18/12/2013: On Big Advisory Firms Role in the Crisis

EUObserver has a very interesting expose of the role played by a handful of large financial consultancies in shaping Europe's responses to the banking crisis: http://euobserver.com/economic/122415

The article quotes from a number of sources, including myself.

Here is a more in-depth version of my position on the issue:

There are two basic reasons for the Central Banks reliance on external assessment and validation of estimated banks losses. The first one is operational and the second one is reputational. 

Operational reason arises from the fact that during the per-crisis boom in credit creation, National Central Banks of countries with rapid credit expansion lost core personnel competencies and skills to staff migration to the private sector financial services providers. As the result, senior staff with skills at professional certification levels (e.g. CFA) and hands-on experience became virtually extinct in the Central Banks and regulatory authorities. The remaining staff largely performed mechanical tasks of collating and repackaging information supplied to the Central Banks by the financial institutions. Forensic analysis and modelling skills were lost. External analysts can supply these skills and provide more up-to-date specialist knowledge, rarely available in the tenured jobs-for-life setting of the Central Banks that was made even more scarce by the staff migrations to private sector. An added operational constraint faced by the Central Banks in crisis-hit countries was the demand for staff time to cover regulatory and policy changes during the crisis and deploying emergency measures. In simple terms, this meant that the Central Banks were short of staff.

Reputational reasons are more complex, spanning a number of areas where Central Banks faced and often continue to face significant deficits. Firstly, reputation ally, Central Banks are not known for possessing specialist forensic analysis skills required to bring together balance sheet analytics and forward business modelling. As such they lack credibility as markets analysts. Secondly, stress testing had two functions: identifying approximate potential losses on banks balance sheets and signalling these losses to the markets. In the case of countries severely hit by the crisis, the latter objective had to be served by supplying a credible signal to the markets. This signal could not rely on the internal assessments by the Central Banks which were at the time seen by the markets as being captive to the incumbent banking institutions. This too required bringing in external validation. Thirdly, as in the case of Greece, there was always concern that more realistic assessment of the banking situation will expose Central Banking authorities to renewed public anger and trigger public retaliations. As the result, a third party often had to step in to provide a public buffer between the losses estimates, the banks and the Central Bank. Fourthly, counterposing potential public backlash, the banks themselves were significantly incentivised (in the context of loss assessment exercises) to attempt influencing the Central Banking authorities to alter the results of the exercise. Perceived objectivity of the estimates, therefore, required more external validation.

18/12/2013: Portugal's Expresso on Irish Strategy for Growth 2014-2020

Portugal's Expresso is featuring Ireland's Strategy for Growth 2014-2020: "Irlanda quer ser o melhor pequeno país para as empresas" with comments from myself & @seamuscoffey :
http://expresso.sapo.pt/irlanda-quer-ser-o-melhor-pequeno-pais-para-as-empresas=f846740

16/12/2013: Russian economy & Ireland-Russia Trade updates

My most recent note on Russian economy is available here: http://irba.ie/2013/12/03/russian-economy-a-slowdown-before-policy-driven-re-acceleration/#more-1245

On Russian inflation: as noted in the above, inflation accelerated in October. This is the first month of re-acceleration since May 2013 when inflation peaked at 7.4% y/y. The cycle low inflation was recorded in September at 6.1% y/y.

Ireland's bilateral trade (goods only) with Russia is covered here: http://irba.ie/2013/12/03/trade-with-russia/

16/12/2013: Troika Consultancies... via EUObserver

A very interesting article on the EUObserver.com today (disclosure: I contributed a comment) on the issue of professional advisory services relating to the banks and fiscal crises: "Troika consultancies: A multi-million euro business beyond scrutiny"

15/12/2013: First-to-Seventh Rate People?... via Schengen

Romania and Bulgaria have once again been rejected from membership in Schengen. Details here: http://www.ceeinsight.net/2013/12/11/romania-bulgaria-rejected-schengen-entry/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+ceeinsight+%28CEE+Insight%29

So as a reminder, we still have a Europe of multiple layers of equality between its members' citizens, residents and foreigners:

