6/2/2014: Euro Area Economic Conditions and Expectations: Ifo

The Ifo Indicator for the economic climate in the euro area for Q1 2014 is out today. Some positives, some negatives.

Overall index of Economic Climate in the  Euro Area rose from 114.7 in Q4 2013 to 119.9 in Q1 2014. Which is good - we are at the highest levels since Q3 2007. 

All improvement is due to improved assessment of the current situation: Present Situation index is up at 120.3 from 106.3 in Q4 2013. This is the highest reading for the index since Q4 2011. But if you think this is 'as good as it gets' we have some room to climb up, then, since the sub-index historical average is 126.9. With Germanic precision, the Ifo characterised the latest development as "far less unfavourable assessments of the current economic situation". Not a 'positive' or a 'favourable', but 'less unfavourable'.

Meanwhile, "the economic outlook for the next six months remains unchanged at the highest level for around three years. The economic recovery should become more marked in the months ahead." This references the fact that Expectations for the Next 6 months index is stuck at 119.7 in Q1 2014, same as in Q4 2013. Which is significantly above historical average of 94.7. 

But expectations mean little. One bizarre quirk is that crisis-period average for the series is 95.9, which is above the historical average. Which, obviously, begs a question: Just how much does the forward optimism track the future outcomes? Apparently, not much. There is a negative historical correlation of -0.18 between expectations and current conditions assessments, so in a sense expectations just tell us that, on average, business leaders expect improvement in the future when conditions are poor today. I showed before that once you check for lags, 6mo forward expectations do not do much to forecast outcomes registered for current conditions 6 months after the expectations are issued. And I have tested not just point lags, but also 6mo averages. The result is still the same: all expectations are telling us is that when things are terrible today, businesses expect them to improve tomorrow. This is like telling us that growth conditions are mean-reverting. Which is, of course, the case. Even in North Korea.

Expectations gap to current conditions has fallen, as current conditions improved. The gap now stands at 99.5 down from 112.6 in Q4 2013. The gap confirms what we learned from expectations series. Average expectations gap during the crisis is 153.8 and historically it is 88.5, which shows that businesses form much more optimistic forward expectations during the crisis period than in other periods. 

Some charts:

Few more points, this time straight from the Ifo release: 

"Germany, where the very positive economic situation continued to improve, received the best assessment. More economic experts were also positive about the current economic situation in Austria. Latvia, which introduced the euro as a currency at the beginning of the year, and Estonia are also among the few countries in the euro area where the current economic situation is deemed satisfactory overall. The present economic situation in Greece, Italy, Portugal, Spain and Cyprus, by contrast, barely changed compared to the last quarter and remains at a crisis level. In Belgium, Ireland and The Netherlands the economic situation improved somewhat compared to last quarter, according to WES experts, but remains "unfavourable" as in Finland and France.

Expectations for the next six months remain at a high level in almost all euro area countries apart from Greece and France, where the experts surveyed were less positive than three months ago. Cyprus is the only country in which experts expect the economic situation to deteriorate further.

The forecast inflation rate for the euro area for 2014 of 1.5% is slightly below the estimated rate for 2013 (1.7%). While experts expect the short-term interest rates to remain stable for the next six months, a greater number of survey participants expect long-term interest rates to rise. The majority of economic experts believe that the euro is overvalued against the US dollar and the Japanese yen. They expect the US dollar to appreciate against the euro over the next six months."

So good news: the incoming freight train of rising rates is yet to reach the tunnel. The bad news is that the 'periphery' is still stuck in the said tunnel, while the 'soft core' of Belgium, Ireland (welcome to the club) and the Netherlands is barely clawing its way toward the exit. The other good news is that the incoming commuter train of exchange rates (effect on exports) is slightly delayed (we can expect some depreciation of the euro before interest rates hikes hammer us back into the FX corner).

6/2/2014: Dependency Ratios Out to 2050

You've heard many analysts talking about the 'demographic dividend' for Ireland as if young people (we still have more of them than other countries in Europe) can be locked safely within the shores of this island. But supply of emigrants from this (and any other country) is driven, in part, by the demand for younger workers in the labour forces around the world. And here things are rather testy:

So that story of the 'demographic dividend'... do we have a policy plan for protecting or securing it here in Ireland? one can only keep hoping... 

