18/9/2013: Building & Construction Sector: Some Cautiously Positive Signs in Q2 2013

CSO released today Q2 data for production indices in Building & Construction. Here are some headline numbers:

Value of Production Indices:

• All building & construction production rose 4.23% q/q and is up 11.98% y/y. The Index is up 7.11% on Q2 2011, but is still down 76.64% on peak. Note: Q2 2012 was the absolute low. The index is now on the rise since Q3 2012 so we have nine months of increases. The rate of increase is significant, but the rise is from a very low level of activity to start with.
• Building ex civil engineering is up 8.2% q/q and 11.24% y/y. The series are down 3.88% on Q2 2011 and down 82.54% on peak. Note: Q2 2012 was the absolute low. The index is now on the rise only since Q1 2013 so we have to be cautious with interpreting any increases to-date.
• Residential building activity rose 2.25% q/q and is up 8.33% y/y. The activity level is now exactly at the level it last recorded in Q1 2012. The index is still down 92.0% on peak and is now up 8.3% on absolute low. This marks the second consecutive quarter of increases, which suggests that we are getting closer to calling a turnaround. The index is still down 10.78% on Q2 2011.
• Non-residential building activity is up 10.95% q/q and 13.22% y/y, but only 0.16% on Q2 2011. Relative to peak, activity is down 50.77%, but it is up 13.22% on absolute low. The series are volatile and we have only one quarter of increase consecutively, which means we should read this change with caution.
• Civil engineering activity is slightly down -0.13% q/q, but still up 12.59% y/y. Activity is now 31.79% ahead of Q2 2011 and the series are down 44.63% on peak and up 59.23% on absolute low. Timing of these series changes is more consistent with public spending and thus quarterly changes are not exactly very useful. 

Volume of Production Indices:

• All building & construction production rose 1.7% q/q and is up 11.16% y/y. The Index is up 4.37% on Q2 2011, but is still down 77.17% on peak. The index is now on the rise since Q3 2012 or nine months of consecutive increases. This suggests that price effects had a positive boost to value numbers shown above, but overall trend up is sustained on both volume and value sides.
• Building ex civil engineering is up 8.0% q/q and 10.76% y/y. The series are down 5.91% on Q2 2011 and down 83.54% on peak. The index is for just one quarter, so the same caution expressed about the value index applies to volume.
• Residential building activity rose 1.25% q/q and is up 8.0% y/y. The index is still down 92.2% on peak and is now up 10.96% on absolute low. This marks the second consecutive quarter of increases.
• Non-residential building activity is consistent with the value index performance, same as for civil engineering activity is slightly down -0.13% q/q, but still up 12.59% y/y. Activity is now 31.79% ahead of Q2 2011.

Overall: some positive news on total index and very cautiously positive news on ex-civil engineering data. Residential activity showing positive upside, but non-residential series are still bouncing along the bottom. Non-residential activity is showing some cautiously positive developments.

Charts to illustrate:

18/9/2013: Sovereigns at a Welfare State Funeral...

In my MSc in Management class today in UCD Smurfit School of Business I discussed with the students the issues of unfunded liabilities. In particular - the distinction between contractually obligatory liabilities and politically-granted ones.

The biggest difference is in the treatment of public servants' pensions as opposed to 'statutory' old-age minimum pensions. The former are contractually defined, the latter are not. And thus, the only way future European and US governments will be able to escape insolvency of their public spending systems - once the cost of ageing hits home - will be via a default on the latter.

I spoke about the same yesterday with an Austrian journalist.

And now we have this coming out of the Netherlands: http://www.independent.co.uk/news/world/europe/dutch-king-willemalexander-declares-the-end-of-the-welfare-state-8822421.html

Yes, at last, the honest Dutch blew the whistle on the Ponzi scheme that is politically-driven public financing of old age security. It. Is. A. Dream. just that... a dream. Not a contract, not a duty, not an obligation.

17/9/2013: CBI Sets New Targets for Mortgages Arrears Resolution

The Central Bank of Ireland has published new target for the mortgages resolution process: http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankstatementonMortgageArrearsResolutionTargetsConcludedArrangements.aspx

The new target is that by the end of December 2013, 15% of mortgage holders in arrears above 90 days (as of the end of June 2013, ) should have "concluded agreements " completed. In March 2013, the Central Bank had requested offers of solutions to be made in respect of 20% of arrears cases, rising to 30% to Q3 and 50% by the end of December 2013. On foot of these targets, the Central Bank is now requiring that 15% of all arrears cases above 90 days should be concluded by the end of year.

