16/1/2014: Fresh Signs of Euro Area Banks Deleveraging Out of Global Growth

For some time now I have been pointing at the ongoing exits by the European banks from the rest of the world (obviously there are some exceptions)... Here's a reminder http://trueeconomics.blogspot.ie/2012/10/13102012-europes-banks-are-now-global.html

Now, more evidence trickling in:

And the process ain't over yet...

15/1/2014: BusinessInsider's Investment Ideas For The Next Decade

BusinessInsider is running a 10-year investment suggestions from some analysts...
http://www.businessinsider.com/best-investment-ideas-for-the-next-decade-2014-1#ixzz2qUatCHZj

Warning: my suggestion is at number 17.

I should put some disclaimers around this - in my view, one should aim to hold a diversified portfolio of investments, structured to match your life-cycle objectives and risk preferences, as well as reflecting income and wealth specifics, etc. Hence, my contribution should be looked at in this context, as food for thought...

The idea of 10 years-out outlook gave me a bit of a thought... and although I am not known for providing trading ideas, here are my 5 cents on 15 and 30 year horizons:

For the next 15 years: A basket of precious metals: Both monetary conditions and physical demand dynamics suggest that a non-speculative (cost-averaging-based) accumulation of these within a balanced portfolio will provide a reasonable long term hedge against upcoming risks and demand pressures. This is not a speculative bet, but a view that long-term, small fixed share of a balanced portfolio should be maintained in the gradually accumulated precious metals positions.

For the next 30 years: arable land with substantial water rights in Northern US and Central Canada. A combination of rising global temperatures, declining fresh water reserves and rising pressures on food production make it a compelling investment case. Opening up of the Northern Sea Route and generally increased accessibility of Northern Territories, coupled with stable institutional and legal environments are making it a good risk hedge for potential geopolitical risks that logically likely to accompany the aforementioned pressures.

15/1/2014: Things are fine... things are working...

On foot of disastrous (for euro area) long range forecasts from DG ECFIN (covered here: http://trueeconomics.blogspot.ie/2014/01/1412014-dg-ecfin-latest-long-range.html), Morgan Stanley latest forecast for the global economy is here:

H/T Fabrizio Goria @FGoria

2012 outrun: euro area = lowest growth
2013 estimated outrun: euro area = lowest growth
2014 forecast: euro area = lowest growth
2015 forecast: euro area = lowest growth on par with Japan

Unpleasant, to put it mildly... Meanwhile, here's some bragging about the great euro area achievements... obviously not to be confused with those stated above... via ESM Press Office:

@ESM_Press:
#ESM MD Klaus #Regling in hearing with EU Parliament Members, Strasbourg: lv/stream at 15:00 http://www.europarl.europa.eu/ep-live/en/schedule …
#Regling: I welcome this debate because I think transparency & discussion are essential ingredients for lively democracies
#Regling: not my role to defend troika, support overall eco. approach. €area faced existential crisis with no tools, so troika was set up
#Regling: I worked for #IMF & know well #IMF program design which was model for program of €countries under assistance
#Regling: our critics miss the point. GR, IR, POR, CY faced choice: buying time with #EFSF/#ESM program or collaps w/ adjustment overnight
#Regling: no #EFSF/#ESM program would have meant risk of leaving €area; polls show citizens of concerned countries want to stay in €area
#Regling: disagree that there is no democratic control for programs; troika advises, political decision is taken by elected governments
#Regling: In POR & IR even opposition parties at the time, which are today in government, committed to assistance programme
#Regling: decisions on #EFSF/#ESM financial assistance is for national gov/parl because risk is on national budgets
#Regling: am not minimizing the difficulties that the countries are facing, especially unemployment
#Regling: there are clear signs that our strategy is working, in Dec IRL & ES had successfully exited their programs.

Happy times... and -0.6-0.5+0.6+1.1 is just a fine, fine, fine arithmetic... cause you know... 'things are working'...

15/1/2014: Simple, but entertaining... a democratic elites 'score card'

Recently, I cam across the following highly simplified, but rather amusing graphic highlighting some differences between the US and Italy

It is, as I noted, a highly stylised and simplified sort of information. Nonetheless, it does make a valid point: why are European democracies top-heavier than other democracies?

