporaneous negative correlation in price of gold v volume of gold coins sales between September 2009 and April 2012, with exception of December 2010 - August 2010. This correlation has now been broken down and turned positive since April 2012 - a new sub-trend that remained consistent since then and was reinforced in December 2012 figures. Chart below illustrates this much more clearly:

A little more statistical 'beef' on these: 12mo dynamic correlation between gold prices and total gold sales via coins (total oz weight of sales) rose to +0.34 in December from +0.28 in November 2012, so declined prices (y/y) have been associated with some increase in demand. Recall that in November-December 2011, gold prices fell from $1,746 to $1,531, while in the same period 2012 they moderated from $1,726 to $1,657.50. December marked 4th consecutive month of positive 12mo dynamic correlations. Historical 12mo dynamic correlation of +0.17. Looking at longer-range correlations, 24mo dynamic correlation in December 2012 stood at -0.23 against the historical average of -0.10 and up (in absolute terms) of -0.19 in November.

Per average coin sold gold content:

As mentioned above, December 2012 sales were characterised by a substantial increase in average gold weight of coins sold which is running well ahead of the historical (upward sloping) trend. More significantly, this year sales fell below the historic trend in 6 months out of 12. Hence, neither trend direction, nor current deviation from the trend are indicative of any severe downward demand pressures.

Overall, sales dynamics show that since February 2012, volumes of sales in oz have recovered nicely back to their historical trend (upward sloping) and are currently running above the January 2000-July 2008 averages.

Note:
Historical, long-term relationship between gold prices and demand:

While December 2012 observation is to the downside of the trend, it is clear from the picture overall that changes in gold prices during a given month have statistically no discernable relation to the demand for gold via US Mint coins sales. This simply confirms the nature of fundamentals driving demand for coins as discussed in my previous posts on the issue (see previous post linked above for one such link).

5/1/2012: US Mint Gold Coins Sales: 1986-2012 data

The readers of this blog would be familiar with the exclusive time series on US Mint sales of Gold coins that I have maintained for some years now. With December 2012 sales finalised, it is time to update the annual and monthly data analysis on these.

Here is the analysis for January 2012 - to open the year - that predicted 'return to fundamentals' theme for coin sales. And here is my article for Globe & Mail on what fundamentals relate to gold coins sales.

I am happy to note that my prediction of moderating trend in speculative buying and restoration of stronger link to long-term behavioural demand and savings fundamentals has been confirmed through 2012.

Looking at annual data for 2012 (note: subsequent post will provide more shorter-term dynamics analysis for December data), first in weight terms:

• In 2012 the US Mint sold 747,500 oz of gold in form of coins, down 25.25% y/y, with demand for coinage gold declining below 2008 levels of 860,500, but well-ahead of the 2005-2009 average annual sales of 640,800 oz per annum.
• In terms of longer-term averages, 1990-1994 average was at 384,050 oz, 1995-1999 average at 1,047,800 oz, 2000-2004 average run at 386,550 oz, 2005-2009 average at 640,800 oz per annum and 2010-2012 average is currently at 989,333 oz per annum. 
• 2012 was the 10th highest demand year in history in terms of volume of gold coins sold in oz of gold, with series covering 1986-2012 period. In other words, 2012 was not a good year for Gold Bears and for Gold Speculators alike. This doesn't make it a great year for Gold Bulls, but, given that the average annual gold price in 2012 stood at $1,678/oz - ahead of any on the record and up  7.0% on 2011 - it does appear to have been another year when fundamentals seemed to triumph over shorter-term psychosis. 
• My annual forecast for sales in 2012 was 694,050, which means that simple dynamic trend of moderating sales expectations based on previous years' price effects was bearish.

In terms of number of coins sold:

• US Mint sold 1,123,500 coins in total in 2012, down 21.27% on 2011. The demand for actual coins was at the levels compatible with 2008 when the Mint sold 1,172,000 coins and well ahead of all annual sales in 2000-2007 period.
• In terms of longer-term averages, 1990-1994 average was at 637,620 coins, 1995-1999 average at 2,246,300 coins, 2000-2004 average run at 738,700 coins, 2005-2009 average at 955,800 coins per annum and 2010-2012 average is currently at 1,397,167 coins per annum. In other terms, current sales are annually bang on at the annual average for the last 8 years.
• 2012 ranks as the 10th most successful year for coins sales in terms of the number of coins sold, confirming my view in the third bullet point above regarding sales of coinage gold in oz.
• My forecast for 2012 sales was at 1,21,223 coins - a much closer call than on oz of gold sold via coinage, suggesting that the demand remains closely driven by long-term dynamics.

