3/4/2013: Irish Manufacturing PMI: March 2013

Manufacturing PMI data from NCB and Markit released yesterday was a bit of a disaster, mitigated only by the fact that Ireland's performance was in line with the abysmal reading for the entire euro area.

Headline seasonally adjusted Manufacturing PMI fell from 51.5 in February (indicative of a reasonably marked expansion, albeit still not statistically significant) to 48.6 in March (statistically not significant contraction). The swing of 2.9 points was the largest since July-August 2012. This was the first sub-50 reading in PMI since February 2012.

12mo MA is now at 51.4 against 6mo average of 51.1. 3mo MA is running at 50.1 and is substantially down on 3mo average through December 2012 (52.0). This compares favourably to 49.8 3mo average through March 2012, but is well below 56.1 average for 3mo period through March 2011 and marginally ahead of 3mo average through March 2010 (49.9).

Index volatility is running well above historical levels at 2008-present stdev at 5.33 against historical stdev of 4.40.

Output sub-index fell from 51.3 in February 2013 to 48.1 in March 2013, marking the lowest reading since January 2012 and the first sub-50 reading since April 2012. 12mo MA and 6mo MA are both at 51.7, with 3mo MA at 50.3 against previous 3mo MA at 53.1.

New orders sub-index also fell below 50 line with February 50.8 weak expansion slipping into contraction territory at 49.1 in March. Once again, this was the weakest reading since January 2012.

New Export Orders came in at 47.6 - a sharp contraction and a massive fall on 50.1 in February, signalling the worst performance since August 2009. 12mo MA is now at 51.9, with 6mo MA at 51.0 and 3mo MA at 49.5 (previous 3mo MA was at 52.5, implying a 3.0 point swing down). Current reading is statistically significant sub-50 reading.

As you know, I compute current and forward-looking composite indices of activity.

Current Composite PMI reading is at 48.3 in March, down from 51.4 in February and marks the lowest reading since January 2010. Forward Composite PMI reading is at 48.4 - the worst performance since December 2011 and down on 50.5 reading in February.

Output prices fell at 48.2 in March, same as in January and down from expansion at 51.2 in February 2013. Meanwhile, input prices inflation moderated, but remained robust at 54.8 in March, down from 57.1 in January and February. Thus, overall profitability fell. In last 24 months, profitability rose in the sector in only one month.

Employment fell sharply to 47.2 in March against expansion of 52.7 in February. March reading was the lowest since October 2011.

Overall, the PMI for manufacturing sector was a disaster!

2/4/2013: Talkin of Gettin Things Really Wrong...

When Washington Post gets things badly wrong...

"Ireland doesn’t look likely to cause problems anytime soon. It’s been paying back the 2010 bailout from the E.U. faster than it had too [sic], which has pushed bond rates way down."
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/30/cyprus-luxembourg-italy-or-malta-which-country-will-unravel-the-euro-zone/

Sorry, what?! Ahem... no... WHAT?!

2/4/2013: Confused or spun? Property prices in Ireland

So foreign investors are allegedly flocking in thousands to Irish commercial real estate markets, snapping anything they can get their hands on... right
http://www.independent.ie/business/world/number-of-empty-office-buildings-soars-by-67pc-29167687.html

Meanwhile, of course, residential property is on a 'recovery path' (aka flat-line dead) per latest CSO figures for the Residential Property Price Index.


In February 2013, RPPI for all properties fell from 65.4 in January to 64.4 (a decline of 1.53% - the steepest rate of m/m drop since February 2012 and worse than the year-to-date average m/m decline of 1.07%). The index is now down 2.57% y/y.

Looking at slightly smoother 3mo figures: 3mo cumulative change on previous 3 months was -2.57% which signals acceleration in decline compared to 6mo change on previous 6 mo at -1.23%. Thus, relative to peak, RPPI hit absolute bottom at -50.65% with previous record drop of -50.34% recorded in June 2012.

The Government needs some serious spin to paint house prices dynamics in anything but bleak terms. Per RPPI, House prices are deteriorating, slipping to 67 in February 2013 from 68.1 in January 2013 and setting an all-time record low. House prices are down 1.62% m/m and 2.90% y/y. 3mo cumulated change is -3.04% and 6mo cumulated change is -1.47% so things are getting worse, not better, over time once again.

