6/6/2014: Credit to Irish Resident Enterprises: Q1 2014

Since time immemorial (ok, since around 2009) Irish Government after Irish Government has been promising the restoration of functioning credit markets. Targets were set for the banks to lend out to non-financial (aka real economy) enterprises. Targets were repeatedly met. Banks have talked miles and miles about being open for lending, approving loans etc etc etc. And credit continued to fall and fall and fall...

And so the story repeats once again in Q1 2014. Central Bank latest data on credit advanced to Irish resident private sector enterprises attests to the lifeless, deleveraging-bound, zombified banking sector.

• Credit advanced to financial intermediation companies is down 3.63% in Q1 2014 compared to Q4 2014. This marks 9th consecutive quarter of declines. Since Q4 2008, credit has fallen in 11 quarters, and actually it has fallen in 12, since Q4 2011 rise was down to reclassifications being factored into the equation for the first time. Worse than that, majority of declines came since the current Government took office, not before. 
• Credit advanced to financial intermediation and property sectors fell 4.05% q/q in Q1 2014. The fall was steeper than in Q4 2013 compared to Q3 2013 and also marks ninth consecutive quarterly decline in the series or 11th if we are to control for 2011 reclassifications.
• Excluding financial intermediation and property, credit advanced to Irish resident non-financial companies ex-property sector has fallen 1.31% q/q in Q1 2014. This marks fourth consecutive quarterly fall. Credit to the real economy is now down in 20 quarters since Q4 2008. Since the current Government came into office, credit to these companies is down in 10 quarters out of 12.
• Total credit advanced to Irish resident enterprises was down 3.49% q/q in Q1 2014 - steeper than the decline of 3.07% recorded in Q4 2013, and marking ninth consecutive quarter of declines (11th, if reclassifications are ignored).

So keep that hope alive... one day, some day... things will be better. Do not forget to give credit to the Government and the Central Bank - they predicted this 'betterment' years ago and like a stopped clock, one day they will be proven right...

5/6/2014: Why ECB might have found a cure that strengthens the disease

Today's announcement by the ECB Governing Council that the Bank will be charging a premium to hold private banks' deposits has the potential to generate two positive effects and one negative, in the short run, as well as another negative in the medium-term. The ECB cut its deposit rate to minus 0.1 percent from zero and reduced its benchmark interest rate to a record-low 0.15 percent.

On the positive side,

1. Lower repo rate can translate, at least partially, into lower rates charged on variable rate legacy loans and new credit extended to households and companies. It will also reduce the cost of borrowing in the interbank markets. This potential, however, is likely to be ameliorated, as in the past rate reductions, by banks raising margins to increase profitability and improve the rate of loans deleveraging. This time around, the ECB introducing negative deposit rates is designed to reinforce the effect of the lending rate reduction. Negative deposit rate means that banks will find it costly to deposit funds with the ECB, in theory pushing more of these deposits out into the interbank lending market. With further reduction in funding costs, banks, in theory can borrow more from each other and lend more into the economies, including at lower cost to the borrowers. Note: in many countries, like Ireland, reduced lending rates will likely mean a re-allocation of cost from tracker loans (linked to ECB headline rate, their costs will fall) to variable rates borrowers (whose costs will rise) washing the entire effect away.
2. Negative rates, via increasing supply of money into the economy, are hoped to drive up prices (reducing the impact of low inflation) and, simultaneously, lower euro valuations in the currency markets (thus stimulating euro area exports and making more expensive euro area imports. The good bit is obvious. The bad bit is that energy costs, costs of related transport services, other necessities that euro area imports in large volumes will have to rise, reducing domestic demand and increasing production costs.

On the negative side,

1. The ECB has spent all bullets it has in terms of lending rate policy. At 0.15 percent, there is very little room left for ECB to manoeuvre and should current policy innovations fail, the ECB will be left with nothing else in its arsenal than untested, dubiously acceptable to some member states, direct QE measures. 
2. But there is a greater problem lurking in the shadows. US Fed Chair, Janet Yellen clearly stated last year that deposits rates near zero (let alone in the negative territory) can trigger a significant disruption in the money markets. If banks withhold any funds from interbank markets, the new added cost of holding cash will have to be absorbed somewhere. If the banks pass this cost onto customers by lowering dramatically deposit rates to households and companies, there can be re-allocation of deposits away from stronger banks (holding cash reserves) to weaker banks (offering higher deposit rates). This will reduce lending by better banks (less deposits) and will not do much for increasing lending proportionally by weaker banks (who will be paying higher cost of funding via deposits). Profit margins can also fall, leading all banks to raise lending costs for existent and new clients. If, however, the banks are not going to pass the cost of ECB deposits onto customers, then profit margins in the banks will shrink by the amount of deposits costs. The result, once again, can be reduced lending and higher credit costs.

