9/11/2013: Stress testing zombie banks: Sunday Times, November 3

This is an unedited version of my Sunday Times article from November 3, 2013.


In the marble and mahogany halls of European high finance HQs, the next few months will be filled with the suspense of the preparation for the banks audits.

Much of this excitement will be focused on matters distant to the real economy. Truth is, saddled with zombie banks, and public and private sectors’ debt overhangs, euro area is incapable of generating the growth momentum sufficient to wrestle itself free from the structural crisis it faced since 2008. The latest ECB forecasts for the Euro area economy, released this week, predicted real GDP contraction of 0.4 percent for 2013 and growth of 1 percent in 2014. With these numbers, the end game is the same today as it was two years ago, when previous stress tests were carried out. The system can only be repaired when banks absorb huge losses on unsustainable loans.

New stress tests are unlikely change this. However, the tests are important within the context of the weaker banking systems, such as the Irish one. The reason for this is that the ECB needs to contain the sector risks as it goes about building the European Banking Union, or EBU.

The good news is – there are low- and high-cost options for achieving this containment in Ireland’s case. The bad news is – neither involves any relief on the legacy banks debts necessary to aid our stalled economy. The worse news is – the Government appears to be pushing for exiting the bailout without securing the low cost option, leaving us exposed to the risk of being saddled with the costlier one.


The IMF data suggests that Euro area-wide banks’ losses can be as high as EUR350-400 billion - or just under one third of the total deleveraging that still has to take place in the banks. The ECB needs to have an accurate picture of how much of the above can arise in the countries where banks and Government finances are already strained beyond their ability to cover such losses. The ECB also needs to deliver such estimates without raising public alarms as to the levels of losses still forthcoming.

Taken together, the above two points strongly suggest that in the case of Ireland, the banks will come out of the stress tests with a relatively clean bill of health shaded somewhat by risk-related warnings. Pointing to the latter, the ECB will implicitly or explicitly ask the Irish Government to secure funding sources for dealing with any realization of such risks. Such precautionary funding can only come from either a stand-by credit line with the IMF and/or European stabilization funds, or a commitment to set aside some of the NTMA cash. An NTMA set-aside will cost us the price of issuing new Government debt. This is potentially more than ten times the price of IMF credit line.

In short, Ireland should be using ECB’s concerns over our banking system health to secure a cheaper precautionary line of credit. Judging by this week’s comments from the Government, we are not. One way or the other, it is hard to see how continued uncertainty build up within Irish banks can help our cause in obtaining both a precautionary line of credit and a relief on legacy banks debts.


The ECB concerns about Irish banks are not purely academic. Our banking crisis is far from over.

Consider the latest data on three Pillar Banks: AIB, Bank of Ireland and Permanent tsb, covering the period through H1 2013 courtesy of the IMF and the EU Commission reviews published over recent weeks. On the surface, the three banks are relatively well capitalised with Core Tier 1 capital ratio of 14.1 percent, down on 16.3 percent a year ago. Meanwhile, the deleveraging of the system is proceeding at a reasonable pace, with total average assets declining EUR30.5 billion year on year.

The problem is that little of this deleveraging is down to writedowns of bad loans. This means that high levels of capital on banks balance sheets are primarily due to the extend-and-pretend approach to dealing with nonperforming loans adopted by the banks to-date. All members of the Troika have repeatedly pointed out that Irish banks continue to avoid putting forward long-term sustainable solutions to mortgages arrears and that this approach can eventually lead to amplification of risks over time.

Loans loss provisions are up 11 percent to EUR28.2 billion and non-performing loans are up to EUR56.8 billion. Still, while in H1 2012 non-performing loans accounted for 22.2 percent of all loans held by the banks, at the end of June this year, the figure was 26.6 percent. Non-performing loans are now 35.5 percent in excess of banks’ equity, up from just 4.7 percent a year ago. As a reminder, Irish Exchequer holds 99.8 percent stake in AIB, 99.2 percent share in Ptsb and 15.1 percent stake in Bank of Ireland. This means that should capital buffers fall to regulatory-set limits, further writedowns of loans will mean nullifying the Exchequer stakes in the banks and crystalising full losses carried by the taxpayers.

Continued weaknesses in the solvency positions of the banks are driven primarily by three factors. Firstly, as banks sell or collateralise their better loans their future returns on assets are diminished. The second factor is poor operational performance of the banks. Net losses in the system fell between H1 2012 and H1 2013. However, this still leaves banks reliant on capital drawdowns to fund their non-performing assets. The third factor is the weak performance of banks’ non-core financial assets. Over the last 12 months, Irish banks holdings of securities grew in value at a rate that was about 12-15 times slower than the growth rate in valuations of assets in the international financial markets.

