6/1/2014: Services PMI: December 2013

Markit/Investec Services Sector PMI for Ireland for December 2013 is out today, showing accelerated pace of growth in the sector. Per release: "The rate of growth in Irish service sector activity picked up at the end of 2013 as strengthening economic conditions contributed to a sharp rise in new business. The rate of job creation also accelerated during the month. Part of the strength in new orders was reflective of output price reductions, with discounts offered in spite of a faster increase in input costs."

The release goes on to note that "The rate of expansion in new business quickened for the third month running and was the sharpest since February 2007."

Overall, Q1 2013 average PMI in Services stood at 54.2,basically identical to 54.27 average for Q2 2013. This rose to 58.67 in Q3 and to 59.67 in Q4 2013. Year on year, Q4 2013 is now up from 56.0. Q4 2013 average is the strongest in 4 years running.

The PMI index is now above 50.0, adjusting for statistical significance, for 7 months in a row.

Charts to illustrate:

More analysis to follow, so stay tuned.

5/1/2014: Best Books of 2013

My book of the year for 2013 choice is covered on BusinessInsider here: http://www.businessinsider.com/wall-streets-reading-list-2014-1#constantin-gurdgiev-trinity-college-dublin-europe-the-struggle-for-supremacy-from-1453-to-the-present-by-brendan-simms-11

Hint: it is about euro area and Germany...

5/1/2014: An interesting case study in one University transformation

An interesting article in the Slate about the use of new teaching platforms and strategies to increase student graduation rates for part-time students and boost financial position at one US university:
http://www.slate.com/articles/life/education/2014/01/southern_new_hampshire_university_how_paul_leblanc_s_tiny_school_has_become.html#!

It is worth (in light of acrimonious nature of debate about academic and teaching models in Ireland) to note that I do not suggest this is a template for transforming or reforming the entire Irish system of higher education.

When you cut through the opening lines, you get the core point of the change:

"“The business models implicit in higher-ed are broken,” he says. “Public institutions will not see increasing state funding and private colleges will not see ever-rising tuition.”

His solution was to tackle what colleges were doing poorly: graduating students. Half the students who enroll in post-secondary education never get a degree but still accumulate debt. The low completion rate can be blamed partly on the fact that college is still designed for 18-year-olds who are signing up for an immersive, four-year experience replete with football games and beer-drinking. But those traditional students make up only 20 percent of the post-secondary population. The vast majority are working adults, many with families, whose lives rarely align with an academic timetable.

“College is designed in every way for that 20 percent—cost, time, scheduling, everything,” says LeBlanc. He set out to create an institution for the other 80 percent, one that was flexible and offered a seamless online experience."

5/1/2013: Euro periphery in CDS markets: 2013

One of the core improvements in the Irish economic conditions over 2012-2013 period relates to the decline in Government bonds yields and associated reduction in the Credit Default Swaps spreads (CDS spreads). In particular, bonds and CDS spreads have been referenced often enough as showing Ireland's 'divergence' from the euro area peripherals.

Here are some stats and charts based on CDS data and implied cumulative (5-year) probability of default (CPD) for the euro area peripheral states:

Summary table first, showing changes in CDSs and CPDs over 2013

The table above shows that Irish CDS performed well, but not as strongly as those of all other peripheral states, save Portugal and Italy. In fact, Ireland CDS decline over 2013 at -81.8 was slightly slower than the average for Italy, Portugal and Spain (-87.3), while our CPD decline of -5.16 percentage points was slightly faster than the average CPD decline for Italy, Portugal and Spain (-5.02 percentage points). The reason for the latter outperformance is made clear in the last bullet point of this post.

In absolute terms, however, Irish CDS are signalling stronger sovereign performance when it comes to risk of default:

But Spain is catching up in terms of CPD and in terms of CDS spreads.