On the longer term side, assuming that the ECB measures are successful in increasing liquidity supply in the interbank markets, the measure will achieve the following: stronger banks (with cash on balance sheets) will now be incentivised (by negative rates) to lend more aggressively (and more cheaply) to weaker banks. This, de facto, implies a risk transfer - from lower quality banks to higher quality banks. The result not only perpetuates Europe's sick banking situation, and extends new supports to lenders who should have failed ages ago, but also loads good banks with bad risks exposures. Not a pleasant proposition.

By announcing simultaneously a reduction in the lending rate and the negative deposit rate, the ECB has entered the unchartered territory where negative effects will be counteracting positive effects and the net outcome of the policies is uncertain.

Aware of this, the ECB did something else today: to assure there is significant enough pipeline of liquidity available to all banks, it announced a new round of LTROs - cheap funding for the banks - to the tune of EUR400 billion. The two new LTROs are with a twist - they are 'targeted' to lending against banks lending to businesses and households, excluding housing loans. TLROs will have maturity of around 4 years (September 2018), cannot be used to purchase Government bonds (a major positive, given that funds from the previous LTROs primarily went to fund Government bonds). Banks will be entitled to borrow, initially, 7% of the total volume of their loans to non-financial corporations (NFCs) and households (excluding house loans) as of April 30, 2014. Two TLTROs, totalling around EUR400 billion will be issued - in September and December 2014. The ECB also increased supply of short term money. TLTROs are based on 4 years maturity. Ordinary repo lending will be extended in March 2015-June 2016 period to all banks who will be able to borrow up to 3 times their net lending to euro area NFCs and non-housing loans to households. These loans are quarterly (short-term). Crucially, to enhance liquidity cushion even further, the ECB declared that loan sales, securitisations and write downs will not be counted as a restriction on lending volumes.

Thus, de facto, the ECB issued two new programmes - both aimed to supply sheep money into the system: TLTROs (cost of funds set at MRO rate, plus fixed spread of 10 bps) and traditional quarterly lending. There was a shower of other smaller bits and pieces of policies unveiled, but they all aimed at exactly the same - provide a backstop to liquidity supply in the interbank funding area, should a combination of lower lending rates, negative deposit rates and TLTROs fail to deliver a boost to credit creation in NFCs sector.

Final big-blow policy tool was to announce suspension of sterilisation of SMP programme - I covered this topic here. The problem is that Mario Draghi claimed that non-sterilisation decision was acceptable, since non-sterilisation of SMP does not imply anything about sterilisation of OMT (his really Big Bazooka from 2012). He went on to say that ECB never promised to sterilise OMT in the first place. Alas, ECB did promise exactly that here. Update: WSJ blog confirming exactly this and published well after this note came out is here.

In line with this simple realisation - that non-sterilisation of SMP opens the door to outright funding of sovereigns by the ECB via avoidance of sterilising OMT - German hawks were already out circling Mr Draghi's field.

Germany's Ifo President Hans-Werner Sinn said: "This is a desperate attempt to use even cheaper credit and punitive interest rates on deposits to divert capital flows to southern Europe and stimulate their economies," Sinn said on Thursday in Munich. "It cannot succeed because the economies of southern Europe must first improve their competitiveness through labour market reforms. Long-term investors, in other words savers and life insurance policy holders, will now foot the bill," warned Sinn.

And there we go… lots of new measures, even more expectations from the markets and in the end, Germans are not happy, while Souther Europe is hardly any better off… In the long run - weaker banking sector nearly guaranteed… A cure that makes the disease worse?.. And if one considers that we just increased even further future costs of unwinding ECB's crisis policies, may be the disease has been made incurable altogether?..

Here are a couple of charts showing just how massive this legacy policies problem is (although we will face it in the mid-term future, not tomorrow):

Did Draghi just make the impossible monetary dilemma (here and here) more impossible?

5/6/2014: Irish Composite Activity indicator for Services & Manufacturing: May 2014

In the previous post, I covered Irish manufacturing and services PMIs on monthly frequency basis. Here, an update on quarterly (Q2 to-date) and composite series.

As chart above shows:

• Manufacturing PMI rose to 55.6 Q2 (to-date) against 53.7 in Q1 2014 and 49.3 in Q2 2013. These are solid gains. Still, some lingering doubts as to just how much growth can be read off this result. Q1 2014 reading was bang-on in-line with Q4 2013 (53.6) and as we know, Q4 2013 was a quarter of falling GDP.
• Services PMI rose to 61.8 in Q2 2014 (to-date) against 59.9 in Q1 2014 and 54.3 in Q2 2013. Again, solid gains.
• Composite PMI (this is not supplied by the Markit/Investec, but is computed by myself based on their data for Manufacturing and Services) rose to 60.3 in Q2 2014 (to-date) up on Q1 2014 reading of 58.4 and Q2 2013 reading of 52.8 (note: including Construction into Composite PMI generates virtually identical result).

