16/6/2013: Euromoney Country Risk Scores Update

Some updates from Euromoney Country Risk (ECR) reports. First a summary of latest credit risk assessment scores moves:

And on foot of Russia's score move, a related story on Russian government delaying issuance of much expected sovereign bond. Via Euroweek:


"Russia is likely to wait until autumn before bringing its mandated sovereign bond, said analysts. Forcing through a $7bn bond in one deal might also be unwise, but demand is deep and the sovereign could spread its funding plan out across separate transactions, said bankers... Investors have already priced in a large sovereign issue and Russia would not struggle to drum up demand, he added. But the problem is price."Everything is 100bp wider than a month ago and so the sovereign will hope things calm down and allow them to issue closer to the historic tights they were looking at just a few weeks ago," said another syndicate banker."

15/6/2013: Weekend reading links: Part 2

The second part of my Weekend Reading links on Art and Science and No-Economics (see the first part here: http://trueeconomics.blogspot.ie/2013/06/1462013-weekend-reading-links-part-1.html)

Let's start with this:

http://vida.fundaciontelefonica.com/project/may-the-horse-live-in-me/
It's not a horse meets artist or vice versa, but an artist 'becomes' a horse. Literally, physiologically. Amazing stuff, although MrsG thought it is taking performance art a bit too far.


Next up - amazing show of new work by one of my favourite artists of all times: Gerhard Richter
http://www.mariangoodman.com/exhibitions/2012-09-12_gerhard-richter/%20and%20related
Couple of images:

The migration of Richter's work toward more linear, form-focused, less figurative work over recent years has been in tune with what is happening around the world of abstract art today. I love it, but the 'old' Richter (second image above from 2005: http://www.mariangoodman.com/exhibitions/2009-11-07_gerhard-richter/) is much more dynamic and still more appealing to my aged self. From that vantage point, an even more brilliant show of works by the artist is here: http://www.ludorff.com/en/exhibition/gerhard_richter_abstrakte_bilder/works . Art Basel 2013 has more vintage Richters too.


http://www.mariangoodman.com/artists/ has some very interesting artists I knew far less about. Great example is Julie Mehretu: http://www.mariangoodman.com/exhibitions/2013-05-11_julie-mehretu/#/images/7/

Reminds me of one of my old favourites: a merger of abstraction by Cy Thombly (http://www.cytwombly.info/) and mathematical / architectural precision of Alberto Giacometti: http://www.fondation-giacometti.fr/en/art/16/discover-giacometti/ scroll down to Encounters, Portraits and Fifty Years of Prints sections for the likes of

Wyeth cross over too… for some reason… maybe geometry or Giacometti-esque reference to line?

Lastly for the arts: cool images from the Arctic spying outpost: http://www.wired.com/rawfile/2013/06/charles-stankievech-northernmost-settlement/

On science: a quick link to the Science Gallery - brilliant place, brilliant coffee, brilliant crowd: http://sciencegallery.com/

On a personal note: I came across this wonderful set of radio spots recorded for Mount Juliet. Followers of mine would know I was recently privileged to cast a fly (more like nymphs and wet flies) at the estate and can attest to the superb quality of water there. The spots are lovely and worth listening to: http://www.mountjuliet.ie/radio-adverts/

My favourite is The Ghillie one. I did not use ghillie's services on my day on the Nore, preferring the 'risk' of reading the river on my own, but I had wonderful help and conversation with the staff member who helped me with the waders and dry room and fishing room. Superb. And superb doesn't even begin to describe the late-very-late breakfast I got on my return from 5am-noon fishing.

Loved it. And here's one of my friends from the Nore who is still happily swimming in his pool…

Update: I rarely update the Weekend Reading Links posts after they are out, but here are more interesting links, this time on science.