RPPI overall, however, was supported to the upside by the price changes in sub-index covering Apartments. Apartments prices sub-index rose to 51.5 in February from 48.1 in January (+7.07% m/m) which suggests that a single outlier transaction might have distorted the cumulative figures. Nonetheless, in terms of 3mo MA this only brings sub-index to the levels of May-June 2012.

Lastly, Dublin sub-index showed once again that flat-line can actually be associated with both down and up volatility. In February 2013 Dublin sub-index slipped to 59.3 from 59.5 in January, which means that the index is now up 2.95% y/y. Happy times? Somewhat. But note that 6mo cumulated change through February 2013 was at +3.49% while 3mo cumulated change through February is -1.17%, so dynamically things are worrisome, rather than encouraging.

Funny thing this recovery, folks... Government & Green Jerseys say one thing, their own data says another... confused.com? or maybe spin.ie?

2/4/2013: US Mint Gold Coins vs Gold Prices

In the previous post I covered some Q1 2013 trends in US Mint gold coins sales and mentioned correlations between spot price of gold and volume of coinage gold sold. Here's a bit more beef on the latter.

As charts above clearly show, there is not much of a statistically significant relationship between price of gold and volumes of coinage gold demanded, neither in levels terms, nor growth terms. Which, of course, strongly suggests that the demand for coinage gold is based on longer-term considerations than those underpinned by simple price reactions.

Looking at H1 data over the same time horizon confirms the main observation:

There is zero relationship in smoother data (H1 cumulated) between demand for coinage and price of gold, while there is a relatively weak positive correlation between demand for gold content per coin purchased and the price of gold.

Key point here is that there is absolutely no hard evidence that gold coins demand is bubble-prone or bubble-driven.

2/4/2013: US Mint gold sales: Q1 2013

Q1 2013 data for gold coins sales by US Mint is out and is worth a look. Here are some top trends:

Per chart above, number of US Mint coins sold in March 2013 declined to 103,000 compared to 155,000 in February. Controlling somewhat for seasonal changes, y/y number of coins sold rose 3.52% from 99,500 in sales in March 2012. Looking at Q1 totals, Q1 2013 sales added to 533,500 coins, up 39.3% on Q1 2012, 10.57% on Q1 2011 and 96.86% on Q1 2010. Healthy uplifts against generally flat-trend prices. And, crucially, coins sales do not appear to be tracking 'risk-on' and 'risk-off' signals from equity markets. As I always maintained, coins sales have much more to do with steady risk-averse savers than with speculative buyers.

Chart below details relationship between volumes of gold sold via US Mint coins and price of gold (monthly final). In terms of volumes sold, March 2013 clocked sales of 62,000 oz, down from 80,500 in February 2013, and down 0.8% on March 2012 (62,500 oz). In quarterly totals, Q1 2013 came in at 292,500 oz and this was up 38.95% on Q1 2012, down 2.34% on Q1 2011 and up 7.93% on Q1 2010. In other words, much steadier demand growth in volumes of sales was also broken in 2013.

Meanwhile, price of gold rose 1.21% m/m in March and slipped 3.29% y/y. (More on correlations below).

The following chart details trend in average gold content per coin sold (oz/coin): in March 2013, average gold content stood at 0.602 oz/coin, up on 0.519 oz/coin in February 2013 and not far off from the 0.628 oz/coin in March 2012. However, overall trend remains relatively flat at around 0.65 oz/coin since mid-2006. Longer term trend is gently upward, indicating that over time, investors and savers started to allocated slightly more of their investable savings into coinage gold.

 Chart below shows correlation between volumes of coinage gold sold and gold price:

Two things worth noting in the above:

1. Since approximately Q2 2012 we are experiencing steady upward momentum in 12 months rolling correlations, and these are rising toward +0.5. This trend was confirmed in March 2013 and it is consistent with 24mo rolling correlations, but is still far off on 36mo or 50mo rolling basis.
2. Linear long-term trend is also upward and is now in the positive correlation territory. This can potentially suggest that gradual financialisation of the gold markets in general is having a long term impact on gold's shorter-range hedging properties, since positive correlation is consistent with higher propensity of 'buy-on-dips' and 'book profit' behaviour. However, as 60mo chart shows below, we are still in solid hedging territory for now when it comes to longer investment horizons. Furthermore, correlations trends are negligible in size. So something to watch in the future and to blog on next... stay tuned.