Key takeaways:

1. Solid performance on Composite PMI reading. Q2 2014 to-date shows strongest growth since Q2 2006
2. Q1 2014 and Q4 2013 both showed strongest growth signals since Q1 2007.
3. Thus, by all readings in the last three quarters, Irish economy should be expanding in Q1 2014 and this expansion should have accelerated in Q2 2014.

5/6/2014: Irish Manufacturing & Services PMIs: May 2014

Both, Irish Services and Manufacturing PMIs are now out for May 2014 (via Markit and Investec Ireland) and it is time to update my monthly, quarterly and composite series.

In this post, let's first cover the core components in monthly series terms:

1. Manufacturing PMI eased from 56.1 in April to 55.0 in May - a decrease that reduced the implied estimated rate of growth in the sector. Still, Manufacturing index is reading above 50.0 (expansion line) continuously now since June 2013. 3mo MA through May is at 54.8 - solid expansion and is ahead of 3mo average through February which stood at 53.1. So expansion accelerated on 3mo MA basis. The current 3mo MA is ahead of 2010, 2011 and 2013 periods readings. Over the last 12 months there have been only 3 months with monthly reductions in PMIs: November 2013 (-2.5 points), January 2014 (-0.7 points) and May 2014 (-1.1 points).
2. Services PMI eased only marginally from 61.9 in April to 61.7 in May - this implies that services sector growth barely registered a decline and remained at a blistering 61-62 reading level. Services index is reading above 50.0 (expansion line) continuously now since July 2012, helped no doubt by a massive expansion of ICT services MNCs in Ireland, which have little to do with the actual economic activity here. 3mo MA through May is at 60.0 - solid expansion and only slightly below 3mo average through February which stood at 60.3. The current 3mo MA is ahead of 2010, 2011 and 2013 periods readings. Over the last 12 months there have been 5 months with monthly reductions in PMIs, all sharper than the one registered in May 2014.

Here are two charts showing historical trends for the series:

The two series signal economic expansion across both sectors in contrast to May 2012 and 2013:

In line with the above chart, rolling correlations between the two PMIs have firmed up as well over recent months, rising from 0.33 in 3mo through February 2014 to 0.5 for the 3mo period through May 2014.

We will not have an update on Construction sector PMI (Markit & Ulster Bank) until mid-month, so here is the latest data as it stands:

• In April 2014, Construction sector activity index rose to 63.5 from 60.2 in March 2014. This marks second consecutive month of m/m increases. In the last 12 months, there have been 7 monthly m/m rises in the index and index has been returning readings above 50 since September 2013.

Core takeaways:

• Both services and manufacturing sectors PMIs are signaling solid growth in the economy,
• Jointly, the two indices are co-trending well
• Caveats as usual are: MNCs dominance in the indices dynamics and shorter duration of statistically significant readings above 50.0 line: Manufacturing shows only last three consecutive months with readings statistically significantly in growth territory; while Services index producing statistically significant readings above 50 for the last 6 months.
• Last caveat - weak relationship remains between actual measured activity in the sectors and the PMI signals: http://trueeconomics.blogspot.ie/2014/05/1552014-pmis-and-actual-activity.html

Next post will cover quarterly data and composite PMI.

5/6/2014: Irish Commercial Property Values Forward...

Lost decade in Irish non-residential property? 

Based on IPD quarterly index, here is an exercise in basic forecasting (take it as just a stab in the dark - things can go all over the shop in a small economy, like Ireland) for capital values returns for 4 asset classes of Irish non-residential property.

The forecast is based on 'better case' scenario that assumes rates of growth from Q2 2014 on that reflect:

• Last 3 quarters growth rates in Retail, Office and All Property indices, which are respectively: Retail 1.9% q/q (4 quarters growth rate is less benign at 1.0%); Office 4.3% (4 quarters rate is 3.5%); All Property 3.1% (4 quarters rate is 2.3%); and
• Last 4 quarters growth rate of 2.3% for All Property taken as growth rate for Industrial class (own Industrial Class 3 quarters growth rate is 0% and own 4 quarters growth rate is negative - 0.2%).

