27/1/2013: Eurocoin January 2013: Misery broadly unchanged isn't a sign of stabilization

You might be forgiven for thinking that the euro crisis is over and that we are returning to the 'Old Normal' of growth, recovery, stability etc... Much of the recent commentary has been focused on the 'restoration of markets confidence' in sovereign finances, citing yields declines across the euro area.

I covered the latest data on sovereign yields from the CMA quarterly report for Q4 2012 here.

However, euro area remains a global (that's right - global) growth laggard on par with the gravely sick Japan - as the IMF latest WEO update clearly shown (see details here).

And here are the most up-to-date data on leading economic growth indicator from CEPR and Banca d'Italia - the eurocoin - for January 2013:

• In January 2013 eurocoin stood at -0.23, an improvement on -0.27 in December 2012 and the highest reading since June 2012, but still in the negative territory.
• January marked 16th consecutive month of below zero reading in eurocoin and based on historical trends, this gives us forecast for the euro area economic growth of -0.4% in Q4 2012 and same for January 2013.
• In 2008-2009 recession, eurocoin average reading stood at -0.31. In 6 months period through January 2013, the average reading is at -0.29. 
• Ominously, while in 2008-2009 recession period, average ECB rate stood at 2.54%, last 6 months average rate was 0.75%, suggesting that easing of monetary conditions has little effect on the real economy.

Some charts to illustrate:

The next set of charts shows that the ECB policy remains in a bizarre no-man's land of neither delivering price 'stability' target (close to, but below 2%), nor supporting growth.

So no easing of the real economic crisis in sight and no signs of the euro 'saviour' ECB when it comes to dealing with the growth collapse.

26/1/2013: A quick reading list

My reading list these days includes two excellent essays on State Capitalism (here) and the moral limits of markets (here). A third essay is on Europe's Next Big Mistake (here). All via Project Syndicate. Reminds me exactly why I was the first editor in Ireland to bring Project Syndicate content to public domain, back in the days when I edited Business & Finance. 

23/1/2013: IMF WEO Update: Euro Area snapshot

In the previous post (link here) I have looked at the headline numbers from the IMF revision to their World Economic Outlook. Now, a quick summary for the Euro area:


"The euro area continues to pose a large downside risk to the global outlook. In particular, risks of prolonged stagnation in the euro area as a whole will rise if the momentum for reform is not maintained. Adjustment efforts in the periphery countries need to be sustained and must be supported by the center, including through full deployment of European firewalls, utilization of the
flexibility offered by the Fiscal Compact, and further steps toward full banking union and greater fiscal integration."

To summarise the forecasts and their revisions:

The above clearly show that the euro area remains the weak point for global growth and that this picture is likely to continue in 2013 and 2014. More importantly, the revisions since October 2012 show that the IMF pessimism about the euro area growth prospects is getting deeper, compared to other economies.

Time stamp

23/1/2013: IMF World Economic Outlook Update

IMF WEO is out just now. Headline reading is:

"Global growth is projected to increase during 2013, as the factors underlying soft global activity are expected to subside."

"However, this upturn is projected to be more gradual than in the October 2012 World Economic 

Outlook (WEO) projections."

"Policy actions have lowered acute crisis risks in the euro area and the United States. But in the euro area, the return to recovery after a protracted contraction is delayed. While Japan has slid into recession, stimulus is expected to boost growth in the near term. At the same time, policies have 

supported a modest growth pickup in some emerging market economies, although others continue to struggle with weak external demand and domestic bottlenecks. If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks."

On Global growth drivers:

• The IMF expectations are for World Trade Volumes to rise 3.8% in 2013 and 5.5% in 2014, after posting increases of 5.9% in 2011 and 2.8% in 2012. In other words, the average growth rate in 2011-2012 was 4.4% and in 2013-2014 the projection is for the average of 4.7% growth. Not exactly a massively rapid recovery. 
• World Trade Volume forecasts have been revised down -0.7 ppt for 2013 and -0.3 ppt for 2014 compared to october 2012 forecasts, implying that average growth in trade over 2013-2014 was expected to hit 5.15% annually back in October 2012 and this has been brought down now to 4.7%.
• The IMF further predicts exports volumes for Advanced Economies to rise 2.8% in 2013 and 4.5% in 2014, with annual average of 3.7% forecast. This contrast with exports growth of 5.6% in 2011 and 2.1% in 2012 - an annual average of 3.9%. 
• Back in October 2012, the IMF forecast for exports growth in Advanced Economies was for an average rate of growth of 4.25% pa in 2013-2014. This has now been brought down to 3.7%.
• The IMF forecast for exports growth in the Emerging Markets & Developing Economies for 2013 of 5.5% and 2014 of 6.9%, down from 5.7% and 7.1% projections issued back in October 2012. 
• However, in 2011 the growth rate in exports from the Emerging Markets & Developing Economies reached 6.6% and this has fallen to 3.6% in 2012. Thus, 2011-2012 annual average rate of growth was 5.1%, 2013-2014 projection is for 6.2% and this represents a reduction from October 2012 forecast of 6.4%. In other words, in contrast with the Advanced Economies, the Emerging Markets & Developing Economies are expected to accelerate significantly in growth of exports compared to 2011-2012.