A convoluted title of this paper: "Action video game playing is associated with improved visual sensitivity, but not alterations in visual sensory memory" should not be a deterrent from reading its very interesting findings. Basically, games players (for electronic games that is) tend to be able to see more in the faster-paced and more complex scenes than non-gamers. However, what they see they don't remember all too well after the fact. I am not even sure they comprehend what they see any deeper either, but that a different topic all together. http://link.springer.com/article/10.3758%2Fs13414-013-0472-7


Further evidence that Anglo Irish Bank was lending well beyond the constraints of our planet was found by Nasa: http://arstechnica.com/science/2013/06/nasa-finds-unprecedented-black-hole-cluster-near-andromedas-central-bulge/ In brief, the Andromeda's core is about as concentrated with black holes as Dublin docklands: http://www.independent.ie/business/irish/nama-behind-70pc-of-the-vacant-docklands-sites-29346104.html

15/6/2013: Irish Health Pricing Policy: Stupid, Short-Termist & Costly

Per Irish Times article, the Government is planning to impose a massive price hike on hospital beds, leading to health insurance prices hike of estimated 30%.

This Government has been disastrous when it comes to containing the costs of healthcare. Here are three charts showing:

1. That the within the category of Miscellaneous Goods and Services, to which Insurance Services belong, Insurance Connected with Health posted the highest price inflation since December 2011, with index of prices rising to 127.4 in May 2013 against the benchmark of 100 in December 2011. 
2. In last 12 months, through May 2013, health insurance costs rose 12.5%. This represents the highest rate of cumulated inflation over 17 months from January 1, 2012 through May 2013 for any non-food item of expenditure recorded by the CSO and the second highest rate of annual inflation for any non-food line of expenditure after a bizarre 21.2% price hike in 'Cultural admittance' costs.
3. Across all categories of consumer expenditure, Irish Government controlled or regulated prices (with controls exerted either via high incidence of specific goods and services taxation, where taxes imposed by the state account for over 1/2 of the product final cost; or via State regulation setting prices; or via semi-states dominance in the sector allowing monopoly power pricing, etc) dominate heaviest price increases categories.

The charts below are easy to read: in Yellow, I mark the State-dominated sectors, with blue bars marking other sectors. All price indices are through May 2013. All data is from CSO.

Charts above confirm the observations made in points (1)-(3).

This Government is clearly on an economic suicide course. Raising health insurance costs will multiply demand for public healthcare & increase the cost of this demand by forcing more patients into emergency rooms. Worse, the completely moronic (and I cannot find any other way of expressing this) system will create a cascading cost increase to public system.

Currently, an insured patient in a hospital yields: vat and other tax revenues to the State, and generates positive return per bed occupied. In addition, the patient is pre-screened for hospital admission by a private doctor 9also generating vat and other tax revenues to the state) thus avoiding emergency room admission.

Forcing this patient from insurance into public system removes all of the above tax revenues and leads to the patient going via emergency room into admission. This means higher emergency room costs, plus higher treatment costs, because by the time a patient goes through with emergency room their admitting point condition would be most likely worse than were they to go through more preventative care and monitoring with private doctor pre-screening.

The word for this policy on health costs inflation is idiocy. Pure and simple.

14/6/2013: Weekend reading links: Part 1

Weekend reading links as usual, and as in previous week - in two posts.

Let's start with some fun. After a week of reading economics on this blog, why not leaf through 12 "random and obscure laws" that still exist. I know the USofA is a liberty paradise but… allegedly, not in Maine and not when it comes to Christmas lights and wreaths… or in Wisconsin as it goes for margarine...
http://likes.com/facts/totally-random-and-obsucre-laws-that-actually-exist?pid=95328&utm_source=mylikes&utm_medium=cpc&utm_campaign=ml&utm_term=25124720


My favourite visualisation of Big Data this time around comes from North Korea

And do check out the rest of the fab pics here…
http://likes.com/facts/wtf-north-korea?v=eyJjbGlja19pZCI6IDExMTkzMDIyNzksICJwb3N0X2lkIjogMjUxMjQ3MjB9

Note: on a serious side, I do find the above pic almost artistic - in the same vein as Andreas Gursky's real art: http://artblart.com/tag/andreas-gursky-tokyo-stock-exchange/

which (the above) also came from DRNK… and his very famous
http://artblart.files.wordpress.com/2008/11/gursky-99cent.jpg
My students from UCD courses in Masters in Management programme would remember the linked image.