In short, the IMF review presented the picture of the banking sector here that retains all the signs of remaining comatose. This was further confirmed by the EU Commission report this week, and spells trouble for the Irish banks stress tests.

In 2011 recapitalisation of Irish banks, the Central Bank assumed that banks operating profits will total EUR3.9 billion over the 2011-2013. So far the banks are some EUR4.5 billion shy of matching the Central Bank’s rosy projection.

This shortfall comes despite dramatic hikes in interest margins on existent and new loans, decreases in deposit rates, and reductions in operating costs. Compared to H1 2011 when the PCARs were completed, lending rates margins over the ECB base rate have shot up by up to 138 basis points for households and 59 basis points for non-financial companies. Rates paid out on termed deposit have fallen some 103 basis points. As the result, banks net interest margins rose.

On top of that, the funding side of the banks remains problematic. The NTMA is now holding almost half of its cash in the Pillar Banks, superficially boosting their deposits. Private sector deposits continue to trend flat and are declining in some categories. This is before the adverse impacts of Budget 2014 measures, including the Banks levy and higher DIRT rates start to bite.

Behind these balance sheet considerations, the economy and the Government are continuing to put strains on households' ability to repay their loans. This week, AA published analysis of the cost of mortgages carry (the annual cost of financing average family home and associated expenses). According to the report, the direct cost of maintaining an average Irish home purchased prior to the crisis is now running at around EUR 21,940 per annum. Under Budget 2014 provisions, a married couple with two children and combined income of EUR 100,000 will spend one third of their after-tax earnings on funding an average house. In such a setting, any major financial shock, such as birth of another child, loss of employment, extended illness etc., can send the average Celtic Tiger household into arrears.


All of this, means that any honest capital adequacy assessment of the Irish banking system will be an exercise in measuring a litany of risks and uncertainties that define our banks’ operating conditions today and into the foreseeable future. Disclosing such weaknesses in the system will risk exposing Irish banks to renewed markets pressures, including possible failures to roll over maturing debts coming due. It can also impair their ability to continue deleveraging, and fund assets writedowns. On the other hand, leaving these stresses undisclosed risks delaying recognition of losses and exposing us to pressure from the ECB down the line.

Not surprisingly, as the ECB goes into stress tests exercise, it is exerting pressure on Ireland to arrange a stand-alone precautionary line of credit. While it is being presented as a prudential exercise in light of our exit from the bailout, in reality the credit will be there to cushion against any potential losses in the banking system over 2014-2018, before the actual EBU comes into force. Should such losses materialise, the Exchequer will be faced with an unpalatable choice: hit depositors with a bail-in or pony up some more cash for the banks. Having a stand by loans facility arranged prior to exiting the Bailout will help avoid the latter and possibly the former. The cost, however, will be an increase in overall interest charges paid by the State, plus continued strict oversight of our fiscal position by the Troika.

A rock of interest charges and Troika supervision, a hard place of zombiefied banking, and a rising tide of risks are still beckoning Ireland from the other side of the stress tests.

Box-out: 

The latest data from the retail sector released by the CSO this week painted a rather mixed picture of the domestic economy’s fortunes. Controlling for some volatility in the monthly series, Q3 2013 data shows that despite very favourable weather conditions over the July-September 2013, Irish core retail sales (excluding motors sales) fell in volume by some 0.3 percent compared to Q3 2012. On the other hand, there was a 0.6 percent increase in the value of sales over the same period. Currently, the volume of total core retail sales in Ireland sits 4.3 percent below 2005 levels. Non-food sales, excluding motor trades, fuel and bars sales, fell 2.1 percent on 2012 in volume and is up 1.2 percent in value. The inflation effects imply that when it comes to core non-food sales, the volumes of retail trade are now down 22 percent on 2005 levels, while the value of sales is up almost 2 percent. Consumers are still on strike, while retailers are getting only a slight prices relief in the unrelenting crisis.

7/11/2013: Taxation and Human Capital: Blundel's Thoughts

A recent paper from Richard Blundel, titled “Taxation of Earnings: the impact on labor supply and human capital” (Becker Friedman Institute, 27th September 2013 available at: http://bfi.uchicago.edu/sites/default/files/research/Blundell_BFI%20_September_27_2013.pdf) argues that the tax system can be reformed “to generate the levels of revenue required to fund public goods while reducing the overall level of distortions implicit in the system”.