And then I checked Ireland:

• Population 4.589 million (2012)
• Senators: 60 (76,483 persons per senator)
• Dail Eireann: 166 TDs (27,645 persons per TD)
• Ministers: 14 Ministers and 15 Ministers of State (158,241 persons per Minister)

Just for your bemusement, not for some scientific or even economic argument sake...

Note: Auto Blu references state cars and Carburante references cost of petrol per litre.

15/1/2014: Are Irish Family Benefits Really the Highest in the OECD?..

An interesting chart on public spending relating to families across the OECD states:

Ireland is a clear leader in terms of family supports. But the bulk of our lead comes from cash payments (second only to Lux). Which suggests that Irish families do not need another tax break or lower tax burden.

There is a problem, however, with this assessment. Here's why.

Per methodological note behind the chart (see here: http://www.oecd.org/els/family/PF1_1_Public_spending_on_family_benefits_Dec2013.pdf)

"Child-related cash transfers to families with children [include] …child allowances, with payment levels that …sometimes are income-tested (PF1.3); public income support payments during periods of parental leave (PF2.1) and income support for sole parents families." Which, obviously, means the chart is distorted by non-working parents allowances and payments.

Furthermore, "Public spending on services for families with children includes, direct financing and subsidising of providers of childcare and early education facilities, public childcare support through earmarked payments to parents (PF3.4), public spending on assistance for young people and residential facilities, public spending on family services, including centre-based facilities and home help services for families in need." Which largely does not apply to the majority of Irish families outside income-tested cases.

Finally, "Financial support for families provided through the tax system. Tax expenditures towards families include tax exemptions (e.g. income from child benefits that is not included in the tax base); child tax allowances (amounts for children that are deducted from gross income and are not included in taxable income), child tax credits, amounts that are deducted from the tax liability…" Some of these do apply to working families with children in Ireland.

Worse: "…tax advantages for married people as exists in, for example, Belgium, France, Germany and Japan are not considered to serve a ‘social purpose’, and are not included here (regardless of whether or not such measures are part of the basic tax structure). Only the value of support for children through such measures is included."

Lastly, it appears that data above is not adjusted for the size of families.

In other words, we have no idea as to where Ireland really stands in comparison to other countries in terms of subsidies/supports for working families...

15/1/2014: 2008 Guarantee was "fully justifiable": J-C. Trichet

Yesterday, the former head of the ECB, Jean-Claude Trichet, told the EU Parliament's Committee on Economic and Monetary Affairs that the Irish government had been correct to guarantee the banks in September 2008.

The guarantee, which ended up imposing onto the Irish taxpayers costs of EUR64bn or more (depending on how one calculates the full extent of banking measures applied, and excluding the payments on the Guarantee by the banks) was a "fully justifiable position given the very difficult circumstances [the Irish government] faced".

However, per Mr Trichet, Ireland has issued the Guarantee all on its own, based on the same advice as given to other countries. "The message from the (European) Central Bank to Dublin was the same as the message from the Central Bank to Germany, to Belgium, to France, and we were at the heat of the crisis saying clearly, beware. We know what happens after we had Lehman Brothers."

In fairness to Trichet, as he claimed yesterday, the ECB did warn on numerous occasions that prior to the crisis, there was a growing cost competitiveness gap across the euro area and that fiscal performance was insufficient for a number of countries in the region.

More on the story is here: http://www.irishtimes.com/business/economy/europe/ireland-s-bank-guarantee-was-justifiable-claims-trichet-1.1655216

One way or the other, the Trichet's testimony now opens up room for the Government to put into public domain the content of the controversial letters that Trichet wrote to Minister Lenihan back in 2010 as well as full correspondence between ECB and Irish authorities back in 2008. Let's see what advice was exactly given to Ireland by the ECB on the Guarantee and subsequently.


Update: H/T to Seamus Coffey's: the letters that are yet to be released relate to 2010 exchanges between Mr Trichet and Brian Lenihan.