4/2/2014: More spin needed, urgently... as Trust in Government sinks

Edelman Trust Barometer 2014 was published last week. Here is the link to the full presentation: http://www.slideshare.net/edelmanireland/edelman-ireland-2014-trust-barometer

And a couple of summary slides:

 Global trust scores:

• NGOs lead with total trust 64% in 2014 up on 63% in 2013
• Business is second with 58% in 2014 unchanged on 2013
• Media on behind Business with 52% trust, down from 57% in 2013
• Government least trusted, with 44% in 2013, down from 48%.

Meanwhile in Ireland, things are even more stark:

• NGOs trust down from 63% in 2013 to 58% in 2014 - now below the global levels from previously global average levels
• Business is again second, with trust falling from 44% in 2013 to 41% in 2014 - both below global averages
• Media is in the third place with trust declining from 45% in 2013 to 37% in 2014 survey - both below global averages
• Trust in Government in Ireland sunk to 21% in 2014 (less than 1/2 of the global average) and down from 32% in 2013. 

Trust index overall has dropped from 46 to 39 between 2013 to 2014 - a massive drop from already low levels:

 And the perceived quality of institutions is declining from 2009 on for the Government:

On 2009-2013 average:

• NGOs: 54.6% average is below 58% level in 2014
• Media: 37.0% average is identical to 2014 reading of 37%
• Business: 40.4% average is below 2014 level of 41%
• Government: 29.2% average is well above current level of 21%.

So of all institutions, the only one that deteriorated in terms of trust in 2014 compared to 2009-2013 average is... Government.

Time to pump out more Government spin and 'Economic Outlook' presentations by quangos and Departments... 

4/2/2014: Good at anything? Europe's broken monetary policy engine

Monetary policy is not a nuclear science. It is not even anatomy, for what it matters. Instead, it is more like a simple task in civil engineering. Bank of Japan can get the message, the Fed wrote books on it, Bank of England has discovered it, Canadians, Swedes, Danes, Swiss, everyone has figured it out by now... Meanwhile, in the euro area, there is a whole lot of mystery, mystique, halls of mirrors and corridors of contortions, when it comes to the monetary policy. And a simple, plain-sight visibility of its failure…

Take a look at this chart, plotting euro area real GDP growth against M1 money supply growth rate (via Pictet):

Spot anything of interest? Oh, simples.com: M1 growth declines predate GDP growth and levels declines. No, seriously, since 2006, euro area could not manage one policy - money supply. Forget the intricacies of fiscal policy (it is not an easy job to spend money on stimulating economic activity, when you are in debt up to your ears), the EU simply could not put enough money into the real economy to prevent cash in circulation from shrinking.

How on earth can such a feat be achieved? Simple: the ECB pumped trillion euros plus into the banks, instead of pumping the very same trillion (and more still would have been needed) into the real economy. Frankfurt opted for loading money into the banks balance sheets . It should have opted for using printed money to pay down real economy's debts (households' and non-financial companies' debts) which would have (1) repaired banks balance sheets, and (2) repaired the real economy, restarting consumption and investment. Instead, we have a bizarre, senile, idiotic situation where we print money and then, de facto, lock it up in the vaults.

It would half as bizarre if it was just locking the liquidity in the vaults, but the euro area monetary policy is currently all about the repayments by the banks of the LTROs, or in different terms - burning of cash out of the economy. This is cutting down on M1 growth rate. Just as the M1 growth should be rising, not falling. Forget about doing the right thing at the wrong time… we are doing the wrong thing at the wrong time… and doing so repeatedly.

And the latest? Annual growth rate of M3 money supply is again slowing, to 1.0% y-o-y in December 2013 from already low 1.5% y/y growth in November. The law of under fulfilled low aspirations clearly at work: expectation was for 1.7% y/y growth in M3, and ECB delivered 1.0% - the lowest rate since September 2010. Oops, predictably, lending to the private sector remained at -2.3% y/y in December 2013, an all-time low.