Here is Ireland's progression in 2012-2013 showing that most of the improvement was priced in 2012, rather than over the last year:

And looking at the year-end position puts forward several core points about our sovereign debt risks:

• Irish CDS have shown strong declines since the beginning of 2012
• Irish CDS declines do not warrant a conclusion that we are distinct from other peripheral countries. Instead, the conclusion should be that we (alongside Spain and Italy) are distinct from Portugal and Greece. This is intuitive, given that Italy did not have to raise bailout funding, while Spain raised bailout funding solely for banks recapitalisations. Recall that Ireland was tipped into the bailout by the banking crisis and that absent banking crisis, we could have, potentially, sustained Exchequer funding without the need to resort to a bailout. This is not to downplay very substantial deficit pressures that we had ex-banks. But it is to point out that we are different from Portugal and Greece, both of which had to raise funds to shore up almost exclusively sovereign funding.
• Irish CDS since the beginning of 2012 are carrying heavier weighting on probability of default estimates: in the last two charts, our CPD is priced along the mid envelope of (CDS, CPD) quotes, while Greece implies underpricing of the probability of default (along the lower envelope). Our probability of default is slightly over-estimated compared to Portugal and Spain, but is in line with Italy. This potentially relates to the point raised above in relation to speed of our CPD declines over 2013: we might be experiencing an over-due repricing (very slight) in the relationship between the CDS levels and implied estimates of the probability of default.

Less drama-prone interpretation of data than what the thesis of 'Ireland has decoupled from the peripherals' suggests...

4/1/2014: Small downgrade for Russia in ECR survey

Euromoney Country Risk survey update for Russia out today is not a pleasant reading. Here are the details:

Overall score is down, signalling rising risk:

The risk factoring is still more benign than for a number of EU and some Euro area countries:

Recent trend is relatively stable, with some mild improvement on mid-2013:

But sub-scores and sub-factors are largely pointing South:

Overall, not a nice change... All scores in the above below 5.0 are of concern and those below 3.75-4.0 are of significant concern.

4/1/2013: Irish Private Sector Deposits: November 2013

Central Bank of Ireland published series of data today covering deposits and credit in Irish banking system through November 2013. Here are the highlights on deposits. Credit side was covered in the previous post here: http://trueeconomics.blogspot.ie/2014/01/312013-irish-private-sector-credit.html

Here, we cover deposits and loan/deposit ratios:

• Private sector total deposits fell in November 2013 to EUR180.2 billion from EUR180.417 billion in October, but deposits are up EUR13.696 billion (+8.23%) y/y. 3mo average through November 2013 is up EUR13.259 billion on a year ago.
• However, private sector non-financial deposits (deposits by households and non-financial corporations) show much weaker performance than total deposits, rising only EUR1.357 billion (+1.11%) y/y in November and up just EUR969 million (+0.79%) year on year on 3mo average basis.
• The main reason total deposits are up is down to Insurance corporations, pension funds and other financial intermediaries booking a rise of EUR12.339 billion in deposits in November 2013 compared to November 2012.
• Households' deposits are down EUR1.013 billion (-1.1%) y/y in November and down EUR567 million compared to October 2013. 3mo average through November 2013 is down EUR975 million (-1.06%) y/y.
• Non-financial Corporations' deposits are up EUR2.37 billion y/y in November (up EUR1.944 billion on 3mo average basis) and are up EUR99 million on a monthly basis.

With private non-financial sector (households and NFCs) loans at EUR188.892 billion (down 0.59% y/y and down 0.79% m/m) and private non-financial sector deposits at EUR123.731 billion (up 1.11% y/y and down 0.38% m/m):

• Loans to deposits ratio in November 2013 stood at 153%, basically unchanged since August 2013 and marking the lowest level since October 2003.

Note: The data for both deposits and loans is  severely distorted by changing composition of banking institutions (exits by a number of banks from the market) and by regulatory changes (inclusion of new institutions, e.g. credit unions).

3/1/2013: Irish Private Sector Credit: November 2013

Central Bank of Ireland published series of data today covering deposits and credit in Irish banking system through November 2013. Here are the highlights.

Overall, household credit outstanding at the end of November 2013 stood at EUR107.763 billion, down EUR1.354 billion on October 2013 and up EUR2.547 billion on November 2012. Compared to November 2011, outstanding credit to Irish households is down EUR3.069 billion (-2.77%). On a more stable, 3mo average basis, Q4 2013 average credit outstanding was EUR2.886 billion ahead of the same period in 2012.

Monthly decline in overall credit supplied to Irish households can be broken down into a decline of EUR1.226 billion in loans for house purchase, EUR119 million decline in consumer credit and EUR9 million decline in other loans. In other words, monthly decline was broad across all three categories of household credit.