However, we still do not know as to what exact advice was given to Mr Lenihan by Mr Trichet and the ECB before the Guarantee of 2008. As far as I am aware, back in September 2008 there was no official ECB position on any government issuing guarantees to cover the liabilities in their banking sector. Even after Ireland issued its guarantee, there was no such position publicly formulated. In fact, Irish Government notified the ECB, the Ecofin and the Eurogroup of its decision to guarantee the banks liabilities ex-post issuing the guarantee. It did so at the same time as making the Guarantee public. The closest we know of that the Government came to potentially receiving any wisdom from the ECB of the Guarantee could have been during a phone call between Mr Trichet and Minister Lenihan that took place a week before the Guarantee issuance. As far as I am aware, we do not know the exact contents of this conversation.

14/1/2014: Irish M&A activity in 2013

Irish M&A values rose strongly in 2013, according to the Experian data.

• "Total number of Irish Mergers and Acquisitions and Equity Captial Market deals in 2013 was 254 - a decline of 15.1% from the 299 deals announced in 2012". 
• "The total value of deals for the year, however, increased significantly led by a spike in the number of mega (€1bn plus) deals. Transactions worth €38.590bn were announced in 2013, up by 39.1% from 2012’s €27.734bn worth of deals."
• Core mega-deals were split between pharma manufacturing and financial services
• "The Republic of Ireland represented approximately 2.4% of the total volume of all European transactions in 2013, and accounted for 4.9% of their total value. In 2012, the Republic of Ireland featured in 2.9% of European deals and contributed 3.6% to their total value."
• There were 37 large deals (over €120mln) announced in 2013, up by 32.1% on 2012’s total of 28 transactions; the twelve large deals announced in Q4 represented the busiest quarter in the large deals value segment since Q4 2006. Large deal values were up from €24.687bn in 2012 to €35.846bn in YTD 2013, a rise of 45.2%. The largest announced deal in 2013 was Perrigo Corp’s acquisition of Elan Corporation Plc for US$8.6bn.
• Mid-market (€12-€120mln) deal activity declined; 43 transactions were announced, down by 35.8% from the 67 deals announced in 2012. The aggregate value of mid-market deals fell by 34.4%, from €2.803bn to €1.840bn. Notable mid-market deals in 2013 included Dublin electronic payments business Payzone sell Cardpoint Ltd, to Houston-based Cardtronics Inc. for €119mln.
• The number of small deals (under €12mln fell by 11.1% on 2012’s figures; down from 54 to 48 transactions. The aggregate value of small transactions also fell - by 26.3%, from €243mln to €179mln.
• Largest by sector was - manufacturing. In 2013 accounted for 43.3% of deals; however, deal volumes here were down by 27.1% (from 150 in 2012 to 110 in 2013). 
• Second most active sector: wholesale, retail & repair, activity declined by 41.6%.
• Post and telecommunications sector saw 114% upturn in activity. 
• Social and personal services sector activity rose 76.5%. 
• Research and development sector activity was up 53.3%.  

Internationally:
"Europe saw a slight reduction in transaction volume in 2013 (from 10,500 to 10,476 deals), but an upturn in deal value, from €754.7bn in 2012 to €786bn, an increase of 4.1%."

"North American deal volumes were down by 28.7% (from 8,283 deals in 2012 to 5,908 in 2013), but the aggregate value of transactions was up by 1.3% year-on-year, to €939.7bn. North America returned strong activity in its manufacturing and information technology sectors in 2013."

"Asia-Pacific region ...volume was down 25.2% (from 8,822 deals in 2012 to 6,602 in 2013), without the associated increase in value recorded in the US and Europe (total deal value slumped from €616.9bn in 2012 to €385.6bn in 2013)."

See more on the subject here: http://www.experian.co.uk/assets/consumer-information/white-papers/corpfin/cf-monthly-review-dec-2013.pdf

A chart to illustrate:

14/1/2014: DG ECFIN latest long-range forecasts for euro area, 2014-2023

Some interesting, although abysmal, forecasts from DG ECFIN on euro area's growth prospects out through 2023. Original paper is linked here.

Few charts of note with my comments:

Total factor productivity growth in Euro area... three regimes: decline in 1970s, gradual and shallow recovery in 1980s-1990s, collapse in 2000s and early 2010s, and now expected shallow recovery to below 1% trend in 2015-2023... In brief - abysmal...