1. The "Club Schengen"
2. The Club "Better Than Other Foreigners", includes non-EU states that have Schengen access: Switzerland, Norway, Iceland and Lichtenstein who are full Schengen, plus San Marino, Monaco and Vatican (which are de facto Schengen)
3. The Club "Not Good Enough For Much": including Greenland, and Faroe Islands, French ex-European territories, Aruba, Curacao, St Maarten, the Caribbean Netherlands, Norway's Svalbard which all are parts of Schengen states, yet have no Schengen rights
4. The Club "First Rate Foreigners": non-EU nationals resident in Schengen States who are granted Schengen rights
5. The Club "Second Rate Easterners": EU member states with no Schengen access: Romania, Bulgaria, Cyprus and Croatia but are allowed visa-less travel
6. The Club "Second Rate Westerners": EU member states residents who reside in non-Schengen countries such as UK and Ireland, who are married to a Schengen State national
7. The Club "Third Rate Westerners": EU member states residents who reside in non-Schengen countries such as UK and Ireland, who have no rights to free travel whatsoever and require full visas, unless married to a Schengen State national
8. The Club "Third Rate Easterners": EU member states residents with no citizenship (aka some national minorities in some Baltic States)

I'd say we have a pretty extreme case of the Abridged Seven Commandments of the Animal Farm where "All animals are equal, but some animals are more equal than others"... one might wonder if even Napoleon would find it hard to deal with eight tiers of 'equality'.

14/12/2013: WLASze: Weekend Links on Arts, Sciences & zero economics

This is WLASze: Weekend Links on Arts, Sciences and zero economics


Amazing work of experimental architect and artist Lebbeus Woods drawing on his work from the 1980s: http://www.dezeen.com/2012/11/08/lebbeus-woods-early-drawings/. Lebbeus traces back to the Chicago 'Bauhaus' and worked under Eero Saarinen. He later co-founded and led http://www.riea.ch/ which seeming became largely inactive back around 2009-2010, but left a marked legacy of daring innovation. Woods' site is here: http://lebbeuswoods.net/. His work is going to be profiled in November-March 2014 exhibition at the Michigan State University: http://www.archdaily.com/444068/exhibition-lebbeus-woods-architect/

Another wonderful feature from dezeen, with nice home connection: Dublin-based designers Notion have set up own brand NTN. The inaugural collection is brilliant, although short: http://www.dezeen.com/2013/12/08/first-collection-from-new-dublin-design-brand-includes-a-table-with-a-hammock-underneath/
Occasionally whimsical, often challenging, and frequently truly non-derivative in originality, this is an excellent start for what is promising to be a bright, light, creative design shop. And it is a much needed boost to Dublin design community which generally lacks brands that can stand on their own internationally, but has so much real potential. Let's hope Enterprise Ireland is paying attention!
My favourite of the lot:

The brand design base is here: http://www.designbynotion.com/
And NTN brand collection is here: www.ntn.ie



Unlike design in Dublin, which moving toward real sustainable life, life on Mars has taken a turn for the worse in recent years (rather billions of years). Nonetheless, fascinating bit of news from NASA's Curiosity rover is that "a crater found on Mars is actually an ancient lake bed that could have contained the proper conditions to have supported life on the Red Planet."

NASA scientists basically claim that they "have discovered the fossil remains of a lake inside Gale Crater. The scientists say that this lake would have existed for as long as tens of thousands of years, which is long enough for life to have evolved." And, allegedly, the lack "contained chemical and mineral conditions needed to support microbial life. The lake waters held low salinity at just the right acidity and all the chemicals needed to support living organisms." Read more on this here: http://www.redorbit.com/news/space/1113023177/life-bearing-ancient-lake-discovered-mars-120913/

Let's hope Irish Water will too contain the right acidity and all the chemicals needed to support living organisms… and deliver these to us at a price that won't turn Ireland into a Martian 'Gale Crater'…

Fabian Oefner show at the whimsically inimitable MB&F M.A.D. gallery, Geneva (through May 2014) is based on pain tacking deconstruction of classic sports cars and re-assembly of their deconstructed images into a static representation of dynamic motion called 'explosion'… See the brilliant video of the work here:
http://www.designboom.com/art/fabian-oefner-explodes-views-of-classic-sports-cars-11-29-2013/
And MB&F gallery link is here:
http://www.mbandf.com/mad-gallery/explore/disintegrating-by-fabian-oefner/

His other work is here: http://www.mbandf.com/mad-gallery/explore/hatch-by-fabian-oefner/
and his personal page is here: http://fabianoefner.com/
So now you know, when that Lambo no longer fits the driveway… go 'Boom' instead of 'e-Bay'… for some serious visual impact.