Year on year, credit to households fell EUR1.336 billion for consumer credit, and is down EUR110 million for credit extended via other loans. There was a rise of EUR4.680 million for loans for house purchase. However, this increase itself is fully accounted for by a massive EUR6.233 billion jump in credit for house purchase extended in just one month: December 2012. Since December 2012, however, credit remained slightly lower, averaging EUR 83.978 billion over 11 months of 2013 as compared to EUR84.973 billion back in December 2012.

In summary: house purchase loans are slightly down over the 12 months from December 2012 through November 2013, Consumer credit loans are down over the same period, and other loans are also down. In all three cases, declines were moderate, implying that over December 2012-November 2013, overall credit to Irish households declined from EUR111.076 billion to EUR107.763 billion.

Compared to H1 2008:

• Household credit overall was more than 30% down in November 2013 compared to H1 2008 average;
• Credit for house purchases was more than 32% down in November 2013 compared to H1 2008 average;
• Consumer credit was more than 39% down in November 2013 compared to H1 2008 average;
• Other loans were 139% up in November 2013 compared to H1 2008 average.

Non-financial corporations total credit outstanding in November 2013 stood at EUR81.129 billion, down EUR143 million on October 2013 and down EUR3.676 billion on November 2012. Q4 average stock of credit to non-financial companies in Ireland declined in Q4 2013 y/y by some EUR3.734 billion (-4.38%). Compared to November 2011, credit to NFCs in Ireland is down EUR7.225 billion (-8.18%). More than half of this drop took place over the last 12 months.

In summary: credit to NFCs extended in the Irish system is down y/y in November and over Q4 2013 overall and the rate of decline did not decline over the last 12 months, compared to previous 12 months.

Compared to H1 2008:

• Credit to NFCs overall was more than 50% down in November 2013 compared to H1 2008 average.

Next post will cover deposits and loan/deposit ratios.

3/1/2013: BRIC PMIs signal nasty end to 2013

Via Markit Economics:

The above shows the problem with the BRIC grouping: general lack of growth momentum, albeit driven by two different sets of forces.

For Brazil and Russia: domestic economic expansions are starting to fizzle out as debt (Brazil), public spending (Brazil) and consumer spending (Russia) are no longer capable of sustaining previous rates of growth. For India and China, growth is also a challenge, but here core drivers are lack of consumer demand growth in advanced economies (China), too much debt and late stage development of assets bubble (China), reduced capacity for services exports growth (India) and dysfunctional domestic markets (China and India). Note that India's relative outperformance in the group comes on foot of longer and deeper contraction in more recent past.

This is uglier than the Euro area effects when it comes to global growth. Core point is: who will be driving growth around the world in 2014?.. Unless the above momentum is reversed, the answer to that question is: no one in particular...

2/1/2014: Markets, Invisible Hand & Social Ethics

A fascinating paper on the role that markets may play in influencing our social values and shaping our social ethics. Bartling, Björn and Weber, Roberto A. paper "Do Markets Erode Social Responsibility" (November 29, 2013. CESifo Working Paper Series No. 4491. Available at http://ssrn.com/abstract=2363888) "studies the stability of socially responsible behavior in markets".

The authors develop a laboratory 'experimental' approach "in which low-cost production creates a negative externality for third parties' or in other words, the choice of low cost production is associated with imposition of cost on third party. However, the experimental mechanism also includes and alternative production "with higher costs" to the main parties, but which "entirely mitigates the externality". So, in other words, the contracting parties can have a choice:
1) Opt for lower cost technology at a cost to a third party, or
2) A lower higher cost technology that has no additional cost to a third party.

Obviously, choice of (2) implies stronger social values, whilst choice of (1) implies rational optimisation in normal market setting.

"Our data reveal a robust and persistent preference for avoiding negative social impact in the market, reflected both in the composition of product types and in a price premium for socially responsible products. Socially responsible behavior in the market is generally robust to varying market characteristics, such as increased seller competition and limited consumer information. Fair behavior in the market is slightly lower than that measured in comparable individual decisions."

This is really, really interesting. More specifically, the core findings are:

"In our market, competition does drive down overall prices" in other words, it delivers economically efficient outcome, "thus yielding greater relative surplus for consumers at the expense of firms".