Subsequently, steady decline in TFP relative to the US, from levels already below those in the US in 1995 (ca 85% of the US levels back then) to some 25% lower than the US into 2023... Meanwhile, physical capital share is declining less dramatically and is remaining close to that found in the US... which implies that we are witnessing in the case of the euro area increasing relative physical capital intensity of production compared to tech and human capital intensity?..

Notice how the crisis effects on output growth are 'permanent' - through 2023 forecasts, the euro area is not expected to regain the rate of growth in output, let alone the levels of output consistent with pre-crisis trends. That is ca 15 years of 'lost decade' (obviously subject to forecast uncertainty) and a gap of ca 20% of GDP... and this gap will remain beyond 2023 (unless one to dream up a scenario of a discrete jump in GDP of ca 20% comes 2024...)

 Now onto US-euro area comparatives. These speak for themselves.

Ugly prospects for the euro area, to put it mildly.

And a summary of that conclusion:

13/1/2014: Seeking MEPs support for legacy debt resolution?

Today, Irish Times is covering the intention of the Minister Noonan to seek support for a retrospective debt deal for Ireland from the EU MEPs. Here's the full article: http://www.irishtimes.com/news/politics/noonan-to-seek-meps-support-for-debt-relief-over-banks-1.1652911

Couple of thoughts in relation to this intention:

1. This is the 7th year since the ill-fated banks guarantee that started the process of transfer of banking sector losses away from (some) investors in the banks (majority of unsecured and all secured and senior bondholders)  to the taxpayers. This, it appears, is the first instance in which the Irish Government is officially attempting to enlist support for the retroactive resolution of these transfers from the EU MEPs. Why? The Ireland Says No campaign of ordinary citizens and residents of the state have requested such assistance in a number of meetings with the MEPs. People like myself, whenever asked to brief the MEPs on the issues relating to the banking crisis have done so on a number of occasions. Irish Government, it seems, is only now coming around to a realisation that having MEPs support can be of value in addressing the problem? Why? I spoke to the ECON committee members some 6-8 months ago and asked them to support Ireland's efforts. Why is the Irish Government only now officially attempting to do the same?
2. Per article: "The argument that Ireland’s significantly high debt to GDP ratio of almost 120 per cent means that it needs further debt relief has emerged in recent months as a key strand of the Government’s campaign to secure support on legacy bank debt." Why? Sustainability of our debt has been , allegedly, tested by the Department of Finance, by the Central Bank, the Troika etc, and yet none of these entities and organisations ever once voiced any serious concern with sustainability of debt. How can the same Government that continues to claim that everything is sustainable, that Ireland is in a recovery, that we will repay every red cent of our debts etc etc etc now turn around and credibly claim that "it needs further debt relief"? What has changed "in recent months" to alter Government position? Did Government alter its position?
3. In June 2012, Irish Government announced that it has reached - claiming its own effort to credit - a 'seismic deal'. There were no qualifiers used, no caution given, no room for 'may be it won't happen' doubts allowed. The deal was the deal and that was it: Ireland was to get retroactive debt relief. Since June 2012, this 'seismic' deal was thrown like a proverbial banana peel into every gathering of voices doubting the Government achievement or debt sustainability dogma. And now, is Minister Noonan finally admitting there is no deal? Because if the deal is just a matter of time - an 'when' not an 'if' - and has only to wait until the SSM comes into force, then why does Minister Noonan need the MEPs support?

Lastly, as the readers know, this blog position has been that Ireland's total economic debt levels (household, Government and non-financial corporate, combined) are not sustainable. Non-sustainability  of debt in the context of my arguments always involved the view that Ireland is facing a choice: either fund current levels of debt and face long term structural collapse of growth in this economy, or we will need to restructure our debts. In terms of restructuring our debts, I have consistently suggested that the best target would be banks liabilities. The opposing side in the argument always put forward the planned/projected declines in debt/GDP ratio starting with 2014 as a sign of debt sustainability. the cost of such 'reductions' in debt liabilities on the economy (growth and investment effects) and society (health, psychological costs, social costs etc) never phased those who argued that the debt is sustainable. The Government has expended significant effort attempting to argue against the view that our debt is not sustainable. Is the same Government now directly agreeing with the positions they disputed? Are they really saying that we are facing a risk to our debt sustainability?