Of course, the concept of destruction as artistic expression is not novel. Perhaps surgical nature of Oefner's work makes it rather more technically advanced, but the idea traces back centuries, including historical alterations and defacements of the ancients. One good example from the past is this article on "The seeds of destruction" or "Art Under Attack: Histories of British Iconoclasm at Tate Britain" covering the recent exhibition of the Tate:
http://www.tate.org.uk/context-comment/articles/seeds-destruction
I love this work by Jake and Dinos Chapman:

And here's a feature about Capmans show in Kiev earlier this year: http://www.designboom.com/art/the-sum-of-all-evil-by-jake-and-dinos-chapman/

Not a cheerful note to end, but superb art…

Enjoy!

12/12/2013: Measuring the Mortgages Crisis in Ireland

As the readers of this blog would know, I rarely comment on articles in Irish press, and rarer yet on articles in the Irish Times. So here is a rare occasion, not because of the article itself, but because of what it suggests about our national treatment of statistics.

Let's start from the top. The New York Times published an article on Irish crisis today. Here's the link: http://www.nytimes.com/2013/12/12/business/international/as-bailout-chapter-closes-hardships-linger-for-irish.html?pagewanted=2&_r=1&rref=business&hpw&pagewanted=all

Irish Times - in some ways correctly took the New York Times article to task: http://www.irishtimes.com/news/ireland/irish-news/are-we-really-reduced-to-shooting-pigeons-for-food-1.1625588

Let me take up one point in the two articles. Original version of the NYT article cited - quoting from the IT response - that "most startling is the assertion that two-thirds of homeowners have not paid their mortgage “on time for the last two years”".

IT correctly points that this is not true, saying that "The bank’s most recent arrears figures suggest 18.5 per cent of mortgage holders are in arrears of some sort or other.
They also indicate that 22 per cent of those currently in arrears are behind in their payments for at least two years or more."

The NYT published correction to their original claim. Story ends there.

But from the point of view of reality, it does not. This is pivotal to our narrative about the crisis.

Mortgages arrears have many meanings in the economy. But in the social context and in relation to mapping out the extent of the crisis here's what matters: Mortgages arrears are a signifier of the extent of the crisis. In this, they are neither the only indictor, nor are they a relative indicator. Let me explain.

1. Assume we want to identify the extent of the crisis as it impacted the households holdings of property.
2. Assume we have official data to do so only.

From (1) and (2), identifying the crisis extent is simple and yet hard. 

Take an analogy of identifying the crisis in the macroeconomy. That would be GDP. Or rather, the size of the crisis = the gap between the GDP at pre-crisis peak to GDP at crisis-period trough. One thing that does not matter to this analysis is where the GDP is today (post-trough). Should in the future the GDP hit a new trough and should the drivers for this be consistent with the drivers for the original crisis, then that new trough becomes the crisis metric. Should GDP recover to pre-crisis highs (as it will one day), the magnitude of the crisis will not be zero, it will still be GDP pre-crisis less GDP at trough.

Variants on the above are possible by looking at various GDP metrics and/or pre-crisis and trough metrics (trend, potential etc). But the essence of analysis is the same: GDP pre-crisis - GDP at trough = Crisis Impact.

Now, back to the original issue: How shall be measure the impact of the crisis when it comes to mortgages?

The IT comments can suggest (and usually the media obliges to take this as given) that Arrears Current = Crisis Impact. But are they?

My view is that they are not. Let's compute the total impact:

1. Peak of arrears (we are yet to reach that) = part of impact
2. Restructured mortgages that are not in arrears = part of impact for two reasons: (a) they face high probability of going back into arrears (just under 50:50 chance currently and declining slowly); and (b) restructured mortgages are no longer the original pre-crisis mortgages, so the mere fact of restructuring them is a sign of the crisis impact
3. Repossessed homes = direct impact; and
4. Voluntary surrenders = direct impact.