“The discussion in this paper draws on the work in the [Mirrlees Review (2011)] and concerns the taxation of labour earnings as well as relevant aspects of the welfare benefit and tax credit systems.” The core focus here is “on the empirical foundations for tax reform” in favour of “placing the analysis of earnings taxation in a lifetime setting, recognising the importance of human capital investments.”

Summary

Per Blundel, earnings taxation:
1) Raises revenue for public goods
2) Acts as the main source for funding redistribution of “resources from richer to poorer households”
3) “… From a more dynamic perspective, it ‘insures’ individuals and families against adverse events such as job loss and disability.

“Not surprisingly, it occupies a special place in debates about levels and structure of taxation.”

Several other important aspects that Blundel fails to consider are:
- Earnings taxation represents an opportunity cost of public goods provision in terms of reduced availability of funding for investment in enterprise creation and entrepreneurship; and
- Earnings taxation levies a charge on that part of personal income that is linked directly to individual effort and investments in human capital.

“One central question in the policy debate on earnings tax reform is whether, and to what degree, ‘supply side’ reforms can be used to relieve the pressure from ageing populations.” Thus, the question is: “How best to increase employment and earnings over the working life?” Per Blundel, evidence suggests that “the key to using tax policy for improving the trends in employment, hours and earnings in the longer-run will be to focus on”:
1) labor market entry (“Enhancing the flow into work for those leaving education and for returning mothers after childbirth”)
2) retirement (“maintaining work among those in their late 50s and 60s”) and
3) human capital (“Understanding the implicit incentives (or disincentives) created in the tax and welfare system or human capital investments .... Encouraging human capital improves the pay-off to work and ensures earnings grow, and hold up longer, throughout the working life.”)

Tax reforms accounting for human behavior 

Key here is that “Reform of the tax system as it impacts on labor supply and human capital is not simply about increasing life-time earnings”. In addition to levels of earnings consideration, we must also account for “many other aspects of human welfare, including the utility from consuming goods, from home production, from reducing risks, etc.”

Thus, taxes on earnings “should be seen as part of the whole ‘tax system’. In terms of an overall reform package, it is important to view corporate and personal taxation together as there are many aspects where they overlap: not every tax needs to be progressive for the tax system to be progressive; not every tax needs to be ‘green’ for the tax system to provide the right incentives for environmental protection.” In other words, “we still need to be aware of the interactions with capital, savings and environmental taxes.”

All of the above suggests that the Irish Government approach to tax policy, based on the explicitly defined premise that no matter what, the corporate tax system rests outside the scope of any tax reforms consideration, is not and cannot ever be a good practice.

Complexity avoidance is real

Another major point raised by Blundel is that “In most developed economies, the schedule of tax rates on earned income is rather complex. This may not always be apparent from the income tax schedule itself, but note that what really matters is the total amount of earnings taken in tax and withdrawn benefits—the effective tax rate. The schedule of effective tax rates is made complicated by the many interactions between income taxes, earnings-related social security contributions by employers, welfare benefits, and tax credits.” In other words, Blundel clearly states that total burden – whether via direct or indirect taxes – matters. This is something that the Irish Government simply refuses to recognize.

However, in criticism of Blundel, I would also add that it is too simplistic to look at the effective macro-level (economy-wide or average/media) level of taxation. We have to recognize that many benefits paid out in the economy do not apply or are not available to all participants in the economy. Thus, for example, famers transfers are not available to non-farmers, youth support schemes relating to training and education are not available to older adults, unemployment benefits are not accessible to entrepreneurs and so on.

Taxes and labour supply

“At a very high level, some of the main points that emerge from this evidence are that substitution effects are generally larger than income effects: taxes reduce labour supply. Especially for low earners, responses are larger at the extensive margin—employment—than at the intensive margin—hours of work. Responses at both the intensive and extensive margins (and both substitution effects and income effects) are largest for women with school-age children and for those aged over 55.”


There is much, much more to read in Blundel’s insights, so do not even for a second think the above summary is a substitute to reading the whole paper.

Ireland's Black Economy: Sunday Times, October 27, 2013

This is the unedited version of my Sunday Times column from October 27th.

In four and a half years through June 2013, Irish personal and public consumption of goods and services has declined on a cumulative basis by EUR 78.4 billion. Over the same period, Irish black economy has gained around EUR 1.2 billion worth of new business. Today, the unofficial shadow economy in Ireland runs at around EUR20 billion per annum.
Much of the recent activity in this economy is courtesy of our budgetary policies pursued since the onset of the crisis. And much of the growth is in the areas relating to the illegal supply of goods and services that are supplied also via the legitimate retail trade. In simple terms, virtually all of the growth in our shadow economy is down to high costs of State regulations, price controls and taxes. The balance of the demand increases in the grey and black markets is down to the households’ responses to changes in income taxation and the crisis impact on our earnings and employment.