From the sublime above to the atrocious below: The Kitsch of Ashgabat http://www.theatlantic.com/infocus/2013/06/the-city-of-white-marble-ashgabat-turkmenistan/100528/
My favourite is

The bizarre, tortured, almost shredded geometry of the totalitarian PhysEd comes to memory. No, the true derangement of the tyrant is measured not so much by thousands starved or banished or destroyed, but by grandiose waste of beauty, the more forced, the more permanent, the better. It is hard to explain, but violence to intrinsically beautiful is more characteristic of the delusion than violence to human. perhaps because nature usually poses no political threat, thus defacing nature is purely violent without any purpose.

Perhaps this would do for a better explanation: by Joseph Brodsky

 

Space is memory. The above photo records the former to sustain the latter.


A more modern - almost real-time - Duchampianization in Cyprus:
http://www.reuters.com/article/2013/06/10/us-cyprus-toilets-idUSBRE9590IA20130610
and it's inspiration:
http://www.tate.org.uk/art/artworks/duchamp-fountain-t07573
I could have chosen to term this Duchampianism - and almost did - except some attribute Duchamp's inspiration to a positive value - the ready made reproduction of the curvature similar to Constantin Brancusi's marbles, which obviously would not have been an appropriate allegory for Nicosia's installation. So perhaps we have amore ad hoc ready made analogy in two pieces, hence, Duchampianization term.


Take this quote for a teaser: "Most people have no clue that quantum computing exists. Even fewer know how it works. But once you understand it, and its vast processing power, you'll understand that this new Digital Age we're living in has barely scratched the surface of the computer potential."
Read more: http://www.businessinsider.com/what-is-quantum-computing-2013-6#ixzz2WE8s9ZjW
You will want to read more... I know - I did. And here's the source: http://dwave.wordpress.com/ Just awesome!


Two sets of links on time:

The first one is of two watches - the diametrically opposing works of art:
2013 - Vianney Halter

http://basel.watchprosite.com/show-forumpost/fi-636/pi-5864183/ti-862138/
But do watch the video - a fascinating story, also told in the article linked below:

http://live.wsj.com/video/the-most-important-watch-of-2013/62A235B4-BF3A-4BA0-B500-21048E3B3C30.html?mod=WSJ_article_outbrain&obref=obnetwork#!62A235B4-BF3A-4BA0-B500-21048E3B3C30
http://online.wsj.com/article/SB10001424127887324063304578523182943531780.html


And Ukraine's brilliant entry to Basel 2013:
http://basel.watchprosite.com/page-slide.new/ti-867538/pi-5909858/msid-26618318/fi-/nalbumforum.all_bLoB_s-/
and more pics:
http://basel.watchprosite.com/?show=photo&fi=636&imgid=3355653&msid=26618318&ti=867538&pi=5909858


But time (we are on dimensions theme here - following the note about space) is also linked to memory:

http://lifehacker.com/how-your-brain-perceives-time-and-how-to-use-it-to-you-511184192

And thus - to round up the first post of weekend reading links: of space and time... together:

http://www.poets.org/viewmedia.php/prmMID/19072

14/6/2013: EU's FTT: One Tax, Multiple Problems

FTT - Financial Transactions Tax - has been the pet project of pure love for Eurocrats and Socialistas in the Member States, hungry for revenue. It has been labelled a 'Robin Hood Tax' because the politicians attempted to sell it as a tax on filthy-rich financial services to redistribute to starving unemployed, presumably, despite the simple fact that in the un-competitive and fragmented market for financial services that is Europe, such a tax - any tax - will be fully passed onto ordinary savers, investors, depositors and in general onto the users of financial services.