What do we know from official sources: Total mortgages outstanding: 915,746 per CBofI (composed of 768,136 principal residences-linked mortgages and 147,610 BTLs), of these:

1. Total mortgages in arrears: 181,946 per CBofI (composed of 141,520 principle residences and 40,426 BTLs)
2. Restructured, not in arrears: 56,186 (composed of 43,034 principal residences and 13,152 BTLs)
3. Repossessed homes - we have no numbers for aggregates repossessed - neither the CBofI, nor Department of Finance report these on any regular basis. But in Q3 2013 we had 1,566 properties in repossession (1,050 residences and 516 BTLs). These are properties held in possession by the banks. We do not know how many they have sold since the beginning of the crisis.
4. Voluntary surrenders - we have no data on these from any official source, but the properties that are surrendered and are still in the possession of the banks are aggregated into (3) above.

So, with incomplete information on (3) and (4), to-date, the extent of the crisis is for all types of properties:

181,946 in arrears + 56,186 restructured, not in arrears + 1,566 repossessed and surrendered = 239,698 accounts or, ca 26% of all accounts outstanding.

And the number is growing...

This is not 2/3rds as claimed originally in the NYT, not even 1/3rd, and it is certainly not the percentage of mortgages in trouble over 2 years... and the above 26% include BTLs too... But the true extent of the crisis is that 26 out of 100 mortgages in the country have been directly impacted by it. And the crisis has not peaked, yet.

But here's what this tells us about our psychology when it comes to measuring the extent of the crisis: we commonly interpret arrears alone (and often only arrears in excess of 90 days) as the metric of the crisis. This is an error - an error based on the implicit anchoring of the idea of the crisis to the news and thus, to relative position in time. This is simply wrong. The crisis of WW2 is measured by the absolute level of destruction wrecked at the peak, cumulatively, not by where the losses were in 1955 or in 1948.


Actually, should you be interested, I track the evolution of the above metric (I call it mortgages in default, defaulted or at risk of default) in my regular posts on CBofI quarterly data. The latest was provided here: http://trueeconomics.blogspot.ie/2013/11/28112013-irish-mortgages-arrears-q3-2013.html.

And for the conclusion: I recall in 2007 CEO of AIB at the time stating in a meeting with analysts that "Irish people do not default on mortgages. They never do." I replied: "Never is a very precise term. Is there any uncertainty around this claim?" and he retorted: "None." Back to that 26% figure, then?..

12/12/2013: BlackRock Institute Survey: S. America & Asia-Pacific, December 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2013/12/12122013-blackrock-institute-survey.html.

Survey results for North America and Western Europe region were covered here: http://trueeconomics.blogspot.ie/2013/12/12122013-blackrock-institute-survey-n.html


Now: Asia-Pacific and Latin America.

"This month’s Asia Pacific Economic Cycle Survey presented a mixed outlook for the region. Out of the 14 countries covered, only India is currently described to be in a recessionary state; however over
the next 2 quarters it is expected to transition to an expansionary phase.

With regards to China, over the next 12 months, a net of 24% of 21 economists expect the economy to
weaken compared to 30% in the October."

Note: The red dot represents Hong Kong, Japan, Malaysia, New Zealand, Singapore and the Philippines, where no economists describe the country at hand to be in a recessionary state at present or over the next 6 months.

"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."

The global growth outlook remains positive from both regions analysts' perspective, though Asia-Pacific analysts are more bullish on global recovery than Latin America's analysts.


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.

12/12/2013: BlackRock Institute Survey: N. America & W. Europe, December 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2013/12/12122013-blackrock-institute-survey.html.

Now, on to survey results for North America and Western Europe region:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 71% of 115 economists expecting the world economy will get stronger over the next year, (6% higher than within the October report)."

Forward outlook:

• "The consensus of economists project a shift from early cycle to mid-cycle expansionary over the next 6 months."
• "At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Norway, where we currently have a low participation rate."