23/1/2013: CDS markets in Q4 2012 - CMA report

CMA published Q4 2012 report on sovereign CDS markets and there are some interesting trends and stats highlighted.

First 25 top riskiest sovereigns (CPD referes to cumulative probability of default over 5 years):

Note that Ireland is no longer in top 10 riskiest states. Good news. A bit more on this below.


Per CMA: "Global CDS prices ended the year on a strong note, tightening 16% overall as Europe rallies strongly and Greece repurchases debt allaying fears of an exit from the Euro. Only Argentina and Egypt widen significantly on the quarter."

"Argentina CDS ended a volatile quarter as the most risky sovereign reaching a high of 4832bps at the end of November on concerns over USA debt guarantees, but rallied to finish on 1450bps. CDS spreads in Spain tightened from 384bps to 295bps as spreads in Western Europe as a whole tightened 19%."


Next, top 25 least riskiest states:

Note that only 3 euro afea states make it into top 10.

Per CMA:
"Sweden edged Norway off the top spot of the least risky table by 1bps, as the Scandinavian countries ended a strong quarter on the back of a good performance in Europe as a whole. The USA slipped two positions, as a solution to the “Fiscal Cliff” and debt ceiling concerns continue into year end. Austria and Netherlands enter the table with the spreads aligning with the strong economies of Germany and Switzerland." The latter rationale is most bizarre one I heard - the Netherlands are in a serious economic recession, deeper and longer than the rest of the euro area, so I have no idea what CMA are talking about.

Now, some interesting charts relating to Western Europe. Per CMA: "Western Europe continued on the rally from Q3 into Q4, with spreads tightening 19% overall and Greece looking more likely to stay in the Euro. Spreads in Portugal creeped over the 600bps level mid-November but ended the year at 436bps, 13%  tighter. Ireland tightened 31% closing the year at 218bps as the turnaround story continues. Spain and Italy, seen as the key economies in southern Europe, tightened 23% and 19% respectively."

Recall that European CDS overall tightened 19% in Q4 2012 and overall global momentum was very strongly on tightening side.

Note that Ireland experienced comparable (in levels) declines in CDS to all other peripheral countries excluding Cyprus (which saw an increase) and Portugal (where declines were more pronounced, when considered relative to peak reached in the Quarter. It is hard to tell - in this environment - whether Irish performance is driven by own fundamentals or by a combination of these said fundamentals and overall improved investor tolerance for risk.

In terms of percentages declines, we did perform stronger than other peripherals (ex-Portugal) and the Western Europe as a whole.

However, it is still too early to claim that Ireland - based on CDS valuations - is not a part of the 'peripheral' euro area group. Hopefully, more progress in near future will get us decoupled from this camp.

23/1/2013: One Face of 'Irish Confidence Heroes'

Go to Minute 15 to hear this distressed assets investor bragging about forcing the Irish taxpayers to pay for his speculative bets on distressed junior bonds from BofI:
http://www.zerohedge.com/news/2013-01-22/teppers-balls-wall-reappear-lead-explosion-greatness

You wanted to see those 'investors' who have 'confidence' in Ireland? There's one. He got burned by Russians in a similar setting, but, what the hell, Irish Government conveniently made sure same didn't happen to him here. He was made whole on his exceptionally speculative bet.