So for all its OMT, LTROs, BU 'policies activism', the ECB is now 5th year into mismanaging basic crisis-related monetary policy. Inventiveness and monetary engineering gushing out of Mario Draghi left, right and centre to the delight of the policy analysts and bonds salesmen, and the euro area is still where it was: below reference line on M3 growth.

3/2/2014: Good Plans = Good News: Irish Whiskey

Those of you who have been reading my work over the years know that I am big supporter of independent craft whiskey distillers in Ireland and been arguing in favour of policy supports to strengthen indigenous sector here.

So it is good to see some serious growth in the sector here. The latest numbers, provided by the Irish Spirits Association are below:

While still trailing behind Scotch, we are starting to gain some ground. The key here is, however, the number of distilleries. At only 4, Irish whiskey sector remains firmly captured by big, commoditised, lower-quality price-competition focused producers. The sector is still lacking innovation and competition.

The positive is that over the next couple of years there some 11 additional distillery projects underway or being planned in Ireland. By 2020, the sector potential is projected to double to over 12 million cases exported annually, from current 6.2 million. But even at these levels, Irish whiskey will remain under-represented in the global markets compared to Scotch, unless Ireland gets serious at pushing up the value of its whiskey. And this can only be done by careful and rapid innovation and focus on high quality, specialist whiskeys.

The ISA clearly identifies core markets for Irish whiskey as the US, followed by the UK, with "...emerging markets such as Russia and China present significant opportunity for future export driven growth in the sector." Surprisingly, India is not cited. Neither is Japan. Both are big whiskey markets and both offer significant upside for quality premium whiskeys. 

2/2/2014: IMHO-AIB Pilot - First Results

IMHO just published the results of the ongoing IMHO-AIB project for the first 55 days of the scheme operations:
https://www.mortgageholders.ie/blog/posts/progress-update-on-initiative-between-imho-and-aib-ebs-haven

The core numbers are sizeable enough to represent a good sample of borrowers and provide a strong basis for arguing that the independent, professionally provided and borrower-centric advice does work.

I want to stress that all credit for delivering on these results goes to the brilliant frontline team at IMHO!

1/2/2014: WLASze: Weekend Links on Arts, Sciences and zero economics

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

Richard Mosse is on show at RHA in Dublin - an even that is an absolute 'must-see': http://www.rhagallery.ie/exhibitions/theenclave/ I covered Mosse's work earlier in relation to his fantastic show at Biennale earlier in 2013 (http://trueeconomics.blogspot.ie/2013/07/2772013-wlasze-part-1-weekend-links-on.html) and had a distinct pleasure attending the RHA exhibition launch. RHA presentation of his photographs and a separate film-based installation are superb and do proper justice to the tremendously important artist. The exhibition also contains one large photograph that was not on show in Venice.

@RHAgallery

And while at RHA, do not (not that there is any fear you would) miss their superb mini-retrospective of Micheal Farrell - an exhibition spanning the career of one of Ireland’s most accomplished artists, showing both his search across styles and narratives over the years and the emergence of his unique, personal voice. For myself, not all too knowledgeable about Irish artists of the period, this was an eyeopening exhibition.

Now onto more international scene...

My penchant for Science Meets Art themes is being well-catered for by Adam Summers photography that combines use of dyes and fish to reveal the natural beauty of skeletal structure: symmetry, complexity and patterns:
http://www.designboom.com/art/adam-summers-dyes-fish-specimens-to-reveal-their-anatomy-12-19-2013/

When nature meets the power of contrast and the two meet the human eye, values, semiotics, interplays of colour and light and geometry of proximate symmetry - all come into play.