And the 'lost decade' in capital values is:

• For Retail sector: 19 years
• For Office sector: 13 years
• For Industrial sector: 23 years
• For All Property sector: 16 years 

Some 'decade' that is… and the numbers are not out to the peak-to-peak levels, as peak valuations took place around Q3 2007 and the exercise is from Q4 2006, when all above asset classes capital valuations were below the peak by between 9.2 and 10.5 percent. The exercise does not cover explicit outlook for interest rates or credit flows associated with it. Nor does it account for the overhang of land held by Nama. The key point here is really to show three things:

1. It will take a long, very long time for the markets to come around; and
2. So far, turnaround was not miraculous or dramatic, as some agents would led you to believe...
3. Finally, in one segment - Offices - we do have some rays of hope - both uplift and dynamics of that uplift are supportive of the stronger case than what I expected back in the days of 2010, when Nama was unloading properties off the banks balancesheets.

2/6/2014: Europe in the 'Happi-Ending' Data Parlour

The EU has discovered, at last, a new source of economic growth. Just about enough to deliver that magic 1%+ expansion for 2014 that the economical zombified currency block has been predicting to happen for years now. The new growth will come not from any new economic activity or value-added, but from including into the official accounts activities that constitute grey or black markets - transactions that are often illegal - drugs, prostitution, sales of stolen goods, and so on.

The basis for this miracle is the 2010 European System of Accounts which requires (comes September this year) of all EU states to include in official GDP (and GNP) accounts all "illegal economic actions [that] shall be considered as transactions when all units involved enter the actions by mutual agreement. Thus, purchases, sales or barters of illegal drugs or stolen property are transactions, while theft is not."

Wait a sec. Here's a funny one: stealing property is not a GDP-worthy activity, but selling stolen property is… It is sort of "breaking the leg is not adding to our income, but fixing a broken leg is" logic.

The rational behind harmonised treatment of grey and black markets data is that some states, where things like prostitution are legal, already include these services in GDP calculation, while others do not. Thing are, per EU, not comparable for, Netherlands and Luxembourg because of the Red Lights districts operating in one openly, and in another under the cover. From Autumn this year, all countries will do the same. And they will also add illegally-sold tobacco and alcohol

Prostitution is legal in Germany, the Netherlands, Hungary, Austria and Greece; some drugs are decriminalized in the Netherlands. Italy started to add some illegal activities into its GDP ages ago - back in 1987, the country added to its accounts estimates of the shadow economy: off-the-books business transactions which make up ca 20% of Italian GDP. This boosted Italian GDP by 18% overnight - an event that is called il sorpasso because it drove Italian GDP up to exceed that of the UK.

Poland did same earlier this year, with its GDP about to start covering proceeds from prostitution, drugs trafficking, alcohol and tobacco smuggling. Based on GUS (the CSO of Poland) estimates, in 2010 these accounted for some 1.17% of GDP.

Outside the EU, other countries are also factoring in illicit trade and transactions into their GDP. South Africa has been at this game since 2009, with GDP revised up by a modest 0.2% to take account of unobserved economy.

With 'new activities' added, Italy's GDP is expected to rise 2% in 2014, while French GDP will boll in by 3.2%, UK boost will be 'modest' 0.7%. And so on… Spain's shadow economy runs in excess of 20% of GDP. If bribes (some are voluntary, others can be extorted) are included, Europe's GDP will take a massive positive charge.

Here is the UK note on 'methodologies' to be used in estimating the new 'additions'. It is worth noting that the UK already includes illegally smuggled tobacco and alcohol estimates into its GDP, and these add some £300mln to the economy. Here is the Danish government report on the same, showing smuggling accounting for 2% of GDP adjustment. This is from 2005 when the Government adopted inclusion of some of the illegal activities into its GDP calculations. And dating even further back, the OECD guidebook on inclusion of illegal activities into accounts: here. Here is a fascinating paper from 2007 on Croatia's accession to the EU, meeting Maastricht Criteria targets and inclusion of illegal transactions into GDP.

The net result: deficits and debt levels will officially fall compared to GDP. Even private debts, still rising for now, will see rates of growth slowing down...

Of course, Ireland's Stuffbrokers have rejoiced at the thought of CSO boosting the GDP by counting in activities that can land one in jail. Per Irish Examiner report (here): "Davy chief economist Conall MacCoille said while the inclusion of the statistics might help the Government reach its deficit target of 4.8%, the activity is contributing nothing to the exchequer. “Of course we are delighted to see the CSO capture as much economic activity in the GDP figures as possible, but the fact is that this activity is not taxed. If might help push up the GDP figure, but it will not contribute anything to the exchequer,” he said."

Read: Happy times (higher GDP) could have been even happier (tax revenues boost), but we'd settle for anything that might push up the value of Government bonds... (Who's one of the largest dealers selling said bonds?...)