Chart with 60mo rolling correlations

31/3/2013: Structural Reforms in Ireland: Far From Best-in-Class

Some interesting charts from the ECON review of the peripheral countries' structural reforms implementation during the crisis (full report is available here):

Note that by both measures, Ireland is not the 'best pupil in the class':

• By unadjusted metric, we are second in the 'class' in terms of responsiveness rate, but
• Once adjusting for the difference in reforms implemented and underlying conditions, we are only in the fifth (note: ECON chart is taken from the chart produced by the OECD, reproduced below which clearly shows our position to be worse than that of Italy)

In part, the above is driven by the fact that we have started our reforms earlier than other countries, hence, for example, in terms of labour market changes, we have most of the gains in the Gross Value Added per hour worked peaking in 2009-2010. Also, notice that our performance relative to other peripherals has deteriorated in 2011-2012 and is expected to remain there in 2013.

In part, however, the adjusted score is driven by structural differences in reforms adopted. And this implies that per OECD we are still ranked only fifth in the peripheral economies group when it comes to the adjusted scores over the broader period of 2009-2010 to 2011-2012:

31/3/2013: Are European Brahmins Cypriot crisis-free?

In an Orwelian Universe that is the EU, the rules are different for different castes... the Brahmins are, obviously, the top of the pile. Not surprisingly, amidst deposits outflows from Cyprus immediately prior to the EU sanctioned expropriations, there are strands of Cypriot Brahmins rushing out of their banks. Here's the report by Rossija 24 - Russian news agency on the topic:

 via a tweet:

Let's translate verbatim the above:

"Greek press has found compromising material on Cypriot President. According to the Greek media sources, few days before the Eurogroup decision to bail-in deposits, relatives of President Nicos Anastasiades took emergency steps to save their funds. The issue concerns the amount of EUR21 million in funds. A company, which belongs to the relatives of the President, transfered these funds from Laiki bank to London, as reported by the Rossija 24 TV channel. The Laiki Bank is currently undergoing restructuring, and haircuts on clients' funds can reach up to 80 percent."

We should note, of course, that this is just one report, albeit here is a Cypriot press report from just 30 minutes ago covering the same: http://www.incyprus.com.cy/en-gb/Top-Stories-News/4342/33996/money-movements-questioned and Greek reports: http://www.imerisia.gr/article.asp?catid=26517&subid=2&pubid=113018547 and http://www.nooz.gr/economy/suggeneis-anastasiadi-evgalan-kata8eseis-apo-ti-laiki31313 and http://www.zougla.gr/kosmos/article/ligo-prin-to-eurogroup-melos-tis-ikogenias-tou-anstasiadi-figadefse-xrimata .

31/3/2013: Unique Ireland? Why not... per IMF working paper...

Here's an interesting case of Ireland's uniqueness:

Eyraud, Luc and Moreno Badia, Marialuz, "Too Small to Fail? Subnational Spending Pressures in Europe" [(February 2013). IMF Working Paper No. 13/46] paper looks at the re-distribution of spending between national and sub-national governments within the EU over time, covering the period of the crisis. Due to the size of the banking sector measures and their impact on the Government budgets in Ireland, the paper excludes Ireland from the dataset when running analysis.

In other words, we are so out of line with the rest of Europe in terms of resources we threw at the banks during the crisis, that our data is no longer meaningfully comprable to the rest of EU.

Here are two charts illustrating this 'uniqueness':

31/3/2013: Bank Leverage, Systemic Crises and Debt v Equity Funding: Tax Asymmetry

As the readers of this blog would know, I have been advocating more symmetric tax treatment of equity and debt, both in terms of public and private bonds and lending taxation. Here's a recent IMF paper on the topic that provides evidence that asymmetric taxation of debt and equity, with preferential treatment of debt over equity, generated internal instability in the system, making it more prone to crises.

Mooij, Ruud A., Keen, Michael and Orihara, Masanori paper "Taxation, Bank Leverage, and Financial Crises" (February 2013). IMF Working Paper No. 13/48 argues that "that most corporate tax systems favor debt over equity finance is now widely recognized as, potentially, amplifying risks to financial stability. This paper makes a first attempt to explore, empirically, the link between this tax bias and the probability of financial crisis."