The classic definition of the black markets covers a range of activities from trade in illegal drugs to money laundering, from untaxed cash transactions to underground employment, from intellectual property theft to contraband and/or illegal manufacturing of goods and services. One is tempted to depict the black market economy as being a part of urban markets, such as Dublin’s Moore Street or Meath Street, where shifty-looking characters offer illegal wares, ranging from controlled substances to contraband cigarettes. In reality, many more transactions in the black markets take place by private delivery and reach across all socio-economic demographics and into various urban and rural geographies.

In contrast, grey markets include goods legally purchased and imported by individuals, which do not register in the official accounts and as the result do not contribute to the Exchequer balance and the wholesale and retail trade revenues. The best examples of these are goods purchased for personal consumption outside Ireland. Some are imported legally, within the strict limits on values and quantities stipulated by the customs laws. Others are brought in excess of the personal allowances and can be resold or bartered to relatives and friends. Whilst illegal, such transactions are largely undetectable and these laws and regulations are not easily enforceable once the border is crossed. Grey market is the domain of the middle and upper-middle classes: from the South Dublin set’s stereotypical shopping trips to London or New York, to Middle-Ireland’s excursions into the Northern Ireland for a spot of bargains hunting.

The costs of illicit and unofficial trade also reach deeper than the headline numbers suggest. At the top of the pyramid sits the Exchequer with an estimated loss of some EUR 7 billion per annum in revenues – an amount equal to almost 3 years of austerity measures.

Beyond that, shadow economy imposes losses on consumers, legitimate producers and the society at large. The former arise from the poorer quality of counterfeit goods and services supplied and the risks inherent in illegal transactions. Included are the health and safety risks linked to consumption of counterfeit medicines and consumer goods. Losses to legitimate producers of goods and services come from the fact that black market economy takes custom from the legitimate domestic retailers and producers. In many cases, ordinary customers are reluctant to frequent areas where illegal trade takes place. Further losses arise from Intellectual Property theft, and loss of demand for officially-supplied goods and services to cheaper substitutes sold under the counter. Social losses - compounding those listed above - include increased organised crime, links between illegal financial flows and international terrorism, prostitution, and human trafficking, rise in crimes associated with drugs abuse and so on.


In Ireland's case, we are witnessing a rather unique dynamic in the growth of the black markets, courtesy of the current crisis. During the Celtic Tiger period, rising incomes and employment, and declines in personal taxes partially helped to offset the impact of higher consumer prices and hikes in excise taxes on alcohol and tobacco - the two staple goods traded in the grey and black markets. With the onset of the crisis, lost earnings and jobs were compounded by higher taxes, including VAT and excise rates. This resulted in an increased demand for illegally sold goods, but also for legal goods purchased in the Northern Ireland and the rest of Europe.

The composition of the shadow economy in Ireland also changed. Prior to the bust, majority of the losses in economic activity to grey and black markets related to cash-based construction and household maintenance activities. Since 2008, the focal point of growth in the shadow economy shifted to supplying substitutes to goods where Irish regulatory and tax-induced prices have by far exceeded European norms, such as pharmaceuticals, alcohol, tobacco and premium consumption goods.

Construction and property-related services still play significant role in driving black economy, but their overall importance in the illicit trade has declined mirroring the fortunes of the legitimate construction sector.


To see how tax-induced growth in the shadow economy has become a quintessential feature of our reality, consider Irish fiscal policies in relation to alcohol and tobacco taxation. Over the last seven budgets, increases in alcohol and tobacco taxes were supposed to raise additional EUR 494 million in revenues. Instead, the measures fuelled an already sizeable trade in illicit goods. Official consumption of these goods declined, and revenue collected fell short of targets.

Based on recently published research by Grant Thornton, losses to the Exchequer from illegal sales and personal importation of tobacco products for personal use in 2012 amounted to between EUR 240 million and EUR 569 million.
Over the last 11 years, all increases in the cost of tobacco products to consumers came from the hikes in taxes. Post-Budget 2014, Ireland will have the highest retail price of tobacco in the entire EU27, while some 80 percent of every pack of tobacco legally sold in the Republic will go to the Exchequer. Based on KPMG data, almost one in every five cigarettes consumed in Ireland in 2012 were counterfeit and contraband – second highest in the Euro area. In his three budgets, Minister Noonan ‘contributed’ some 40 cents or 9 percent profit premium to the bottom line of the criminals illegally importing goods into the country.