Thus, do expect congratulatory statements about 'austerity working', 'reforms yielding benefits' and 'recovery taking hold' blaring out of radio and TV sets next time pass the 'Happi-Ending' Massage Parlour or a methadone clinic…

Next step: Yanukovich era corruption 'activities' added to Ukraine's GDP. That should lower country CDS from sky-high 960s to Norwegian 13s… Happy times finally arriving to world's economic basket cases, riding on a dodgy stats bandwagon.

31/5/2014: One Chart of the Week, 5 charts of the last 5 years

If you see one chart this weekend, make it count. Here's a contender:

Source: https://twitter.com/okonomia/status/471713359424139264/photo/1

The above shows US GDP growth starting with the end of each recession from 1954 through the last one (where all growth indices are set at 100). And guess what: this time is different. Despite massive, un-parallel, unprecedented monetary expansion and QE, the current recession and recovery signal both - the sharpest decline from the pre-crisis peak and the shallowest recovery from the crisis trough. 

To confirm this - see the historical deviations from the potential GDP:

And this is not just about GDP. Here are changes in employment:

And unemployment:

These charts come from (except for the first one) http://www.cbpp.org/cms/index.cfm?fa=view&id=3252.

And the famous chart from the CalculatedRisk blog tracking percentage of jobs losses:

That's right... all of this 'wealth creation' in the financial markets is hardly about the real economy... Which means that one day, either fundamentals will have to catch up with financial markets valuations (by growth vastly outstripping capital gains), or financial markets will have to scale down the cliff back to fundamentals (by financial markets correcting massively to the downside). Or both... Which one is the 'soft landing'? You guess...

31/5/2014: Twitter: Promoting Isolation, Ideological Segregation and All Things Good to Your Political Engagement

A very interesting study looking at comparatives of media and news use via twitter (social media) and traditional media (print, radio and TV). The paper, titled "Are Social Media more Social than Media? Measuring Ideological Homophily and Segregation on Twitter" (May 2014_ by YOSH HALBERSTAM and BRIAN KNIGHT is available here: http://bfi.uchicago.edu/sites/default/files/research/Twitter_may232014.pdf

Some highlights:

Per authors, "Social media represent a rapidly growing source of information for citizens around the world. In this paper, we measure the degree of ideological homophily and segregation on social media."

The reason this is salient is that there has been a "tremendous rise in social media during the past decade, with 60 percent of American adults and over 20 percent of worldwide population currently using social networking sites (Rainie et al., 2012)…. Indeed, this phenomenal growth in social media engagement in the U.S. and around the world has transformed the nature of political discourse. Two thirds of American social media users—or 39 percent of all American adults—have engaged in some form of civic or political activity using social media, and 22 percent of registered U.S. voters used social media to let others know how they voted in the 2012 elections."

Per authors, "Three key features of social media distinguish it from other forms of media and social interactions." These are:

• "…social media allow users to not only consume information but also to produce information." It is worth noting that social media can also reproduce information produced on social media, as well as that produced by traditional media.
• "…the information to which users are exposed depends upon self-chosen links among users." In other words, social media produced and distributed information can be self-selection biased. The extent of this selection is more limited in the case of traditional media, where individual biases of consumers can be reinforced by selecting specific programmes/channels/publications, but beyond that, the content received by consumers is the one selected for them by someone else - journalists, editors.
• "…information on social media travels more rapidly and broadly than in other forms of social interactions. …[social media network model] leads to a substantially broader reach and more rapid spread of information than other forms of social interactions."

As authors put it: "Given these three distinguishing features, the rapid growth of social media has the potential to effect a structural change in the way individuals engage with one another and the degree to which such communications are segregated along ideological lines."


To examine this possibility, the authors construct "a network of links between politically-engaged Twitter users. For this purpose, we selected Twitter users who followed at least one Twitter account associated with a candidate for the U.S. House during the 2012 election period. Among this population of over 2.2 million users, we identify roughly 90 million links, which form the network." Based on political party followed, users were assigned ideological identifiers.

Two key findings of the paper are as follows:

1. "…we find that the network we constructed shares important features with face-to-face interactions. Most importantly, both settings tend to exhibit a significant degree of homophily, with links more likely to develop between individuals with similar ideological preferences." In other words, we do show strong selection biases in networks we form. Doh!..
2. "…when computing the degree of ideological segregation and comparing it to ideological segregation in other settings, we find that Twitter is much more segregated than traditional media, such as television and radio, and is more in-line with ideological segregation in face-to-face interactions, such as among friends and co-workers." Worse: we not only form biased networks, we also create selection-biased interactions and generate selection-biased chains and flows of content. Doh! Redux...

Conclusion: "Taken together, our results suggest that social media may be a force for increasing isolation and ideological segregation in society."