On the opposite side of the same clustering of art and science, the contrast is amplified through superficial tech:
SOICHIRO MIHARA won 17th Japan Media Arts Festival award, here is his collaborative project from 2011, Moids 2.1.3 - acoustic emergence structure: http://www.samtidskunst.dk/simpleinteractions/projects/soichiro-mihara-hiroko-mugibayashi-kazuki-saita/

The installation combines 1024 autonomously functioning units that record the sounds of their proximate surrounding, and combine a micro-cprocessor that analyzes the recorded sound. The sound is recorded based on the programmed limits which trigger both the start and end of the recording for a specific unit, plus the triggering algorithm for chain reactions.

Big controversy in NY: after pretty lengthy period of speculations and debates, MoMA announced recently that "after an "exhaustive" analysis of the different options (razing the former Museum of Folk Art on 53rd Street, saving the distinctive facade, or saving the building), the museum had reluctantly decided (feel free to roll your eyes here) to demolish the Tod Williams & Billie Tsien-designed structure to make way for a museum expansion and, not at all coincidentally, an 82-story residential tower developed by Gerald Hines and designed by Jean Nouvel."
http://www.metropolismag.com/Point-of-View/January-2014/Done-Deal-MoMA-To-Raze-Folk-Art-Museum/
Here are some images of the museum building:

Sadly, I must add… sadly. The Folk Moma is a brilliant design, architecturally challenging and powerful, breaking up the monotonously 'Manhattanite' space… All to be replaced by what amounts to a spiced-up version of corporatism…

To pure art: Kristian Rothstein an interesting developing artist worth following for abstract art fans: http://kristian-rothstein.com/Weis-1

Still raw and searching, and mostly borrowing from Gerhard Richter, Rothstein is one to watch as he draws on some nicely intuitive, organic sensitivity in his use of colour.


Talking about sensitivity, while swinging a massive u-turn from art to science, here is a story from physics: the far-reaching idea for a Death Star-styled laser that can focus particles into a massive space telescope:
http://arstechnica.com/science/2014/01/giant-laser-could-arrange-particles-into-enormous-space-telescope/
Description via arstechnica is brilliant: "let me present the trifecta of awesomeness: a seemingly ridiculous idea, one that works in a bizarre manner that has little to do with the justification given by the scientists, and—to really make matters special—it involves lasers in space." The rest of this article is mind-boggling and can pass as a good teaser for one of those "Mind-Training" programmes that simultaneously burns vast amounts of calories and flexes your brain… rend and enjoy…


Last week I tweeted about the shortlisting of the Dublin-based Heneghan Peng practice for designing Contemporary Arts Center in Moscow. Here's the link:
http://www.architecturefoundation.ie/news-item/heneghan-peng-on-moscow-museum-shortlist/
Pardon the comparative, but it evokes the imagery of the "Deep Thought" from the Hitchhikers Guide… despite the fact that the "Deep Thought" really was figurative, non-abstract non-geometric structure more resemblant of Henry Moore's sculptures… Or may be it mreminds me of a stack of old-fashioned disk drives for extinct computers… or an old stereo equipment 'tower'? ok, ok, I am stretching things here… But, of course, Moscow is no stranger to geometric juxtaposing in its own architectural heritage… and I like it... I can't quite decide why...


The "Deep Thought" was of course a computer that was created to come up with the Answer to The Ultimate Question of Life, the Universe, and Everything. And everything is a big theme for physics nowadays. Good thing that recently they got a glimpse of a piece of this 'everything'. Per BusinessInsider: "For the first time, astronomers were able to see a string of hot gas known as a filament that is thought to be part of the mysterious underlying structure that dictates the layout of all the stars and galaxies in our universe. Scientists believe that matter in the universe is arranged into a gigantic web-like structure. This is called the cosmic web." Read more: http://www.businessinsider.com/first-image-of-cosmic-web-2014-1#ixzz2s5048t46

The whole thing relates to the eXtreme Deep Field view of the Universe, which is covered in all its glory here: http://www.nasa.gov/mission_pages/hubble/science/xdf.html

Do note that none of this disputes that the answer to the Ultimate Question of Life, the Universe, and Everything is, as found by the Depp Thought, 42. Nor does it provide any insight into Deep Thought's last conjecture that "…the problem, to be quite honest with you is that you've never actually known what the question was". But it is fascinating, nonetheless. 