The EU Commission published volumes of commissioned - made-to-order - research that shows just how brilliant an idea the FTT really is: it will raise loads of revenues, harm no one and will not reduce financial markets efficiency. Stopping just short of declaring the FTT to be a panacea to common cold, the EU enthusiastically propagandized the idea despite the simple fact that vast majority of academic research on the topic of transactions taxes finds that they are either ineffective as means for revenue raising or costly in terms of economic efficiency.

I wrote about this (see link at the bottom of this post below) and will continue to write, not because I long for an easy life for the bankers or financial investors, but because I recognise the fact that investment markets are necessary to the functioning of the society and the economy, and because I also recognise that more open, less restricted, but well-regulated and strictly enforced financial services are better than anything that Brussels et al can conceive in their technocratic dreams.

So in line with the past record, here's another study (http://www.cpb.nl/en/publication/an-evaluation-of-the-financial-transaction-tax) that explores "...whether the FTT is likely to correct the market failures that have contributed to the financial crisis, how well the FTT is likely to succeed in raising revenues, and how the FTT compares to alternative taxes in terms of efficiency."

The study finds (emphasis is mine) "... little evidence that the FTT will be effective in correcting

market failures. Taxing of transactions is not well targeted at behaviour that leads to excessive risk and

systemic risk creation. The empirical evidence does not suggest that the introduction of an FTT reduces

volatility or asset price bubbles. Transaction taxes will likely reduce investment in trading activity and

information acquisition, but also raise the costs of insurance against currency and interest risks by

companies, insurers and pension funds. The welfare effect of that is unclear."

"The FTT will likely raise significant revenues, in spite of the fact that the tax base is highly elastic. In the short term, the incidence of the tax will be chiefly on the current holders of securities. Ultimately, the tax will be borne in part by end users, and we estimate the likely effects on economic growth."

"When compared to alternative forms of taxation of the financial sector, the FTT is likely less efficient given the amount of revenues. In particular, taxes that more directly address existing distortions (such as the current VAT exemption for banks, and the bias towards debt financing) provide more efficient alternatives."

And here's a report from the Open Europe think-tank on the FTT, assessing the EU Commission response to the concerns of the eleven - that right, eleven - member states: (http://openeuropeblog.blogspot.co.uk/2013/05/if-you-had-kept-quiet-you-would-have.html)

Quote: "The Commission's response ranges from weak to capricious to outright ridiculous. For example, when it says that "we're not aware of any credit crunch" in Europe."

What else is new?

Note: I wrote about the concerns around the issues of repos and hedging here: http://trueeconomics.blogspot.ie/2013/05/3052013-ftt-up-down-down-again-climbing.html


Links to past articles on FTT: http://trueeconomics.blogspot.ie/search?q=FTT&max-results=20&by-date=true
You can search this blog for key words and sort the posts by relevance or date.

14/6/2013: Detroit suspends payments on unsecured debt

I recently wrote (albeit in distinct context) about Detroit's bankruptcy. Here's the latest on the saga:
http://www.bloomberg.com/news/2013-06-14/detroit-on-bankruptcy-s-brink-stops-paying-some-debts-orr-says.html

I love this city because it gave me (via Chicago) my greatest partner in the crime of life. And my students in Smurfit Graduate School of Business are certainly familiar with the imagery of the urban collapse from Detroit and Flint, Michigan on foot of my lecture notes slides penchant for dramatic photography.

Sadly, it is totally, comprehensively, irreparably destroyed. Its only hope is a structured and comprehensive default followed by a bottom-up restructuring of its economy, demographics, politics, policies and institutions. Let's hope Michigan State will not commit the errors committed by the Euro area 'leaders' in Greece, Ireland, Portugal, Cyprus, Spain, Italy...