Wait… so we act on the social media base to create networks that are closer to friends networks… and this leads to… isolation?.. Well, my eye, I would have thought this would be the opposite…

But top conclusion makes sense:  "The issue of ideological segregation is important when providing such information. Exposure to diverse viewpoints in a society helps to ensure that information is disseminated with little friction across a large number of people. When a community is polarized and is divided into factions, by contrast, information may spread unevenly and may miss intended targets. Our results suggest that social media are highly segregated along ideological lines and thus emphasize these potential problems associated with the flow of information in segregated networks."

The problem, of course is: Can the selection bias be ameliorated? Can people be 'incentivised' to engage with ideological opposites? In my view - yes. This can be achieved most likely by educating people about systems of thought, logic, structures of knowledge, information. The thing is: in social networks, such education is both more feasible (volume of information delivered and speed are both higher) and probably more productive (because there is inherent trust in one's own network that is stronger than in detached media networks. Peers generate stronger bonds than preachers...

The paper has some fascinating data illustration of media biases, though - worth looking at in the appendix.

30/5/2014: Detailed Analysis of Retail Sales for Ireland: April 2014

In the previous post on Retail Sales data, I covered Q2 comparatives across the years (http://trueeconomics.blogspot.ie/2014/05/3052014-that-state-sanctioned-inflation.html). As promised, here is April data taken on a monthly frequency.

There are several very interesting developments in terms of core retail sales data released earlier this week by CSO. Stay patient as I cover it.

Firstly, from the top level:

• Current 3mo average for Retail Sales by Value index is at 96.7, which is below 96.9 average for the 3mo period through January 2014. Bad news. However, a ray of sunshine: Value Index did rise on seasonally-adjusted basis to 97.3 in April compared to 95.9 in March.
• Current 3mo average for Retail Sales by Volume index is at 102.5, which is virtually unchanged on 102.4 average for the 3mo period through January 2014. Neither bad not good news. However, another ray of sunshine: Volume Index did rise on seasonally-adjusted basis to 103.3 in April compared to 101.7 in March.
• Meanwhile, Consumer Confidence index reported by ESRI averaged 85.3 in 3 months though April 2014, which is blisteringly higher than 78.5 reading recorded across 3 months through January 2014. Bad news: on shorter 3mo average basis, Consumer Confidence continues to go boisterously where actual retail sales are not daring to move.

Chart to illustrate:

Notice the following from the chart above:

1. Bottoming out on trend in Consumer Confidence took place around Q1 2011. Bottoming out in Volume Index of Retail Sales took place around Q2-Q3 2012. Bottoming out in Value Index of Retail Sales is yet to be established, though it appears that it might have happened around Q4 2013. Thus, Consumer Confidence can at best be a weak indicator for changes in Volume and counter-predictor to changes in Value of Retail Sales
2. Consumer Confidence is rising much faster, over sustained period of time, than Volume of Retail Sales which itself is outpacing Value of Retail Sales. In other words, even massive and sustained reductions in the retail sector margins are not being able to explain in full the boisterous dynamics in Consumer Confidence.

Now onto my own Retail Sector Activity Index (RSAI), which is a weighted average of 3mo MAs for Volume and Value of Retail Sales Indices and Consumer Confidence:

Couple of things worth noting:

1. RSAI shows, finally, a breakaway from the flat trend that held the sector down between 2009 and much of 2013. This is good news. The RSAI is now at 111.0 up on 110.6 in March 2014 and on 3mo MA basis it is up from 107.7 over 3 months through January 2014 to 110.7 currently.
2. RSAI in most recent two months has been visibly slowing down in the rate of growth, despite massive rises in Consumer Confidence. This can signal some weakness coming down the road. Or it might signal temporary slowdown (remember, this is seasonally-adjusted data).

Lastly, let's revisit correlations between various indices. Three tables below summarise:

Core takeaways from the above tables:

• Consumer Confidence Index (CCI) has now moved into correlation range with Volume of sales that is similar to the one observed prior to the crisis: 0.757 vs 0.741 and this correlation is no longer negative. This confirms what I said above in the analysis of the first chart. And this is potentially good news, as it suggests firming up of the upward trend in the Volume of sales.
• Consumer Confidence Index remains weakly correlated with Value of Sales (0.393) as compared to pre-crisis (0.720), but it is now also positive as opposed to crisis period readings. This means, as I said above, that it is probably too early to call growth trend in Value series, but it is now time to watch the series closely for confirmation of denial of such trend.
• Much of the RSAI index performance is skewed by the CCI presence in the series computation. Still, the index tracks much better the Value and Volume activity in the Retail Sector than the CCI.

30/5/2014: IMF: We are Failing, but We Soldier On… at Your Expense...