My estimates suggest that post-Budget 2014, total economy’s losses from illicit sales of tobacco products will rise to EUR760 million per annum. In addition, estimates based on the data from the Revenue Commissioners and the World Health Organisation suggest that illicit trade in alcohol will cost us close to EUR125-130 million in lost economic activity in 2013. Budget 2014 is expected to push this out toward EUR160 million.

Research shows that increased taxation of alcohol is driving more drinking into homes and out of public view. Much of this shift in drinking patterns falls outside the data we collect from the licensed sales. With both the state policies and the recession increasing the incentives to purchase cheaper and often illegal alcohol, actual consumption of alcohol per person in Ireland might be well above the currently reported levels. In January-July 2013, Irish Revenue seized some 3.5 times more illegal alcohol than in the full year 2012.

Overall, based on the study by Grant Thornton, my own estimates, and using data from various other sources referenced above, illicit trade in fuel, tobacco, pirated software and digital economy services, pharmaceuticals and alcohol in Ireland accounted for some EUR1.5-1.6 billion in 2013. Post-Budget 2014, this figure can rise to over EUR1.7 billion.

Last, but not least, the same forces that propel growth in the shadow markets for alcohol, tobacco, fuel, pharmaceuticals and healthcare, and digital economy services will also act to draw more purchases of other goods out of the Republic and into Northern Ireland and off-shored on-line trade.

Behavioural research shows that when people take targeted trips to purchase specific large-ticket items, they tend to ‘load up’ on other purchases along the way, especially if their trip takes them to diversified retail locations. Thus, a family travelling to Northern Ireland to shop for alcohol in bulk will also be likely to stock up on other goods, such as groceries, household equipment, car parts, fuel and so on, to ‘cover’ the cost of travel. Retail substitution in alcohol purchasing away from Irish stores will lead to compounded losses due to other purchases made abroad.


In his Budget speech, Minister for Finance Michael Noonan referenced the shadow economy on three occasions, including a direct reference to the VAT fraud, illegal tobacco selling, unlicensed trading in alcohol products, and fuel laundering. In line with these concerns, the Minister unveiled a host of policy measures aimed at targeting illegal tobacco and alcohol sales and fuel laundering. So optimistic was Minister Noonan that his measures will bear fruit that he penciled in EUR20 million in added Exchequer revenues from increased enforcement measures. Yet, both the Department of Finance and the Revenue are well aware of the fact that the current state policy on excise taxation of alcohol and tobacco contributes to the growth of the illicit trade. Both know that any measures to combat this trade are not cost-effective, requiring more spending on policing than the revenues such policing helps to generate. In other words, if we want to make a dent in shadow economy, we need to re-think our excise tax policies and markets regulations.

Box-out:

Media analysis of the Budget 2014 placed significant focus on the impact of the changes to the pensions levies. Overlooked by the majority of the analysts, however, was the issue of longer-term sustainability of our pensions system. Irish pensions remain grossly underfunded in the private sector. On the other side of the economy, State’s social insurance funds are projected to hit deficit of EUR9 billion in 5 years rising to EUR 20 billion within the decade, according to the OECD latest research. Taking into the account current deficits in private and semi-state sectors, we are facing an economy-wide pensions crisis. Unfunded pensions liabilities for those who do have some retirement savings or pensions contracts will rise from the total deficit in excess of 15 percent of our GDP today to over 75 percent in 20 years time. The impact will be equivalent to the banking sector crisis experienced in 2007-2011. Beyond this, hundreds of thousands of families will be left without any pensions provisions. The only ‘solution’ to the pensions crisis proposed by anyone to-date involves compulsory pensions enrolment whereby the state mandates required minimum levels of ‘savings’ for households. While good in theory, such a solution presents a number of problems in the case of Ireland. In today’s world, who can afford setting aside some EUR500-700 per month per person into a pensions pot to assure modest retirement 20 years after?  How will such a scheme help those who are currently in their 40s and older and have total assets with negative or near-zero net worth?

5/11/2013: Metro Herald 60 Seconds interview

Prior to the breakfast briefing this Thursday at NCI, Metro Herald asked me few questions about economics, economists, models and tea-leafing... Here's the link to the interview:
http://edition.pagesuite-professional.co.uk/launch.aspx?eid=3cb13124-50ea-40fa-a6b0-3b10de314640&pnum=8 (page 8)

And the article image (click on the image to enlarge):

5/11/2013: My op-ed for Journal.ie on IMHO/AIB initiative

Yesterday, Irish Mortgage Holders Organisation (IMHO) announced the new pilot scheme to help Irish mortgagees in dealing with their lender, the AIB Group (see details here: http://trueeconomics.blogspot.ie/2013/11/4112013-imhos-latest-initiative-to-help.html).