However, "there is no detrimental effect of increased competition on the degree of concern exhibited toward externality-bearing parties outside of the market. In fact, the market share of products that yield no externality increases slightly under increased firm competition, relative to our market baseline, as does the price premium for the socially responsible product. Thus, instead of decreasing the expression of social responsibility, increased market competition in this case seems to have, if anything, the opposite effect."

The puzzling bit is why this outcome arises in the setting where the parties know they are facing higher cost by accepting the need for concern for third parties? "One possible interpretation for this finding is that, as competition yields increased surplus for consumers, they become more willing to bear the costs associated with mitigating the externality for third parties." In a sense, greater efficiency funds 'purchases' or 'consumption' of social justice.

And what about giving parties more information to attempt to steer their decisions in the desired (presumably socially) direction?

"…we consider the possibility that consumers may have limited information about the degree of externality produced by available products, but have the ability to learn about such product characteristics. This reflects the fact that many consumers do not know which firms’ products are, for example, environmentally or socially harmful, but that such information is often available if a consumer chooses to acquire it. We study both a case in which the information is free to consumers and one in which acquiring it involves the consumer incurring a small cost. In both cases, we find that the need for consumers to actively acquire product information regarding social impact has only a small effect—though slightly larger when acquiring information is costly—on the expression of social responsibility in the market."

The invisible hand of the markets, it seems, is rather kind to ethical concerns, when the markets reach at least some level of prior efficiency...

2/1/2014: Risk, Regulation, Financial Crises: A Panacea Worse than the Disease?

An interesting - both challenging and revealing - piece on 'preventing the future crisis' via http://www.pionline.com/article/20131223/PRINT/312239993/preventing-the-next-financial-crisis-requires-regulatory-changes.

Few points worth commenting on:

Per article: "…Record investment management industry profits as well as record market highs belie the fact we remain truly exposed to complex financial products and services not yet fully restrained since the crisis of 2008." As a logical conclusion to this, of the "three things in particular should concern all of us who are stakeholders in the finance industry as we move into the new year" the first one is:

"…complacency that another crisis can't happen because we have fixed the gaps in regulation."

So far nothing to argue with. Financial innovation (aka a path of increasing complexity) remains the main source of margins uplift in the industry. As long as that is the case, we are going to have less transparency, lower capacity to price risks and, as the result, greater fragility of the system, especially with respect to tail events.

"Nothing could be further from reality and the list of unfinished regulatory business is long. " And the article rolls on with a brief list of reforms and changes yet to take place. Alas, desired or not, these changes are hardly going to bring about any significant change in the way the sector operates. The irony is: the article warns against complacency and then complacently assumes (or even postulates - take your pick) that implementing the list of regulations and reforms supplied will resolve the problem of 'gaps in regulation'.

Really? Now, wait a second. We have a problem of 2 parts:
Part 1: complexity of system is high.
Part 2: complexity of regulation lagging complexity of system.

Matching Part 1 to Part 2 by raising complexity of regulation can only address the problem of risk buildup if and only if Part 1 is independent of Part 2. Otherwise, rising complexity in 2 can lead to rising complexity in 1 and a race in complexity.

Still with me? That is a major problem of the financial system as we know it since at least 19th century. The problem is that rising complexity of regulation is driving financial innovation probably as much as the need for higher margins. The race to match Part 1 and Part 2 above is a loss-making game for regulators, and thus, for economies at large.

If that is at least partially true, the argument should not be about regulations that are yet to be implemented, but rather about which regulations can help reducing complexity (and increase risk management effectiveness) in both Parts 1 and 2. We are still missing that argument, having departed firmly on the path of reasoning that suggests that higher complexity of regulation = higher system ability to absorb shocks. More dangerously, we are seemingly traveling along the line of logic that suggests that higher complexity of regulation = higher ability of system to 'prevent' shocks.


The article goes on to list another major source of risk: "investment management industry overconfidence that it is back in control". Specifically, "We in the industry perceive ourselves as having rectified our inability to see building counterparty, leverage and liquidity risks, masked through Federal Reserve policy by the unorthodox government support of financial markets and the nearly 10,000-point move in the Dow Jones industrial average since the financial crisis."