22/1/2013: US Existing Home Sales Signal Restart of Household Investment in 2012

Cycle returned to the upswing in 2012 in the US Household Investment area, despite a headline dip on monthly series basis:

• Sales of existing homes in the US fell 1% in December to a seasonally adjusted annual rate of 4.94 million, according to the National Association of Realtors. The rate in November was revised down to 4.99 million from an estimate of 5.04 million released earlier. This was the highest rate of sales since November 2009. 
• Lawrence Yun, NAR's chief economist: "Record low mortgage interest rates clearly are helping many home buyers, but tight inventory and restrictive mortgage underwriting standards are limiting sales." 
• On annual basis, existing-home sales are up 12.8% from 2011. 
• The median existing-home price rose 11.5% from 2011 to $180,800. 
• Overall over 2012, existing-home sales hit 4.65 million annual rate of sales, the highest rate since 2007 and up 9.2% on full year 2011. 
• The median price reached $176,600 in 2012, rising 6.3% on 2011 and marking the highest annual growth since 2005

The Calculated Risk has an excellent analysis of underlying data: http://www.calculatedriskblog.com/2013/01/existing-home-sales-another-solid-report.html

Chart from Calculated Risk summarising trends:

22/1/2013: RPPI, Ireland: December 2012

In the previous post I took a quick look at the Residential Property Price Index (RPPI) annual series. Here are monthly frequency observations.

All properties:

• December 2012 All Properties RPPI stood at 65.8, the same level the index was at back in between March and April 2012 and again in September 2012. In Other words, the index de facto is running flat.
• Put differently, the index has now fully erased the miraculous gain of November 2012 and returned prices back to September levels.
• Monthly rate of change in the index was negative at -0.454% and the index is running well below 65.77 12mo MA.
• Year on year the index fell 4.5% in December 2012, after posting a 5.71% decline in November. Thus December represents the slowest y/y rate of decline in the series since May 2008. Which is good-ish sort of news.
• For Nama valuations, latest data suggests a fall in values of 33.26% net of burden sharing cushion.
• 12mo MA monthly rate of change is at -0.378% which is shallower than December 2012 m/m decline of 0.454%
• Putting things into a bit more longer term perspective, simple average of RPPI for the period from January 2008 through present is 90.02, which stands contrasted with 2012 average of 65.73 and 2011 year average of 75.37.
• On shorter term comparatives: H1 2012 average reading was 65.92 against marginally lower H2 2012 average of 65.53. 
• Relative to monthly peak, RPPI stood at -49.58% or comfortably rounded off to 50%. This reading for December 2012 was statistically indistinguishable from the 'nominal' monthly low of -50.34% set back in June 2012.
• Thus, monthly volatility aside, there is no increase in prices. As I noted in November data analysis, we are bouncing along the bottom, which may or may not be a 'true' bottom or a 'false' bottom. This conclusion is further supported by the factors that are likely to impact prices going forward that I outlined in September 2012 data analysis (link here).

House prices sub-index:

• House prices subindex declined marginally from 69.1 in November to 68.7 in December, thus erasing completely any gains delivered from September 2012. 
• House price dynamics are virtually identical to those of the overall RPPI as outlined above.
• 2012 year monthly average index reading was 68.57, slightly behind 68.7 recorded in December. However, 6mo average through H1 2012 was 68.7 and this has fallen to 68.43 average for H2 2012. 
• Y/y index fell 4.18% in December, marking the shallowest rate of decline in the series since May 2008.
• Frankly, all of the changes are within the range of being statistically insignificant, so the theme of 'flat line market' continues unabated.

Apartments show the same dynamics as Houses, so let's avoid repetition and note that

• Houses prices are down 47.95% on peak, while Apartments prices are down 62.15% on peak.

The index has been criticised, for the n-th time by the realtors for failing to reflect the 'great demand' from the cash buyers. Alas, my view is that cash buyers are not, repeat, not a normal market, but rather an aberration that is bound to be short-lived. In this sense, if we want a gauge of real market activity, then the CSO data provides a far better picture than testosterone-fuelled hype of few whales with cash stashed from CPOs of the old days bidding each other out to land a 'family home suitable for conversion into student bedsits'.


Dublin, last.

• Property prices in Dublin slid from 60 in November to 59.2 in December, marking 1.33% decline m/m and 2.47% drop y/y. 
• Relative to peak, Dublin market is down 55.99%. Which is above the absolute low of 57.40 achieved in August.
• On dynamics side, 12mo average is running at 58.32, worse than December reading, but well below 2011 average of 67.86. H2 2012 average is at 58.57 and virtually identical to H2 2012 average of 58.07. In other words, medium-term dynamics are flat. Flatlining is the theme here again.