IMF press release from today [my comments in italics]:

"The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Greece’s performance under an economic program supported by an Extended Fund Facility (EFF) arrangement. The completion of this review enables the disbursement of SDR 3.01 billion (about €3.41 billion, or US$4.64 billion), which would bring total disbursements under the arrangement to SDR 10.22 billion (about €11.58 billion, or US$15.75 billion).

In completing the review, the Executive Board approved a waiver of nonobservance of the performance criterion on domestic arrears, given the corrective actions taken. In light of the delays in program implementation, the Board also approved the authorities’ request for rephasing three disbursements evenly over the remaining reviews in 2014. [In other words, Greece failed to deliver on programme commitments on time. IMF response - just shift the goal posts. Behind the scenes, of course, we all know that Greece is routinely failing to deliver on the Programme and that delivering on said Programme is actually not exactly what Greece needs to restore its economy to growth and its society to health. IMF knows the same, but being a committed 'European' the Fund can't openly say the same in full voice. So instead of admitting the failure of the Programme, it pushes off targets and alters time frames.]

...Following the Executive Board discussion, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“The Greek authorities have made significant progress in consolidating the fiscal position and rebalancing the economy. The primary fiscal position is in surplus ahead of schedule, and Greece has gone from having the weakest to the strongest cyclically-adjusted primary fiscal balance in the euro area in just four years. However, several challenges remain to be overcome before stabilization is deemed complete and Greece is back on a sustainable, balanced growth path. [We know what 'surplus' Greece delivered in 2013. http://trueeconomics.blogspot.ie/2014/04/2542014-stretch-of-numbers-here-bond.html IMF knows this too. Still, soldier on… nothing to admit here.]

“Additional fiscal adjustment is necessary to ensure debt sustainability, through durable, high-quality measures, while strengthening the social safety net. It is essential that the authorities continue to improve tax collection, combat evasion, and strengthen expenditure control. Public administration reforms need to be accelerated. The authorities are taking remedial actions to clear domestic arrears and expedite privatization. [Alas, even the IMF has to face the facts. The Fund does so in a Monty Pythonesque way by calling for more adjustments. After successful adjustments imagineered above, more adjustments still needed… It is as IMF is playing a role of doctor who, having sawed off one leg of the patient is now claiming operation success because the other leg has to go too…]

“Despite significant wage adjustment, export performance remains comparatively weak. The redoubling of efforts to liberalize product and service markets is therefore welcome. Further measures are necessary to remove regulatory barriers to competition in key sectors and to reform investment licensing. The authorities are committed to revitalizing labor market reforms and improving the business climate. [No one can accuse the Fund of ever once having exported anything, save research papers and policy proposals. Having no understanding of business, the IMF thinks that if/once Greece cuts prices/costs sufficiently enough and 'liberalises markets' the entire world will start glamouring for Greek-made exports. What markets does Greece need to liberalise to improve export performance? Exports require goods and services that someone in the world wants. Name sectors of Greek economy that can export that are currently not exporting.]

“Addressing the very high level of nonperforming loans remains an important priority. While there is no acute stability risk, it is critical for the economic recovery that banks be adequately capitalized upfront to recognize losses on the basis of realistic assumptions about loan recovery. Efforts are being made to recapitalize the banking system and set aside the buffer of the Hellenic Financial Stability Fund to deal with contingencies that may arise during the program. The private debt resolution framework should also be strengthened expeditiously. [Efforts to recapitalize Greek banks have been ongoing for a good part of 3.5 years now. Does IMF have any idea when these efforts might bear some fruit? Or is this too a fungible time line?]

“Public debt is projected to remain high well into the next decade, despite a targeted high primary surplus. The assurances of Greece’s European partners are welcome that they will consider further measures and assistance, if necessary, to reduce debt to substantially below 110 percent of GDP by 2022, conditional on Greece’s full implementation of the program,” Mr. Shinohara stated. [Key point is this: Greece needs debt restructuring that will have to be concentrated on public lenders. Aka: ECB and European 'partners'. We are in 2014 now - four years into witnessing staunch denial from the ECB and European partners of the need for such measures. Keep shifting the targets, IMF. It is about the only route to saving face in this mess left to the Fund.]

The entire Greek programme analysis by the IMF now firmly resembles a one-handed resignation that a second rate tennis player starts to display at the end of the second set, having lost the first one and going on to 6:0 loss for the second round.

30/5/2014: That State-Sanctioned Inflation Tax...

There is much to be analysed in the Irish Retail Sales figures for January-April 2014, updated by the CSO this week. And I intend to do so on this pages at a later time.