My op-ed on Journal.ie explains this new initiative and the background to the project: http://www.thejournal.ie/readme/imho-aib-group-mortgage-arrears-1160947-Nov2013/

5/11/2013: BlackRock Institute survey: Latin America October 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for Latin America. EMEA region latest survey note is available here (http://trueeconomics.blogspot.ie/2013/11/5112013-blackrock-institute-survey-emea.html) and North America & Western Europe note is available here (http://trueeconomics.blogspot.ie/2013/10/11102013-blackrock-institute-survey-n.html).

"This month’s Latin America Economic Cycle Survey presented a mixed outlook for the region. Brazil, Colombia, Peru, Mexico, Brazil and Chile are described to be in expansionary phases of the cycle and expected to remain so over the next 2 quarters, while Argentina’s growth is expected to deteriorate from expansion to contraction over this horizon. Venezuela is described by the consensus to be in a recessionary state, with no improvement to this outlook at the 6 month horizon."

This is predictable. However, the surprise side is Brazil. Out 6 months from October, expectations are for continued recessionary pressures (35%) basically suggesting that forward-looking bears are slightly more bearish. The country, alongside with Mexico, is in a group that is stuck between higher growth states and Venezuela and Argentina. This despite the improving global outlook: "The global growth outlook remains positive, with a net of 69% of participants expecting a stronger global economy
over the next 12 months compared to 76% in the September report."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

5/11/2013: BlackRock Institute survey: EMEA October 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.
 A note on latest survey results for North America & Western Europe is available here.

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a bullish outlook for the region."

"The consensus of respondents describe Slovenia, the Ukraine, Croatia and Russia currently to be in a recessionary state, with an even split of economists gauging Egypt to be in expansion or contraction. Over the next 2 quarters, the consensus shifts toward expansion for Russia, Croatia and Egypt and an even split between expansion and contraction for the Ukraine."

"At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen or remain the same, with the exception of Russia." Russian sentiment has deteriorated significantly in recent months.

"Globally, respondents remain positive on the global growth cycle, with a net 73% of 57 respondents expecting a strengthening world economy over the next 12 months – a 13% decrease from the net of 86% figure in last month. The consensus of economists project a shift from early cycle to mid-cycle expansion over the next 6 months."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

Note: Red dot represents Slovakia, Poland, Israel, Kazakhstan, and South Africa. 

4/11/2013: IMHO's latest initiative to help distressed borrowers

Today was a big day for Irish Mortgage Holders Organisation. Here's our announcement:
https://www.mortgageholders.ie/blog/posts/imho-launches-an-initiative-for-aib-ebs-haven-borrowers

It is a big step for many distressed borrowers and we hope that other banks will follow the AIB Group steps and start treat seriously the need to help homeowners secure independent and client-focused professional advice regardless of people's ability to pay.

The scope of the crisis we face is unprecedented. Here's a reminder:
http://trueeconomics.blogspot.ie/2013/09/592013-sunday-times-september-1.html
and the latest data on arrears:
http://trueeconomics.blogspot.ie/2013/08/2382013-irish-mortgages-arrears-q2-2013.html

2/11/2013: WLASze: Weekend Links on Arts, Sciences and zero economics

This is this week's only WLASze: Weekend Links on Arts, Sciences and zero economics post - sorry folks, busy weekend full of work and a major announcement coming up Monday am.

A NY Times article that resonates on ALL levels with what I have to say about the modern state of intellectual inquiry and our society's willingness to face the truth: ideas, thoughts, words, creativity, innovation, insight - these things are not free. They require effort, input, dedication. And if you value them - you should be prepared to pay for them.

http://www.nytimes.com/2013/10/27/opinion/sunday/slaves-of-the-internet-unite.html?_r=0

The deeper issue here is whether the 'free' nature of these goods in the age of internet is destroying the quality of these goods being supplied? I don't have an answer to this, but I can tell you that I have never had a free lunch that I actually enjoyed. If something has a value, it is never free. If something is free, it has no value.

Many of you have noticed that I significantly cut back on commenting in the media and focused on only such 'free' activities which grant me the power to enjoy real freedom to express myself (this blog, for example) and/or which allow me to do real good (non-profit IMHO work). The reason for this is that I no longer find much satisfaction in what I do.

So can 'free' (or exposure-focused) work be of value?