14/6/2013: G8 Summit: pure laughs

G8 Summit has been transforming Northern Irish country towns into prosperous villages... (see the first image in this post: http://trueeconomics.blogspot.ie/2013/05/3152013-bank-holidays-links-on-art.html), but all along, the real winners in the Best Bizarreville News Contest was the host resort itself:

14/6/2013: Scary table of the week: Irish Property Prices 'Recovery' Dating

Updating my databases, I came across an old exercise of estimating the property prices recovery paths for Ireland based on the CSO Residential Property Price Index. Here's an updated table of dates of expected recovery according to three basic scenarios:

There is virtually no point of repeating the same exercise for real values, albeit the closest this comes to such an attempt is Scenario 3.

All calculations are based on CSO data.

13/6/2013: Irish Construction Sector Activity Post Some Better News: Q1 2013

Some good news for Irish construction sector (not as impressive as German stuff, but... much more welcome, given the sector dynamics so far through the crisis).

Per CSO: "The volume of output in building and construction was 4.4% higher in the first quarter of 2013 when compared with the preceding period.

• This reflects increases of 6.8% and 1.2% respectively in residential building and non-residential building. 
• There was a decrease of 0.7% in the volume of civil engineering.  The change in the value of production for all building and construction was +1.9%. 
• On an annual basis, the volume of output in building and construction increased by 10.7% in the first quarter of 2013.  
• There was an increase of 9.5% in the value of production in the same period. 
• The annual rise in the volume of output reflects year-on-year increases of 26.8% and 2.4% respectively in civil engineering and non-residential building work. 
• Output in residential building decreased by 2.5%"

Now, graphs and a summary table for more detailed analysis:

13/6/2013: Boom-time in German Building Industry?

Ifo published some new survey data on German economy. One that jumps out is the Architects Survey. Per Ifo (emphasis mine): "The business climate improved significantly at the beginning of the second quarter of 2013 and has not been as favourable since the German reunification boom at the end of the 1990s, according to the remarkable results of the Ifo Institute's quarterly survey of freelance architects."

Freelance architects "assessed their current business situation as significantly better than in previous quarters and business expectations have also improved compared to last quarter's assessments. 

• The share of architects surveyed who described their cur-rent business situation as "good" increased from 41% to 43%. 
• Business expectations also improved compared to last quarter’s assessments. The share of partici-pants that expressed scepticism about the future fell considerably from 16% to just 10%. 
• 57% of the architects surveyed signed new contracts in the first quarter of 2013. 
• Number of new contracts for detached and semi-detached houses in Q1 2013 is the same as in Q4 2012 - at a level that is almost twice as high as the low point reached in 2006 and 2007.
• Total number of new orders for the planning of multi-family buildings in Q1 2013 was around 150% higher than the figure just six months previously.

It's a boom-time in Germany and Angela might be feeling a bit more confident, assuming the euro news are not too bad come elections...

12/6/2013: Statement, Questions, Facts

Statement: "She pointed out that one in five of credit union loans was in arrears for more than nine weeks. This 20pc figure compares with 11pc of mortgage holders being in arrears for three months or more."

Source: http://www.independent.ie/business/personal-finance/property-mortgages/credit-unions-warned-many-loans-will-not-be-paid-back-29337885.html

Question 1: Given that both Credit Unions and banks are regulated from the same Central Bank, why are we using different time bases for comparatives on NPLs?

Fact: 11.9% is the actual percentage of mortgages in arrears (by account numbers) over 90 days, per latest official data available (Q4 2012), which rounds to 12% not 11%.
Fact: Including BTLs, 13.04% of all mortgages were 90 days and more in arrears (by accounts) and 18.2% by outstanding amounts.

Question 2: Given the above, why is the Registar of Credit Unions referencing 11%?

Fact: Balance of mortgages in arrears over 90 days in Q4 2012 was 15.8%.

Question 3: Should we reference balances for comparatives?

Fact: in Q4 2012 all mortgages in arrears (>30 days or over 4 weeks and given reporting and registration lags, closer to probably 6-7 weeks) amounted to 19.3% of all mortgages by account numbers and 24.9% of all mortgages by outstanding amounts. All of the sudden, that vast difference implied in the quote above is... err... rather much smaller.

Aside: why are we now ca 2 weeks behind the normal release schedule for mortgages arrears data?