March 2013 target of 20% offers of solutions by the end of Q2 2013 required the banks to submit formal offers on 19,575 principal residences mortgages accounts and 6,065 BTL accounts, while the new target of 15% concluded arrangement covers 14,681 principal residences mortgages accounts and 4,549 BTL accounts. In other words, the Central Bank’s combined targets are for the banks to issue formal offers of solutions to 25,640 accounts and achieve concluded arrangements on 19,230 accounts.

Detailed Central bank paper setting out original set of targets is available here: http://www.centralbank.ie/press-area/press-releases/Documents/Approach%20to%20Mortage%20Arrears%20Resolution%20-.pdf

IMHO will be issuing a more extensive press release on today's announcement later, stay tuned for the link.

16/9/2013: More pesky stuff on PMIs v Reality...

Readers of this blog would know that I have been skeptical about the Purchasing Manager Indices capacity to accurately track changes in the economic output, especially during the times of unstable trend or trend shift. The latest on the topic was recently covered here: http://trueeconomics.blogspot.ie/2013/09/1092013-pmi-and-real-economy-goldman.html

And here's the handy chart from Pictet neatly highlighting the same problem:

Not being a conspiracy theorist, I would not suggest that latest changes in Markit reporting of PMIs - and in particular dramatic shift away from actually providing broader public and analysts community with some hard numbers and in favour of providing more 'interpretations' of the data plus often unreadable charts has anything to do with the breakdown in PMIs correlations with actual activity... but it would be nice to have more accurate and data-focused releases.

Note: full Pictet note on industrial production in the euro area is here: http://perspectives.pictet.com/2013/09/13/euro-areas-industrial-production-data-back-to-reality/

16/9/2013: Call me, once granny kicks the proverbial...

Structural slowdown? What structural slowdown... not in France and in particular not in the French traditional way of making the living... by inheriting it...

The chart above comes from one of the leading researchers on income and wealth distributions, Thomas Piketty. The key to reading this chart is that as a fraction of total disposable income, inheritance flows are now back at the levels last seen in and around WW1 period. The good old days of the 19th century when landed gentry and hereditary wealth class were all the rage is back in the Liberte, Egalite, Fraternite dreamland of France. Or put in more brutish, American terms - work? why bother, when inheriting things is so much more fun than earning them by merit.

16/9/2013: Bigger Question than Answers: Euro Area Banks Funding

An interesting chart from Credit Suisse (h/t to Fabrizio Goria ‏@FGoria) on marginal funding costs of Euro area banks:

Four points to note:

1. Marginal funding costs are now in line (albeit with a bit of volatility) with the costs in 2004-2006 period. This should be good, right?.. But
2. Source of marginal funding is now exclusively CDS-backed as opposed to Euribor, and
3. Spread over the repo rate is still consistent with the 2008 and 2011 spikes and is not getting any better with recent rate cuts
4. LTROs helped, but their effect is no longer present and since late 2012 we are seemingly in a 'long-run' trend pattern or in an 'absent catalyst' base?

Question one is, if base rate creeps up, what will happen to funding costs? Question two is, if the US base creeps up, what will happen to euro area funding costs?

The latter is non-trivial: we've heard of the emerging markets rot on foot of 'tapering' talks...

16/9/2013: A Liquidity Slush or an Equity Switch?

Three more charts from BIS Quarterly (http://www.bis.org/publ/qtrpdf/r_qt1309a.pdf), showing the switch of liquidity out of the Emerging Markets into Advanced Economies...

 And then from the Advanced Economies bonds into Advanced Economies equities with a small bounce up on Emerging Markets equities side too...

Two thoughts:

1. There is no yield-driven bounce anymore, so pricing is not a huge help in this process; and
2. Is this the end of the debt bubble and the start of the equities rise (structural, not nominal rise, driven by shift in corporate funding models) or is this a temporary slush of liquidity?