In terms of both - sales in coins numbers (1,123,500 coins) and oz (747,500 oz), 2012 results stand in close comparative to the historical averages. Historical average (1986-2012) for coins sold is 1,261,170 and for oz of gold sold through US Mint coins is at 717,343 oz.

In terms of average gold content of coins sold:

• 2012 average coin sold by the US Mint contained 0.665 oz of gold per coin, down slightly on 0.701 oz/coin in 2011 and well-ahead of the historical average of 0.574 oz/coin.
• 2012 ranks as the fifth highest year on record in terms of average oz/coin sales.

Charts:

Historical dynamics:

As charts above illustrate, all time series have shown convergence to the long-term upward trend:

• There is, so far, no overshooting of the trend to the downside - something that could have been expected if demand for gold coins was showing speculative bubble deflation dynamics or post-bubble correction, although, of course, we cannot say with 100% accuracy that this is not going to materialize with some lag.
• There is no acceleration in the convergence trend in 2012 or since convergence began in 2009.
• This episode of convergence is shallower (in terms of annual speed to target) than in 1997-2002 period and 1986-1991 period.

Historical correlations:

• In terms of historical correlations, the following matrix holds, showing overall zero to low level negative correlations between prices and demand for coins and coinage gold:

The above, of course, implies that given moderating price increases in gold (+7% for annual monthly average in 2012 compared to 22.21% rise in 2011, 25.61% in 2010, 11.44% in 2009 and so on), we can expect a slowdown in overall oz and coins volume demand, which can lag price changes. This is exactly what appears to have taken place in 2012.

As before, I remain comfortable with the 2012 trend and am looking forward toward more stabilised demand dynamics in 2013, with volume of sales declining in 2013 to ca 500,000 marker in oz terms and 850,000 in coins numbers terms, assuming no major volatility in gold price and in line with continued stabilisation in the world economy.

Disclaimer:
1) I am a non-executive member of the Heinz GAM Investment Committee, with no allocations to any specific individual commodities
2) I am long gold in fixed amount over at least the last 5 years with my allocation being extremely moderate. I hold no assets linked to gold mining or processing companies or gold ETFs.

3) I receive no compensation for anything that appears on this blog. Everything your read here is my own personal opinion and not the opinion of any of my employers, current, past or future.

4/1/2013: Major economies PMIs for December 2012

Global PMI snapshot:

Previously covered:

• Asia (ex-China) here
• Netherlands here
• Euro area here
• Ireland here

Some top line performance for the global economy:

Manufacturing:

• US Manufacturing: December 50.7 from November 49.5 - statistically not significant as above 50 reading, so a shallow positive, with a swing of 1.2 ppts being a good indicator of gradual strengthening. New orders static at 50.3 and employment gains at 52.7 in December against 48.4 (contraction) in November.
• Germany: 46.0 in December a deterioration on already abysmal 46.8 reading in November. Clear contraction territory. 
• France: 44.6 in December after 44.5 in November - an outright recession.
• Italy: 46.7 in December on 45.1 in November - falling off the cliff at a slightly reduced rate.
• UK: 51.4 in December on 49.2 in November - expansion, albeit moderate in December.
• Japan: 45.0 in December, worse than already recessionary November reading of 46.5.
• China: 50.6 in December, unchanged on November - both not statistically significantly different from 50.0. Employment continues to contract: 49.0 in December on 48.7 in November, while New Orders are growing at 51.2 in both months - modest growth rate.
• Brazil: 51.1 in December on 52.2 in November - signalling slowdown in already weak growth in November.

So Manufacturing sector is pretty ugly.

Services:

• US: to 56.1 in December from 54.7 in November, confirming strong growth trend. Employment at 56.3 in December - a robust uplift, on top of relatively static 50.3 in November. New Orders rising to blistering 59.3 in December from 58.1 in November.
• Euro area: to 47.8 in December from 46.7 in November - both signalling contraction
• Germany: bucking the trend for the euro area to 52.0 in December from 49.7 in November, with now moderate expansion
• In contrast to Germany, France went deeper into contraction territory: 45.2 in December against 45.8 in November.
• Italy matched France and raised: 44.6 in December (a depression-level reading) from 46.0 in November (a recession reading).
• UK stumbled: 48.9 in December (mild contraction) against 50.2 (effectively flat) in November.
• China: robust 56.1 in December on foot of strong 55.6 in November
• Brazil slightly less impressive, but stil positive: 53.5 in December relative to 52.5 in November.

So Services are all over the shop with the euro area remaining the Ugly of the Bad.

4/1/2013: Irish Manufacturing PMI: December 2012

The latest Manufacturing PMI for Ireland, released this week by the NCB, reflect a number of ongoing changes that can lead to a confirmation of the new trend toward slower expansion for Q4 2012 – Q1 2013. At the same time, the overall series continued to post expansion, in contrast with all euro area PMIs – a rather impressive performance.