12/6/2013: Bond Markets: Is Canary Kicking the Bucket?

I have written before about the prospect of the Fed starting unwinding of the QE operations. Here's my summary forward view.

Stage 1: the Fed will reduce the rate of QE print ('taper on'). This is inevitable and it is already driving 10-year Treasury yields up - in last 40 days, by some 50bps. The same is also inevitable for the Euro area, albeit via a different mechanism (unwinding of excess liquidity supply to the banks, plus scaling down of any expectations for OMT to kick in), driving the Bund up some 35bps.

In both cases, macro news-flows and inflationary pressures pointed to the opposite direction for yields. This is confirmed by the differences in risk pricing indices in the bond markets (MOVE index: Merrill Lynch Option Volatility Estimate (MOVE) Index on US Treasuries) as opposed to the equity market volatility index (VIX). MOVE has gone almost double from around 47-48 in early May to over 80 recently. Levels around 80 are consistent with the height of the peripheral euro area crisis back in 2012. Over the same period of time, VIX is up from around 13.0 to 16.0 and during the height of the euro area crisis it was averaging closer to 40.

Stage 2: In the follow up stage, the Fed will have to engage in more than simply scaling back new purchases. Here, the unwinding will begin in earnest and the Fed will have to sell longer-dated bonds into the market.

For now, we are just embarking on Stage 1. Emerging markets and corporate bonds, as well as euro periphery bonds are all signalling the same story: yields are pressured up. During May, US investment corporate bonds fell 2.7%, while junk bonds were down 2.3%.

Now, in the longer term,  when US gross interest rate rises relative to the euro area, forward exchange rate must rise relative to the spot and dollar will weaken forward. This covered parity relationship tends to hold over the longer periods of time under normal market conditions. In May-June so far, Dollar is 5% weaker than EUR, and over 2% weaker than CHF (linked to EUR). However, Dollar is stronger 22% than JPY and virtually unchanged on GBP, dollar strengthened with respect to the emerging currencies.

However, in the short run we are not in a normal economy. As US economy continues to improve, few things will happen:
1) The Fed will continue tapering on the QE in the short-term
2) Expected unwinding of QE (rising rates, instead of lower speed of purchasing of Treasuries as in (1)) will enter expectations in the market but in a longer term, rather than any time soon
3) Bond yields will continue rising and volatility will remain amplified. Long-term US equilibrium is for 10 years at 3.0-3.2% and short-term overshooting that range, for Bund - at current rates, around 2.5-2.8%.
4) Fed will be watching the speed of increases and manage unwinding process accordingly to keep yields from overshooting 3%-or-so target by a significant margin.

All of this means that news-flow will be crucial in months to come as it will be signalling both short-term and long-term changes to the Fed position (usual stuff about the rates), but also strategy (severity of (1) above, or switch to (2) from (1)).

In the short term, dollar will see pressures to appreciate as interest rates will remain intact at policy level and it will take time for higher Treasury yields to transmit into higher real interest rates in the US, inducing slowdown in the economy. Until that happens, economic recovery will be pushing up equities and USD.

In the longer run, however, this pattern will be altered: improved economic news will signal forward switch from (1) taper off to (2) unwinding. Yields will put pressure on real interest rates (3) and policy rates will move up. This will lead to subsequent devaluation of the USD toward equilibrium and a slamming of the breaks on the recovery.

The emerging markets and corporate bonds squeeze are not simple reallocations of liquidity. Truth be told, there is nowhere for liquidity to 'reallocate', given yields. Instead, these are early warning systems at work. Now, to see the underlying iceberg we are heading for, recall this http://trueeconomics.blogspot.ie/2013/04/2242013-who-funds-growth-in-europe.html


Updated: series of very interesting interviews on the issue of monetary exit: http://www.voxeu.org/article/exit-strategies-time-think-ahead

and an interesting post on term premia due to QE:
http://www.econbrowser.com/archives/2013/06/update_on_the_y.html