16/9/2013: Don't chill that champagne, yet... Irish Agri-food Exports

Here's one of the core reasons as to why agricultural exports are booming in Ireland:

Or more precisely, implied profit margins on sales:

So in basic terms: global food inflation is driving Ireland's agri-food exports since ca Q1 2010, while profitability improvements are contributing to the same since ca Q4 2011. The former is obviously not due to our competitiveness gains or efficiency improvements or great business strategies or policies. The latter is, err... not that much either, as costs continued to inflate since Q4 2011, albeit slower than output prices. In other words, our improved profit margin in the agri-food sector are also due to someone, somewhere on the Planet having to pay more for food.

16/9/2013: Some scary charts from BIS: Yields Blowing Up & Leverage Climbs

BIS Quarterly (http://www.bis.org/publ/qtrpdf/r_qt1309a.pdf) has some interesting analysis of the US yields:

"An examination of the rise in US bond yields between May and July reveals as a key  driver the uncertainty about the future stance of monetary policy. The sell-off mainly shifted bond yields at long maturities, while the short end of the yield curve remained anchored by the Federal Reserve’s continued low interest rate policy."

"In addition, the federal funds futures curve also shifted upwards, signalling market perceptions that a policy rate exit from the current 0–0.25% band had become quite likely to occur as early as in the second quarter of 2014."

"A model-based decomposition of the  10-year US Treasury yield, which sheds light on the various drivers of these shifts,  indicates that the recent yield spike was largely the result of a rising term premium. This is consistent with markets reacting to uncertainty about the extent to which an improving economic outlook would affect future policy rates. It is also consistent with uncertainty as regards the impact that a reduction in the Federal Reserve’s purchases of long-term Treasuries would have on these securities’ prices."

"In comparison, the bond market sell-offs in 1994 and 2003–04 were different in  nature. During those episodes, long-term nominal yields rose together with policy rates or on the back of expected increases in future real interest rates and inflation. By contrast, inflation expectations were largely unchanged in the second and third quarters of 2013."

Basically, as we all know  by now, current yields have nothing to do with inflation and are solely priced by reference to expected liquidity conditions. Or put differently, nothing but printing press matters. So much for monetary policy-real growth links...


And BIS does deliver a nicely focused warning: "Their recent spike notwithstanding, bond yields in mature markets remained low by historical standards. For one, the yields on sovereign bonds in the largest world economies had been on a downward trend since 2007. And investment grade spreads in the United States, the euro area and the United Kingdom declined respectively by 75, 110 and 190 basis points between May 2012 and early September 2013, falling past their earlier troughs in 2010 and reaching levels last seen at end-2007. The evolution of the corresponding high-yield bond indices was similar, with spreads declining by 230 to 470 basis points over the same period."

Go no further than the second chart above: reversion to the mean is going to be brutal. And this brutality will only be reinforced by the fact that quietly, unnoticed by most, leverage has returned: overall share of leveraged and highly leveraged loans in total syndicated loan signings is now at all-time high.

Starting with page 6 (above link), the quarterly is a must-read as it exposes growing problem with high risk debt accumulation by investors and that amidst the historically low rates. The system is back at end-of-2007 levels of credit underpricing. The big difference today in contrast with 2007 is that no one has any bullets left to fight the bear, should one appear on the horizon.

15/9/2013: A Surging... Floater...

You've seen the 'Euro area economy is surging ahead' headlines on foot of recent PMIs... and you have seen warnings on the accuracy of the indices (see http://trueeconomics.blogspot.ie/2013/09/1092013-pmi-and-real-economy-goldman.html)... but what about levels?

Ugh... 'surging'?.. or maybe 'barely floating'?

15/9/2013: BIS Quarterly: a tale of two banking systems

Two hugely revealing charts from the BIS Quarterly Review, September 2013 (http://www.bis.org/publ/qtrpdf/r_qt1309e.pdf) show exactly the remaining adjustments yet to be undertaken by the banking sector in Europe, compared to the US.

Here they are:

 and

 
note how European banks lag US banks in assets deleveraging, and in raising capital, and are slightly lagging in terms of changes in the ratio of risk-weighted assets. In risk-weighted capital ratios, the european banks are about 1/3rd of the way shy of the US, and in terms of capital, roughly 1/2 of the adjustment to the US levels is still required.

And per operational weaknesses of the European banking system? Next we have a table:

Although different across periods, the divergences between the European and US banks are still qualitatively the same for pre-crisis and crisis periods. In particular, US banks operate at higher cost than European ones, but generate more interest income and other income.