The study "…finds that greater tax bias is associated with significantly higher aggregate bank leverage, and that this in turn is associated with a significantly greater chance of crisis. The implication is that tax bias makes crises much more likely, and, conversely, that the welfare gains from policies to alleviate it can be substantial far greater than previous studies, which have ignored financial stability considerations, suggest."

The paper "aims to provide a first attempt to establish and quantify an empirical link between the tax incentives that encourage financial institutions (more precisely, banks, the group for which we have data) to finance themselves by debt rather than equity and the likelihood of financial crises erupting; and then to try to quantify the welfare gains that policies to address this bias might consequently yield."

The paper combines two elements in a causal chain:

"The first is that between the statutory corporate tax rate and banks’ leverage. This has received substantial attention in relation to non-financial firms, but very little in relation to the financial sector. Keen and De Mooij (2011), however, show that for banks too a higher corporate tax rate, amplifying the tax advantage of debt over equity finance, should in principle lead to higher levels of leverage; the presence of capital regulations does not affect the usual tax bias applying, so long as it is privately optimal for banks to hold some buffer over regulatory requirements (as they generally do).

[In other words, capital requirements regulations are not sufficient to address the problem created by skewed incentives. The authors state that "Regulation, of course, has historically had the dominant role in addressing such problems of excess leverage in the financial sector, and the higher and tighter capital requirements of Basel III should to some degree reduce the welfare costs of debt bias."]

Empirically too, Keen and de Mooij (2012) find that, for a large cross-country panel of banks, tax effects on leverage are significant—and, on average, about as large as for non-financial institutions. These effects are very much smaller, they also find, for the largest banks, which generally account for the vast bulk of all bank assets. …Importantly, the finding that tax distortions to leverage are small for the larger banks, which are massively larger than the rest, does not mean that the welfare impact of tax distortions is in aggregate negligible: even small changes in the leverage of very large banks could have a large impact on the likelihood of their distress or failure, and hence on the likelihood of financial crisis."

The second link in the causal chain is the link "between the aggregate leverage of the financial sector and the probability of financial crisis. We estimate such a relationship for OECD countries, …capturing data on the recent financial crisis… The results suggest sizeable and highly nonlinear effects of aggregate bank leverage on the probability of financial crisis."

"… we consider three tax reforms that would reduce the tax incentive to debt finance:

• a cut in the corporate tax rate; 
• adoption of an Allowance for Corporate Equity form of corporate tax (which would in principle eliminate debt bias); and 
• a ‘bank levy’ of broadly the kind that a dozen or so countries have introduced since the crisis."

"The implications of these reforms for aggregate leverage are readily estimated using the results above.

1. We suppose, as before, that a 1 percentage point reduction in the CIT rate reduces banks’ aggregate leverage by somewhere between 0.04 and 0.15. 
2. This means, for instance, that the bank levy of 10 bp would reduce financial leverage by between 0.1 and 0.4 percentage points, for example from 93 percent to 92.9 or 92.6. 
3. Eliminating debt bias altogether with an ACE would reduce leverage by 2.2 percentage points under what we shall take to be the central estimate of 0.08: say, from 93 to 90.8; with the upper bound estimate of 0.15, leverage would fall by 4.2 percentage points."

The above clearly suggests that ACE approach, basically removing disincentive to equity funding compared to other policy alternatives. It also shows that in impact terms, lower corporate tax rates are not sufficient to eliminate or reduce the adverse effects of the asymmetric treatment of debt against equity.

31/3/2013: German Hartz IV reforms - evidence

Another interesting paper, worth a read: Krebs, Tom and Scheffel, Martin, "Macroeconomic Evaluation of Labor Market Reform in Germany" (February 2013). IMF Working Paper No. 13/42.

Back in 2005 Germany undertook a massive reform of social welfare systems, known as Hartz IV reform. This "amounted to a complete overhaul of the German unemployment insurance system and resulted in a significant reduction in unemployment benefits for the long-term unemployed".

The IMF paper used "an incomplete-market model with search unemployment to evaluate the macroeconomic and welfare effects of the Hartz IV reform". The model was calibrated to German data before the reform followed by simulation of the calibrated model to identify the effects of Hartz IV.

"In our baseline calibration, we find that the reform has reduced the long-run (non-cyclical) unemployment rate in Germany by 1.4 percentage points. We also find that the welfare of employed households increases, but the welfare of unemployed households decreases even with moderate degree of risk aversion."