In reality, "Systemic risks are still building, undetected. Transparency is not increasing and the unwillingness or inability to remove government support in the markets is unprecedented."

Guess what? If you assume that more regulation + more complex regulation = better risk management, you are going to become complacent and you are going to get a false sense of security, control. This brings us back to the first point above.


And now to the non-point point number 3: "Finally, we in the investment management profession seem totally nonchalant about the current state of our existing regulatory system. It is alarmingly outdated, under-resourced and no match for the complexity of markets in the 21st century. To be clear, we are not talking about the new regulations addressing the crisis, rather the basic requirements of our present regulatory structure."

Back to point one above, then, again…


The reason I am commenting on this article is precisely because it embodies the very poor logical reasoning that is leading us to structure regulatory responses to the crisis in such a way that it will assure the emergence of a new crisis. But the real kicker is not that. The real kicker is that the very belief that regulatory system based on matching complexity of regulated services can ever be calibrated well-enough to assure stability of the system is a belief suffering from gross over-extension of faith.

A constant race to increase complexity of the system will lead to system collapse. 

2/1/2014: Manufacturing PMI for Ireland: December 2013

Manufacturing PMI is out for Ireland today, per Markit/Investec release: "The Irish manufacturing sector ended 2013 on a positive note as growth of output and new orders gained momentum in December. Meanwhile, the current sequence of job creation was extended to seven months. On the price front, input cost inflation picked up slightly while firms raised their output prices for the fourth month running."

Please note: since Markit/Investec no longer release actual numbers for subindices (e.g. employment or orders or export orders, etc), we have to take these claims on faith. For example, the release claims increased export orders from China as one of the drivers of the new business improvement. Yet Irish exports to China are low and it is hard to see how this source of uplift can register as a driver in the overall data, unless the survey participation is severely skewed toward some specific MNCs with remaining significant exposure to exports to China.

Note: Good exports to China from Ireland in January-October 2013 stood at a miserly EUR1.642 billion, down from EUR1.885 billion recorded in the same period of 2012 and representing just 2.26% of our total goods exports in January-October 2013.

Further per release: "The seasonally adjusted Investec Purchasing Managers‟ Index® (PMI®) – an indicator designed to provide a single-figure measure of the health of the manufacturing industry – rose to 53.5 in December from 52.4 in November. This signalled a solid improvement in business conditions, and the seventh in as many months."

The last claim is a matter of interpretation. 1.1 points gain in the PMI reading is the 4th largest in 12 months of 2013 and 7th largest in the last 24 months. However, the index reading in December is the 2nd highest in 2013 and the 3rd highest over the last 2 years, which is, undoubtedly, a good thing.

Two charts and dynamic trends to illustrate headline index changes:

In terms of overall PMI, Manufacturing activity averaged at 51.1 over the last 12 months, so the current reading is above that. However, December reading is below the 3mo average for November-December 2013 which stands at 53.6.

Q1 2013 average PMI for Manufacturing was 50.13, and this fell to 49.33 in Q2 2013, before rising to 51.9 in Q3 2013 and to a healthy 53.6 in Q4 2013.

Overall, we are now into third consecutive month with the PMI for Manufacturing index statistically above 50.0. Another good thing.


Full Markit/Investec release is here: http://www.markiteconomics.com/Survey/PressRelease.mvc/119915a961bd40caa4218d77234245e2

2/1/2014: 'Rip-off Ireland' and Local Authorities' Rents

H/T to @SeamusCoffey for flagging the following chart from the CSO:

Two things of note:

1. The 'deleveraging' of costs in Ireland (remember the 'competitiveness gains' meme?) is obviously not touching state-controlled rents that remain at the levels compatible to those in early 2008, while private rents index is running around early 2006 levels; and
2. Since 2011 - when the current Government (led by the 'rip-off Ireland' opponents from the FG) came to power - Local Authority Rents are back on the rising trend.

Here is the same CSO data charted in its full glory and rebased to 100 = average for 2003

• Actual Rentals (Housing and Mortgage Interest inclusive) down 8.28% in Q4 2013 compared to Q1 2007 average
• Actual Rents Paid by Tenants are down 2.32%
• Private Rents are down 6.61%
• Local Authority Rents are up 25.97%

You know... 'protecting the worst-off' thingy etc, etc, etc...