Setting aside the above issues, if Minister Noonan is indeed committed to seeking MEPs support for a retroactive debt relief for Ireland in relation to the debts related to our banking crisis, I am happy to help in any way I can. it's been long (too long) overdue.

12/1/2014: Icelandic Banks Crisis: Failure to Enforce?

A detailed account of the Icelandic crisis and the failure of regulatory enforcement (not necessarily of regulatory easing) in propelling risky behaviour by the banks: http://www.voxeu.org/article/gambling-resurrection-iceland

11/1/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

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


Amazing collection of photographs from Hong Kong by Alex Ogle, AFP. http://blogs.afp.com/correspondent/?post/Hong-Kong-squared%3A-Instagramming-a-region

His Instagram page is here: http://instagram.com/alex_ogleOne

Ogle's photographs document one of the most diverse cities in the world. And diversity is best measured by language differences, the only metric that is relatively free from the problem of identification. Here's an interesting study mapping lexicological distances between European languages:
http://elms.wordpress.com/2008/03/04/lexical-distance-among-languages-of-europe/
Sadly, the mapping is incomplete, including some relatively large (by the visual taxonomy) languages, such as Friulan (300,000+ users).


A promising exhibition coming to Project Arts Centre: http://projectartscentre.ie/event/eva-kotatkova/ February-April 2014 featuring joint collaboration between Eva Kotátková and Dominik Lang. The exhibition is preceded by a solo show at the Cube by Eva Kotátková starting from January 23rd.

Here's an example of Kotátková's conceptualism at work:

And here's an example of Dominik Lang's work: Sleeping City, 2011 installation from Czech and Slovak Republic Pavillion, 54th Venice Biennale

Recent North American Big Freeze storm has generated loads of hoax photographs and mis-labeled and mis-dated reprints of past photographs. But some real images are truly stunning. Here are some examples, from Chicago: http://galleries.apps.chicagotribune.com/chi-140108-otherworldly-cold-weather-chicago-pictures/
Taking us from stunning…

… to ugly…

… to outright frightening…

While on the theme of cold and winter, interesting photography - both techniques used and compositional approaches - from Maroesjka Lavigne
http://www.maroesjkalavigne.be/fotografie/island/

Cold is hardly a descriptor for the series of Picasso's linocuts, representing all plate stages, acquired by by the  British Museum. The set covers both finished prints and artist's proofs for his "Still Life under the Lamp" (image next) and "Jacqueline Reading", with both linocuts created in 1962 when Picasso was 80. The real value of the set is that is shows all stages of linocuts evolution from the first state - an occasion so rare that no other museum in world currently has in its collection a complete set. There are nine progressive sets of states for the "Still Life under the Lamp" alone and four proofs of "Jacqueline Reading".

Both sets are on the show in Room 90 at The British Museum through 6 May 2014. More information here: http://www.britishmuseum.org/about_us/news_and_press/press_releases/2014/picasso_linocuts.aspx

11/1/2014: Individualism v Collectivism: Dynamic Effects of Culture on Innovation & Growth

A few years old, but very good paper: "Culture, Institutions and the Wealth of Nations" by Gorodnichenko, Yuriy and Roland, Gérard (September 2010, NBER Working Paper No. w16368: http://ssrn.com/abstract=1678911)

Based on an endogenous growth model with cultural variable the paper "predicts that more individualism leads to more innovation because of the social rewards associated with innovation in an individualist culture. This cultural effect may offset the negative effects of bad institutions on growth. Collectivism leads to efficiency gains relative to individualism, but these gains are static, unlike the dynamic effect of individualism on growth through innovation."

Empirical findings: "Using genetic data as instruments for culture we provide strong evidence of a causal effect of individualism on income per worker and total factor productivity as well as on innovation. The baseline genetic markers we use are interpreted as proxies for cultural transmission but others have a direct effect on individualism and collectivism, in line with recent advances in biology and neuro-science."

And robustness checks: "The effect of culture on long-run growth remains very robust even after controlling for the effect of institutions and other factors. We also provide evidence of a two-way causal effect between culture and institutions."