22/1/2013: Merkel cites Ireland as one of 3 tax havens in Europe

A very interesting exchange between Angela Merkel and Francois Hollande talking at a public venue, as reported by the EUObserver : http://euobserver.com/political/118795

In particular, consider the following quote:

"When asked if it is "utopian" to think that one day there would be a federal EU state, Hollande said that the EU as it is today seemed "utopian" 50 years ago. "I accepted that we need to converge towards common budgetary policies. We need to have a similar discussions about taxes, for instance a common CO2 tax. It's true there are political risks, but we need to embrace our common destiny," he said.

"Merkel named Ireland, Malta and Cyprus as low-corporate tax havens: "I don't want to make a statement now that my fellow EU leaders will be upset about, but step by step we'll need to establish margins and then each country will have to choose how it fits in those margins. Your utopia is totally right.""

No comment needed.

Update: 9/2/2013: Here's another link on Apple use of Irish legal structures to reduce tax exposures in the US. And another one.

Update 10/2/2013: UK MNC Associated British Foods is implicated in tax minimisation scheme involving Ireland: http://www.guardian.co.uk/world/2013/feb/09/zambia-sugar-empire-tax

22/1/2013: Irish Property Prices: 2012

Per CSO's Residential Property Prices Index released today, property prices in Ireland registered a fall of 4.5% in the year to December 2012.

The spin of 'good news' is seemingly abating in the wake of the figures. While I will cover detailed trends in the next post, here is a snapshot of annual series. Do, please, let me know if you see much of 'return to growth' in house prices:

To summarise the above and extend to the begging of the CSO series:

-- Overall RPP Index fell in 2012 to the annual level of 65.7 down from 75.4 in 2011 and down 49.5% on peak. In 2011 relative to peak RPP Index stood at a 42.0% discount. Y/y rate of fall in the annual index in 2012 was 12.86%, statistically identical to 13.10% drop in 2011. Surely, this is not a 'bottom has been reached' set of figures, no?

-- Houses nationally sub-index fell in 2012 to 68.6 against 2011 level of 78.4 (posting y/y decline of 12.5% in 2012, marginally and virtually dental to 13.0% fall in 2011). Again, please, tell me that decline of 13% followed by 12.5% is some sort of 'bottoming out'. Annual series for national house prices is now at 47.7% below peak having fallen 40.2% relative to peak in 2008-2011.

-- Apartments nationwide dropped from 57.8 in 2011 to 47.8 in 2012, with annual rate of decline in 2012 of 17.3% showing acceleration on 16.4% y/y drop in 2011. Again, the clear 'bottoming-out' of prices for Irish apartments is now in sight. These have fallen 52.7% relative to peak in 2011 and are now at 60.9% below peak.

-- Dublin property prices have posted a drop from 67.9 annual 2011 index reading to 58.3 in 2012 - a decline y/y of 14.14% which follows 2011 y/y drop of 13.9%.

To summarise, the 'bottoming-out' of Irish property prices in 2012 has resulted in prices declines across all four core categories (the few with a potentially sufficient numbers of sales to make any meaningful conjectures about). Not one category saw an annual increase in prices. And, to add an insult to the injury, y/y rates of decline in the prices in 2012 were worse than in 2011 in one case, marginally better in one case, and practically identical in two series. 

21/1/2013: Blackrock Institute Survey on Growth Conditions

Blackrock Investment Institute released latest summary of survey results for global growth outlook. Here are the charts by regions:

MENA:

 Western Europe & North America

 Latin America:

 Asia:

And summarising overall optimism levels for Western Europe and North America:

Good to see decent (not spectacular) performance for Ireland in the above (chart 2 and table above). Note: analysis is based on the surveys of professional economists.

21/1/2013: An Uncomfortable Question

Let's ask our Government an uncomfortable question: 

The Government claims (legitimately, to some extent) that 

1. The economy has stabilised & fiscal situation has improved significantly and
2. The Croke Park agreement 1.0 delivered what it required in terms of savings. 

Thus, by (1) & (2) things are going according to the MOU-sealed plan (signed within the confines of the Croke Park 1.0) and there are no new urgent pressures or shocks arising. 

In that case, why does the Government need Croke Park 2.0 with another round of EUR1bn 'savings'?

The idea that we need structural reforms in the public sector is not exactly hot on the Government's agenda. Furthermore, that idea was already, allegedly, reflected in the Croke Park 1.0 which was a 'success' per Government official accounts. Lastly, all structural reforms were supposed to deliver on targets set within the MOUs and these are consistent with the Croke Park 1.0.

So which side of the Government is talking porkies? The side that claims Croke Park 1.0 has delivered on reforms and changes and savings needed or the side that claims we need Croke Park 2.0?