But that is too close to economics, to be here in a WLASze post, so let's backtrack into arts and sciences…

Those who follow my weekend posts know that I am a bit of a fan of space-defining private Japanese architecture. And here's another example, from a public building, but still on human (private) scale:
http://www.dezeen.com/2013/10/29/the-sea-library-in-awashima-by-etat-arkitekter/
Two images: the table first

and then a wonderful counter-point of the wave-faced reflecting wall:

This is a seamless integration of space (room and framed gardens beyond the window), object (table, wall), subject (wave: water to light), light (window to wall or table), personal (constrained space) to total (open-ended reflection in the wall merging with all dimensions of the space around it)… It is an infinite within the finite… Brodskovian:

"Я обнял эти плечи и взглянул
на то, что оказалось за спиною,
и увидал, что выдвинутый стул
сливался с освещенною стеною.
Был в лампочке повышенный накал,
невыгодный для мебели истертой,
и потому диван в углу сверкал
коричневою кожей, словно желтой.
Стол пустовал. Поблескивал паркет.
Темнела печка. В раме запыленной
застыл пейзаж. И лишь один буфет
казался мне тогда одушевленным.

Но мотылек по комнате кружил,
и он мой взгляд с недвижимости сдвинул.
И если призрак здесь когда-то жил,
то он покинул этот дом. Покинул."

Or in english version:

I threw my arms about those shoulders, glancing
at what emerged behind that back,
and saw a chair pushed slightly forward,
merging now with the lighted wall.
The lamp glared too bright to show
the shabby furniture to some advantage,
and that is why sofa of brown leather
shone a sort of yellow in a corner.
The table looked bare, the parquet glossy,
the stove quite dark, and in a dusty frame
a landscape did not stir. Only the sideboard
seemed to me to have some animation.
But a moth flitted round the room,
causing my arrested glance to shift;
and if at any time a ghost had lived here,
he now was gone, abandoning this house.


And while we are on 'spaces' and architecture and imagery, here are the images from the Open House Dublin 2013 photography competition: http://www.flickr.com/photos/irish_architecture_foundation/galleries/72157636936238606/


And to round off, on science side, two posts on AI and the role it plays and might play in the future…

Via BusinessInsider, the story how use of computers in chess training is shifting the nature of the game when played by humans. Now, loads of good stuff here, but the key to me is the point that grandmasters now have to be more creative in their plays, since computerised training of their opponents assigns disadvantage to predictable opening moves and strategies. In other words, indirectly, computer-assisted training leads to increased creativity...
http://www.businessinsider.com/anand-on-how-computers-have-changed-chess-2013-11
This is a classic example of what I termed computer-enabled innovation and creativity - not a system that operates by design, but a system that generates, promotes, advances human innovation.

As computer-assisted cooking does as well, except in this case, it is computer-generated creativity… http://www.fastcodesign.com/1672444/try-a-recipe-devised-by-ibms-supercomputer-chef
I had a pleasure engaging with IBM few years ago in developing new ideas for using Watson's capabilities in finance and insurance, but I never could have imagined that the most powerful AI system can be used to write new recipes for the kitchen…


Enjoy. I will be cooking Uzbeki Plov tomorrow for the family… Computer un-assisted cooking and a recipe that is centuries old...

1/11/2013: Irish Consumer Confidence: Handle with Caution...

Having written just yesterday about Retail Sales for September 2013 (see here: http://trueeconomics.blogspot.ie/2013/10/31102013-i-am-sorry-but-retail-sales.html) I can now update the Consumer Confidence reading to October.

In October, Consumer Confidence indicator rose to 76.2 from 73.1 in September. This is the 10th highest reading for the index since April 2005 and the highest in 76 months since June 2007. If it were indicative of anything, we are sitting on a cusp of a consumer demand boom.

However, problem is that Consumer Confidence has a negative historical correlation with Retail Sales over the period of current crisis: correlation between Consumer Confidence and Value of Retail Sales since June 2008 is -0.663 and with Volume of Retail Sales it is -0.599. In other words, according to data, higher consumer confidence has been associated with lower retail sales (consumer demand).

Here's an illustration, updated to October for Consumer Confidence figure...

So caution, please, with interpreting Consumer Confidence.

1/11/2013: Decent News on Live Register Front: October 2013

Live Register numbers for October released yesterday are pretty good, for a change. 

On a seasonally-adjusted basis, overall official Live Register counts declined to 409,900 from 413,600 in September. Seasonally-adjusted LR is now down 5.60% y/y - an improvement on decline of 4.9% recorded back in September.

3mo MA also is down 5.03% year on year, and 2.2% lower on 3mo through July 2013. 

So decent headline readings, consistent with continued trends working through LR overall:

1) Outflows due to new jobs creation

2) Outflows due to emigration and benefits expirations

Level changes: m/m down 3,700 and y/y down 24,300. 