Hence, my top conclusions – based on the detailed analysis below – are:

• Irish Manufacturing continued (albeit slowing in the rate) expansion reflects impressive robustness of the exports-driving MNCs, while
• The overall strong and persistent headwinds of slower global trade flows growth and the contractions in trade within the euro area are starting to feed through to Irish manufacturing sector – a trend that can prove to be a significant drag on growth in Q4 2012 – Q1 2013.

Now to the detailed analysis:

Top line reading for PMI came in at 51.4 in December, down from 52.4 in November. December reading printed exactly at 12mo MA and below 6mo MA (52.1) and 3mo MA (52.0). 3mo MA of 52.0 for October-December is down on 52.2 3mo MA for Q3 2012, but is above Q2 2012 average (51.5) and Q1 2012 (49.8). Q4 2012 average is bang on at Q4 2010 average and ahead of 49.1 average for Q4 2011. The December reading was the lowest in 4 months.

All of this implies a weakening growth momentum with output index peaking, for 2012 at 53.1 and 53.9 in June and July, afterward slipping toward 51.7 average reading. It is worth noting that a reading above 53 is statistically significantly different from 50.0, while a reading at or below 52.2 is not significantly different from 50.0.

Output PMI fell from 54.4 in October to 53.8 in November and to 51.2 in December 2012. December 2012 reading was the first statistically insignificantly different from zero-growth 50.0 in 3 months and marked seventh month in 2012 when growth was statistically at or below 50.0. At the same time, December reading was the 8^th consecutive month that output index printed above 50.0 level. All of which only makes sense when one recognizes that Output index is strongly volatile. For example, historical STDev for overall PMI is at 4.44, while STDev since January 2000 is at 4.36 and the crisis period STDev since January 2008 is at 5.43. In Contrast, Output PMI STDevs were 5.14, 4.94 and 6.04 respectively.

At 51.2, December output reading was below 12mo average of 51.7, and below 6mo average of 52.6. However, on a positive side, and statistically significantly, Q1 2012 index averaged 50.2, rising to 51.4 in Q2 2012, followed by 52.1 in Q3 and 53.1 in Q4.

While Output slowdown was marked only in December, fall off in the New Orders sub-index was much more pronounced and is signaling a longer term trend down. New Orders reading came at 50.9 (still above the 50.0 libne, but not statistically significantly different from 50.0) down from November reading of 52.1. New Orders activity peaked in 2012 in June-July and has fallen since. At the same time, in simple level terms, the index was for the tenth consecutive month above 50.0.

12mo MA for the New Orders sub-index is at 51.8, while 6mo MA is at 52.6. Q1 2012 average was at 49.9, Q2 at 52.0, Q3 at 53.3 and Q4 2012 came in at 51.9.

In contrast with sluggish bouncing along the zero growth line in the New Orders series, New Export Orders series posted surprising rise in December, reaching 53.6 (statistically significantly above 50.0) from 52.1 (not statistically significantly different from 50.0). This marked the highest reading in the series since July 2012 and allowed the sub-index to regain territory lost since August 2012. Per survey respondents, the core driver for new export orders was rising demand from the US.

New Export Orders have been steady on a gentle upward trend – based on averages and correcting for some shorter term volatility – Q1 2012 average was at 51.9, Q2 and Q3 2012 at 52.8, Q4 at 52.5. Thus, 12mo MA is at 52.5, very close to 6mo MA of 52.7.

Other subcomponents:

I will deal with employment and profit margins conditions once I complete analysis of the Services PMI in the next few days, so stay tuned.

3/1/2013: Irish Income Par Capita at 1998-1999 levels

On foot of the post on the US household incomes (see here), I took a look at CSO series for Ireland's per capita national income. Here's a chart:

As the chart shows, Ireland's current per capita national incomes stood at EUR27,105.6 in 2011, down 19.74% on peak and below 1999 level. Irish per capita national disposable income at EUR26,575.7 in 2011 was down 20.2% on peak levels and was below 1998-1999 average.

Using IMF projections for personal consumption and private investment for 2012, Ireland's 2012 per capita national income can be expected to remain below 1998-1999 averages in 2012.

Put in different terms, as the result of the current crisis, Ireland's real economy has already lost not a decade but over 14 years worth of growth. Assuming disposal incomes per capita grow at 2.5% per annum into perpetuity, Ireland will regain 2006 peak levels of real income per capita by 2022, at 2% by 2024 and at 1.75% - by 2026, implying that the 'lost decade' for Ireland's economy is likely to last not 10 years, but between 16 and 20 years.