Euro area: "The consensus outlook for the Eurozone continued to improve, where the 6 month forward outlook shifted from 87% to 90% expecting the currency-bloc to move to an expansionary phase. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon."

North America: "Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Note Ireland's position: vis-à-vis euro area (weaker) in the first chart and overall (strong) in the second chart.

 Note: Red dot denotes Austria, Canada, Germany, Norway and Switzerland.

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.

12/12/2013: BlackRock Institute Survey: EMEA, December 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.


"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, Egypt and Russia currently to be in a recessionary state.

Forward expectations:

• Over the next 6 months, "the consensus shifts toward expansion for Russia and Egypt and an even split between expansion and contraction for Croatia."
• "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 Slovenia and Ukraine."

Global economy view from the region: "Globally, respondents remain positive on the global growth cycle, with a net 74% of 58 respondents expecting a strengthening world economy over the next 12 months, unchanged from last month’s report. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy"

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

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.

11/12/2013: Irish Patenting Activity: November 2013

Reading Pictet's latest monthly, covering the topic of Swiss competitiveness... it is awesome - with interviews from academics, watchmakers, artists, museums directors, company that makes engines for Mars rovers, biotech giant, and so on. And it reminded me to update the data set on Irish patenting activity from NewMorningIP for November.

Here are the results:

Monthly data shows that November 2013 patenting activity in Ireland fell to its third lowest level since the records maintained by NewMorningIP started in August 2012. At 183 patents filed, November 2013 is down on 197 a year ago. So far, Q4 2013 results are running at the lowest level for all quarterly results.

It is worth noting that the data can be throwing seasonal variation. We can't tell due to short nature of series.

Not spectacular numbers at any rate. Big overseas inventions fall-off to 100 in November, the third lowest month on record. Irish inventions are down also.

On annual basis, 2013 is shaping up to post around 2,600 patents, up on 2012. All increases are due to increased overseas patents activity, with Irish patents falling. We shall see how December plays out, however.

11/12/2013: Will Europe Have Any Firepower for Banks Bail Outs?

The Banking Union debate drags on and on and on and the further we travel in time into this debate, the more apparent is the pathetic nature of the undertaking, and with it, the pathetic state of leadership across Europe... Here's the latest instalment:
http://blogs.ft.com/brusselsblog/2013/12/eu-bank-bailout-fight-more-leaked-documents/

Key quotes in this latest instalment:

"Both the European Commission and the European Central Bank – along with most eurozone finance ministries – believe a “break in case of emergency” backstop needs to be in place to provide a safety net for the bank rescue fund since, even when it’s completely full, it will only have €55bn in it. Given the recent crisis experience, that might only be enough to bail out two or three mid-sized European banks."

Laugh! or Cry! or both. The entire circus is about EUR55 billion. Not enough to backstop another Ireland (based on the 2008-2010 crisis dimensions). Not enough to backstop the retail division of the Deutsche Bank alone (based on 5% loss over capital cushion). Not enough to backstop anything, really. Administration, compliance, enforcement and other bureaucratic functions associated with this backstop (and the necessary Banking Union spoking it to the ECB and the eurosystem) will be running at somewhere around 5-10 percent of the entire fund, annually. If this is a form of insurance, you might getter better quote on insuring Titanic in its current state for passenger traffic.

"In addition, the fund will take 10 years to completely fill through levees on European banks, meaning some kind of backstop needs to be in place in the interim. The “SRF Backstop” paper basically says: we need a backstop, but we’re still not sure what it should be or how it would work."

Two things. Unless euro area hopes to remain in the Great Stagnation for the next 10 years, we shall see growth in banks balancesheets. Over 10 years horizon (even if balancesheets grow at 1.5% = real GDP growth expectation for euro area + HICP target, so 3.5% nominal growth pa in balancesheets), the banking assets side (covered liabilities from the SRF perspective) will have expanded by 41 percent. In other words, to provide the same cover as today's EUR 55 billion the fund will require EUR 78 billion. Forget the idea that in its current vision SFR will only be sufficient to bailout two or three mid-sized European banks. We'll be lucky if it can bailout 1 or 2 of mid-sized European banks in 10 years time.