Compared with Q1 2011 average - the last period prior to the current Government coming into office, Live Register is down 3.8% in the last 3 months through October 2013.

Two charts above also show Live Register with State Training Programmes participation added to it (LR+STPP). This broader measure of LR currently stands at 485,850 in October (I use September figure for STPPs as this is reported with one month lag). Assuming this holds, LR+STPP numbers are now 5.8% below where they were in October 2012 (note, September STPP figure more likely underestimates the October numbers, as there is very strong volatility and seasonal increases in September-November). 

This contrast with 3.7% decrease in LR+STPP recorded in September. Now, again - keep in mind that September numbers are the true comparative, as they are reflective of the recorded levels of STPPs. 

Back to october figures. The trend for LR+STPP is now to the downside when we strip out some of the monthly volatility. 3mo MA for LR+STPP currently runs at 1.35% lower than 3mo MA through July 2013 and is down 4.2% y/y. This confirms the decline of 2.4% recorded in LR+STPP y/y basis for the 3 months through July 2013.

Current 3mo MA is 4.7% below Q1 2011 reading for LR+STPP.

Broadly-speaking, the numbers are encouraging.

Another interesting trend in the LR participation by the under-25 years of age: this is down massive 10.4% y/y in October and was down 10.3% in September. On 3mo MA basis, the figures are down 10.4% y/y and are down 3.4% on previous 3mo MA through July 2013. I wonder how much of these declines is due to cuts to benefits and expirations of benefits and younger people removing themselves out of the labour force.

Finally, Casual and Part-time Workers on LR have fallen 5.1% y/y in October and were down 3.3% in September. On 3mo MA basis, the figures are down 5.7% on previous 3mo period through July, and are down 3.6% y/y.

Summary: overall we have encouraging changes in the LR. More analysis is needed to decompose these into jobs creation numbers as opposed to benefits expirations and emigration. More current data is needed on State Training Programmes participation (this will be available for October when November LR is released). A summary of changes is shown in the chart below:

Updated: Revealing some of the mysteries of 'improving' Live Register, here's an article from The Examiner: http://www.irishexaminer.com/budget/news/reality-behind-live-register-stats-246183.html

31/10/2013: I am sorry, but Retail Sales did not get any better in September, again...

With some lag, time to update Irish Retail Sales stats to September data. Instead of going over the usual details of the dynamics, let's take a broader look at what is happening in the sector:

Starting with a chart:

As above clearly shows, both the Value and the Volume of core retail sales are going nowhere - the series are bouncing along the bottom, switching direction almost on month basis. This suggests that

1. Consumers are not going to the shops anymore than they absolutely need to; and
2. Consumers are running out of money to spend on things they need to purchase, while retailers are running out of margins to cut prices.

Of course, you would also notice in the above chart the absolutely bonkers behaviour of Consumer Confidence indicator. And you are right: as chart below clearly highlights, the Consumer Confidence has completely detached itself from Retail Sector realities:

Timing the start of the crisis to late the start of 2009 (if we take the start at mid-2008 things are even uglier for the Consumer Confidence), we have:

• Consumer confidence rising along an upward trend;
• Retail Sales in Volume and Value falling along declining trend;
• Consumer confidence being more volatile than Volume and Value indicators for Retail Sales

This implies that Consumers are claiming that which they do not practice. Why? I have no idea. Patriotic duty to be optimistic? By Consumer Confidence recent readings, we should observe retail sales activity around late 2006-2007 levels. Ooops... Value of Retail Sales is now below where they were back at the start of the series in 2005. Volume of Retail Sales is now around late 2005.

The same applies to more smooth 3mo MA series:

There are no statistically or economically meaningful links between 3mo MA for Consumer Confidence and either Value or Volume of Retail Sales. Worse, year on year, the disconnect between the series has grown wider for both, with the widening being steeper for Value index. Again, this potentially indicates that margins in the retail sales have been wiped out and that this is not enough to get consumers spending again.

Which raises one serious question: local authorities are planning to jack up their rates in 2014. How will retail businesses afford these when they are trading in the above conditions?

As you know, I run my own index of Retail Sector Activity - RSAI - and updating this to September shows the flatlining of the trend for Retail Sector activity overall. All in, we are now in 75 months-long period of declining or flat retail sales:

You can turn the numbers upside down and compute them sideways. You can listen to the Government spokespersons telling us about improving consumer confidence until the Halloween pyres consume the last tractor tyre. You can believe that we are in a turnaround.

And I wish I could do so alongside you... but the above figures are not showing this. Perhaps we can add 'not yet' to that statement to keep some hope alive.