But one thing jumps out: taking data for Q2 2014 to-date (in other words, looking at April performance), and comparing this against all previous Q2 data (monthly averages for April-June) gives a bit of a shocker:

Per chart above, since the onset of the crisis (from the peak) through today, both values of retail sales and volumes of retail sales have declined. With exception of food, these declines have been pretty sharp and despite some improvements in recent months, they remain sharp.

But, in all cases, across all broad categories of goods traded, retail sales have fallen more by value than by volume. This means that retailers have been selling less in terms of actual volumes of goods, but are receiving even less in terms of revenues for these goods sold. Of course this means two things:

1. There is on-going deflation in those sectors where value declines are steeper than volume declines; and more importantly
2. There are lower margins (and lower investment and hiring) in the segments where (1) takes place.

Yet, two segments of goods stand out from this picture: Bars and Automotive Fuel. In both, value of sales declined less than volume. In other words, less is being charged for these goods, but even less is being supplied. That is a signifier of rising cost of provision of same goods at retail level - or in plain terms - real, actual inflation. Now, both sub-categories are witnessing two sub-trends:

1. Inputs costs in both are not rising at any appreciable rate (fuel inflation relating to oil prices is relatively low over time considered, and drink industry is seeing lower factory gate prices, not higher);
2. Taxes on both are rising, at various stages of supply chain.

In other words, the chart above shows that in Irish economy, the inflation tax is being forced through heavily taxed sectors where the State extracts the lion's share of final cost of goods supplied to consumers.

The above also puts under serious questions the bars industry lobby claims that there is a need for high level minimum pricing on alcohol. Their sector, it appears, has been hit by a drop in demand and not by a drop in prices. In fact, if anything, ceteris paribus, their sector might benefit from lower prices - charging punters 7 quid per pint of domestic beer is not a good way to improve your sales, you know...

29/5/2014: Earnings in Ireland: Something's Fishy in that Murky Water?..

Average weekly hours and earnings were released by CSO this week, covering Q1 2014 data. Remember, these are delivered in the context of reportedly growing employment and accelerating economic activity, right?

Ok, top-line observations: y/y average weekly earnings are down 0.4% or EUR2.66/week (EUR138.32 per annum, assuming paid holidays and not adjusting for working hours etc, but you get the point: in 2013 a person earning average weekly earnings level of salary would have had EUR2,346 per month in disposable after-tax income, in 2014 they have EUR2,341 per month).

Worse than that, the decline in weekly earnings was driven by a drop in average hourly earnings (down 0.5% y/y) against flat hours worked (31.2 hours/week on average). In other words, we are creating jobs in tens of thousands, but seemingly there is no pressure on hours worked and there is downward pressure on hourly earnings.

Were these changes down to cuts in bonuses, perhaps?

Well, no: excluding irregular earnings, average hourly earnings fell 0.6% y/y. So if you work in a job where bonuses are not present, congratulations, the economic recovery is biting into your earnings even more. It is worth noting that this trend is not uniform in the economy: private sector hourly earnings rose 0.6% but public sector earnings fell 2.5% year on year. And steepest increases in earnings took place in enterprises with less than 50 employees (+2.3% y/y), while steepest declines took place in enterprises with 50-250 employees (-2.9% y/y). Large enterprises saw average hourly earnings excluding irregular earnings fall 1.6%.

So short term falls in earnings are down to public sector and larger enterprises...

Of course, earnings can be volatile even y/y, so here is a handy comparative for earnings changes on Q1 2010:

Per CSO: "Across the economic sectors average weekly earnings increased in 7 of the 13 sectors in the year to Q1 2014, with the largest percentage increase in the Construction sector (+10.2%) from €639.35 to €704.41.  The largest percentage sectoral decrease in weekly earnings was recorded in the Education sector (-2.7%) from €814.12 to €792.03. Between Q1 2010 and Q1 2014 average weekly earnings across individual sectors show changes ranging between -6.3% for the Education sector from €845.59 to €792.03 and +13.6% for the Information and communication sector from €915.94 to €1,040.10"

Still, Public Admin & Defence are down just 0.1% on Q1 2010... shrinking Industry is doing swimmingly, as does Finance & Insurance & Real Estate...

On last bit: average working hours were unchanged y/y in private sector, but up 2.3% in public sector. Which is worrisome - rising employment in private sector should lift hours ahead of numbers employed, by all possible logic, since hiring more workers is costlier than letting those employed work longer hours for the same or even higher pay. Still, hours are static y/y, and are up by only 0.1 hour on Q1 2010... Puzzling... Worse: working hours are unchanged y/y and down on Q1 2010 for smaller firms, where wages pressures seem to be highest.

This simply does not gel well with the numbers of tens of thousands of new employees, unless, of course, new employees are working fewer and fewer hours...