1/2/2014: US GDP growth Q4 2013

US Q4 GDP numbers posted a surprisingly strong performance, with third quarter in the row coming at above the 2009-2013 average rates:

Source: Pictet

At the top level, GDP posted 3.2% q/q expansion and annual (y/y) growth accelerated from 1.3% to 2.0% to 2.7% between Q1 and Q4 2013.

The quality of growth also improved. In Q2-Q3 2013, personal consumption grew 1.8% and 2.0% respectively (annualised), with Q4 2013 growth registering 3.3%. Private final demand grew 4.0% in Q4 2013, against 3.4% and 2.8% in Q2 and Q3. Bad news came only on private residential investment side, where activity declined massive 9.8% having posted  14.2% and 10.3% expansions in Q2 and Q3.

Government spending fell 4.9% in Q4 2013, compared to decline of 0.4% in Q2 2013 and growth of 0.4% in Q3 2013.

Excluding Government spending, GDP grew 5.2% in Q4 2013, beating 5.0% growth in Q3 2013 and 3.2% growth in Q2 2013.

31/1/2014: January Credit Supply Conditions: Germany

Credit supply survey from Germany shows slight tightening in credit conditions, but continues to trend at the levels consistent with historically low credit constraints:

No surprise then that German policymakers are not to phased about the issues of credit supply... 

31/1/2014: Economics Teaching in Ireland

A very interesting research via @stephenkinsella and @brianmlucey on what is going on in Irish economics: teaching and research-wise... http://brianmlucey.wordpress.com/2014/01/31/what-do-irish-economists-think-and-teach/

Caveat - low response rate to the survey can be taken as a warning to conclusions, but also a reminder of just how detached Irish economics profession might be.

Basic conclusions: economics is a stand-alone science which should not be polluted by applications to the 'real world' which is highly imperfect, but does correspond rather well to orthodox economic models. If only the Government gave more money to economics researchers, the world can be made a better place, despite the fact that very few researchers seem to teach in the areas in which they research... Oh, and final point: leave us (economists) alone, you pesky little people...

28/1/2014: Decline in Debt and Regaining of Trust?

The following out this morning:

So is Herr Schaeuble correct? Did reductions of debt help 'regain trust during the crisis'? Were there actual reduction in debt?

Table summarises 2007-2013 maximum debt levels (for General Government Debt as % of GDP) attained by the euro area economies and the year when this maximum was attained:

Three observations:

1. With exception of two countries: Germany and Portugal, 2013 debt to GDP ratios are maximal for the entire period 2007-2013.
2. In the case of Germany, peak debt level attained in 2010 was 82.44% of GDP, while in 2013 estimated level of debt/GDP is expected to be 80.393% of GDP. The reduction is small. Meanwhile, German bund yields are not reflective of any specific reduction - they were low in 2009 and 2010 and they are low now.
3. Portugal's peak debt/GDP ratio is notionally at 2012 at 123.8% of GDP. Country 2013 expected debt/GDP ratio is 123.56%, which is statistically indifferent from 2012 levels, so we cannot call this material by any measure.

Here's evolution of debts over the period in two charts, confirming that there has been no reduction in debt levels relative to the earlier stages of the Global Financial Crisis:

And here is the chart showing how dramatic were the increases in debt levels over the course of the crisis:

But, of course, virtually the entire euro area bond yields have shown improvements in 2012-2013, which is really totally and completely divorced from the debt dynamics:

The IMF is not even projecting decline in debt until 2015...

27/1/2014: Two Reforms, One Conclusion

Two headlines about EU policymaking, one conclusion:

EU audit reform reduced to 'paper tiger' : http://euobserver.com/economic/122815 in which the EU 'reforms' of the rules for financial audits are shown as a 'paper tiger', "unable to break up the dominant position of the world's four biggest audit firms."

EU bonus cap to have little impact on bank pay : http://euobserver.com/economic/122852 in which Fitch explains why "EU's new bank bonus rules are unlikely to have much effect on executive pay".

And the one conclusion is: for fake reforms with no teeth, tune into the EU policymaking post-crisis…