15/9/2013: WLASze Part 2: Weekend Links on Arts, Sciences and zero economics

Due to time constraints of yesterday's TEDx talks (http://www.tedxdublin.com/), I had a shorter version of WLASze: Weekend Links on Arts, Sciences and zero economics. As promised, more is now following in part 2…



15 dynamic images of changes in the demographics across 15 countries around the world from today through 2100: http://www.businessinsider.com/15-countries-in-2100-2013-9
Very interesting changes. As a teaser: "The year 2020 will be a seminal one for Japan, with the country's capital home to the 31st Summer Olympiad and adult diapers set to outsell their baby counterparts." Just think about that line for a second… I will be posting tomorrow night my Sunday Times article from last Sunday which covered the figment of imagination that is our unwavering belief in some 'demographic dividend' for Ireland. The article addresses the question 'What happens when Germany get older, while Ireland stays younger?'


A superb article from The Atlantic on the effects that our education system's obsession with regurgitation of facts has on our ability to think:
http://www.theatlantic.com/education/archive/2013/09/when-memorization-gets-in-the-way-of-learning/279425/
This is a neat extension point to something I have been talking about in my TEDx Dublin talk earlier today - the fact that our education systems are innately incapable of producing the human capital that we will need for the future. I wrote about the related deficiencies in education systems here in my earlier Sunday Times column, with unedited version available here: http://trueeconomics.blogspot.ie/2013/08/2182013-irelands-potemkin-village.html


From the sciences side of things:
http://www.redorbit.com/news/video/the-daily-orbit/1112946481/moon-water-origins-hint-at-early-earth-091213/
We normally hear about extraterrestrial origins of things found on Earth. How about terrestrial origins of things found elsewhere in the solar system? Hm… And the daily Orbit  presentation style… double hmmm…


Extraterrestrial is the best way to describe some of the DesignJunction pop-ups at the London Design Week:
http://www.dezeen.com/2013/09/13/pop-ups-at-designjunction-next-week/
Need proof?

Or how about the Digital Sunrise (it appears to be a rug, but feel free to guess):

On the serious side of things: the rest of DesignJunction is corporate and boring… no, really, see for yourselves: http://thedesignjunction.co.uk/virtual-showroom/


From the series of accidental art:
IMAGE: russian-skywalking-photographers-european-skyscrapers-designboom-10
"russian photographers and daredevils vadim mahora and vitaly raskalovym travel europe with a clear purpose -- to illegally climb to the highest point of the city's main attraction, hang off its edge, and capture their extraordinary viewpoint" via http://www.designboom.com/art/russian-skywalkers-photograph-european-buildings-from-the-air/

The thing is: to be consistent the duo must take pictures from all cities visited. Problem is: once you confine yourself to such a commitment, art becomes secondary to pursuit of locations, and as such, purely accidental. As the show linked above clearly shows, not all (by far) images are even close to possessing properties of artistic inquiry or discovery, let alone aesthetic completion and compositional integrity. Hence, accidental nature of art… Still, impressive!


http://www.art-moscow.ru/ is opening on the 18th of September. The show will feature special exhibition Russian Avant-Garde 1910-1930 with some rare paintings by less-known artists: http://www.art-moscow.ru/2642.html
Whimsical and yet somehow infused with challenges and questions work of Grigori Mayofis: http://www.art-moscow.ru/2701.html will also be on show:

In the week when Harvard awarded its annual Ig Nobel Prizes - the spoof prizes for idiotic  research, it is only worth running few links on that:
http://www.cbc.ca/news/technology/shrew-eating-penis-amputation-studies-earn-ig-nobel-prize-1.1828634
http://rbth.co.uk/arts/2013/09/13/six_ig_nobel_prize_awards_received_by_russians_29823.html
And the 2013 awards summary: http://www.policymic.com/articles/63697/10-weirdest-ig-nobel-prize-winners-this-year


This weeks Part 2 is turning out to be quite a Russia-fest - not by design, just as an accident… so to conclude it - an images gallery from Kamchatka Peninsula: http://rbth.co.uk/multimedia/pictures/2013/09/11/going_to_kamchatka_to_get_a_glimpse_of_the_moon_29721.html

Enjoy the links!