For all the debate about the merits of such reforms, it is pretty darn clear that Hartz IV-styled reforms - currently being advocated by the IMF and the EU for the peripheral states - cannot take place in the environment of protracted and structural Euro area-wide and national recessions and especially in the presence of other exacerbating factors, such as debt overhangs,  insolvency regime breaks, dysfunctional banking sector, monetary policy mismatch, etc.

Put simply, in 2005, German economy was into its second year of (anaemic at 0.7% in 2004 and 0.84% in 2005) growth with unemployment at an uncomfortable 11.2% still leagues below the current rates in the peripheral state. German government deficit in 2005 was at relatively benign 3.42% compared to the deficits in the peripheral states, with structural deficit at even lighter load of -2.6% of p-GDP and primary deficit at 1.0%. German debt/GDP ratio on Government side was at 68.5% of GDP. All of these parameters clearly indicate that Germany was in a much better starting position for consolidating social insurance systems than the peripheral states find themselves today.

31/3/2013: Draghi calling President Napolitano: a nasty precedent

Here's one of the best examples of the total departure of the EU institutions from the normal democratic constraints on their mandate vis-a-vis national affairs:

The story link is: http://www.reuters.com/article/2013/03/31/us-italy-vote-draghi-idUSBRE92U01W20130331?feedType=RSS&feedName=businessNews

For a reply:

That is correct (assuming the reported call did take place): the ECB represents a sub-section of the executive pillar of power in the EU (and via the national central banks - in the member states), just as the US Fed. Neither the Fed nor the ECB have any business in influencing or restricting the legislative pillar (in the case of the above incident - the electoral process) or the entire executive pillar (in the above case - pertaining to the Presidency to which monetary policy institutions are accountable or co-accountable whenever oversight over monetary policy institutions co-rests with legislature) or the judiciary (presumably, Mr Draghi might call on European or national judges too, should their workings approach the issues related to OMT or other aspects of the monetary policy).

To see this, simply replace ECB's Draghi with, say, General X of the Common Security & Defence Policy calling President Napolitano to express concerns about Italian elections. How fast will 'military interference in political affairs' rise to media headlines?

Europe is now clearly on a dangerous path that can lead to subversion or manipulation of democratic institutions and processes. 

31/3/2013: Entrepreneurship and the Great Recession

Staying on the theme of 'catching up with my reading' today - a very interesting paper by Fairlie, Robert W., "Entrepreneurship, Economic Conditions, and the Great Recession" (February 28, 2013). CESifo Working Paper Series No. 4140.

From the abstract:

"The “Great Recession” resulted in many business closings and foreclosures, but what effect did it have on business formation?

On the one hand, recessions decrease potential business income and wealth, but on the other hand they restrict opportunities in the wage/salary sector leaving the net effect on entrepreneurship ambiguous.

The most up-to-date microdata available -- the 1996 to 2009 Current Population Survey (CPS) -- are used to conduct a detailed analysis of the determinants of entrepreneurship at the individual level to shed light on this question.

• Regression estimates indicate that local labor market conditions are a major determinant of entrepreneurship. 
• Higher local unemployment rates are found to increase the probability that individuals start businesses. [Note: authors do not control for quality of entrepreneurship, e.g. survivorship rates for entrepreneurial ventures founded by 'forced' entrepreneurs out of unemployment spells]
• Home ownership and local home values for home owners are also found to have positive effects on business creation, but these effects are noticeably smaller. 
• Additional regression estimates indicate that individuals who are initially not employed respond more to high local unemployment rates by starting businesses than wage/salary workers. The results point to a consistent picture – the positive influences of slack labor markets outweigh the negative influences resulting in higher levels of business creation. Using the regression estimates for the local unemployment rate effects, I find that the predicted trend in entrepreneurship rates tracks the actual upward trend in entrepreneurship extremely well in the Great Recession."

Wait, what was that about 'home ownership' and 'local home values'? Sure this is not suggesting that negative equity might have an effect on entrepreneurship? Irish Government & our 'Green Jerseys' say that it only matters when one decides to move...

See three posts from 2010 that I wrote on the topic of Negative Equity effects in Ireland: Post 1, Post 2 and Post 3) and another link from 2010 on the topic of Negative Equity and entrepreneurship (here).